SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934 (No Fee required)
For the fiscal year ended September 30, 1996
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from to .
------------ ------------
Commission File No. 0-27606
WHG Bancshares Corporation
--------------------------
(Name of Small Business Issuer in Its Charter)
Maryland 52-1953867
- -------- ----------
(State or Other Jurisdiction of Incorporation I.R.S. Employer
or Organization) Identification No.
1505 York Road, Lutherville, Maryland 21093
- ------------------------------------- -----
(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (410) 583-8700
---------------
Securities registered under to Section 12(b) of the Exchange Act: None
----
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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.
YES X NO .
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $6,704,471
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the average bid and asked price of the registrant's
Common Stock on December 6, 1996 was $16.33 million.
As of December 6, 1996, there were issued and outstanding 1,620,062 shares
of the registrant's Common Stock.
Transition Small Business Disclosure Format (check one):
YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
September 30, 1996. (Parts I and II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders
for the Fiscal Year ended September 30, 1996. (Part III)
<PAGE>
PART I
Item 1. Business
- -----------------
Business of the Company
WHG Bancshares Corporation (the "Company") is a Maryland corporation
organized in December of 1995 at the direction of Heritage Savings Bank, F.S.B.
(the "Bank") to acquire all of the capital stock that the Bank issued in its
conversion from the mutual to stock form of ownership (the "Conversion"). On
March 29, 1996, the Bank completed the Conversion and became a wholly owned
subsidiary of the Company. The Company is a unitary savings and loan holding
company which, under existing laws, generally is not restricted in the types of
business activities in which it may engage provided that the Bank retains a
specified amount of its assets in housing-related investments. The Company
conducts no significant business or operations of its own other than holding all
of the outstanding stock of the Bank and investing the Company's portion of the
net proceeds obtained in the conversion.
Business of the Bank
The Bank which was founded in 1902 under the name West Baltimore
Building Association is a federally chartered stock savings bank headquartered
in Lutherville, Maryland. In 1975, the Bank changed its name to Heritage Savings
Association and in 1987, the Bank became a federal savings bank and changed its
name to "Heritage Savings Bank, F.S.B.". The Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and its
deposits have been federally insured by the Savings Association Insurance Fund
("SAIF") and its predecessor, the Federal Savings and Loan Insurance
Corporation, since 1954. The Bank is a member of and owns capital stock in the
FHLB of Atlanta, which is one of the 12 regional banks in the FHLB System. The
Bank has investments in two service corporations. See " -- Subsidiaries
Activities."
Competition
The Bank is one of many financial institutions serving its market area
which consists of the Baltimore, Maryland metropolitan area that includes
Baltimore City and its five surrounding counties (Baltimore County, Harford
County, Howard County, Carroll County, and Anne Arundel County). The competition
for deposit products comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions, and multi-state regional
banks in the Bank's market area. Deposit competition also includes a number of
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers. Loan competition
varies depending upon market conditions and comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
multi-state regional banks, and mortgage bankers.
Lending Activities
General. The Bank's loan portfolio predominantly consists of
adjustable-rate mortgage loans secured by one-to-four family residences and to a
lesser extent the Bank originates commercial loans secured by real estate,
construction loans, land lot loans and savings account loans. It is the current
policy of the Bank to remain a portfolio lender, though, the Bank occasionally
sells, with servicing retained and without recourse, mortgage loans to other
Baltimore based savings associations.
2
<PAGE>
Analysis of Loan Portfolio. Set forth below is selected data relating to
the composition of the Bank's loan portfolio by type of loan and type of
security on the dates indicated:
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------
1996 1995
--------------------- -----------------------
$ % $ %
---- ---- ---- ----
(Dollars in Thousands)
Type of Loans:
<S> <C> <C> <C> <C>
Residential......................... $69,500 91.76% $65,656 93.76%
Commercial (real estate)............ 3,026 4.00 3,005 4.29
Construction loans.................. 3,277 4.33 887 1.27
Lines of credit(1).................. 475 .63 500 .71
Land/lot............................ 774 1.02 269 .38
Home improvement loans.............. 9 .01 13 .02
Savings account loans............... 426 .56 641 .92
Lease finance receivables........... 828 1.09 284 .40
------ ------ ------- -------
78,315 103.40 71,255 101.75
Less:
Loans in process.................... (1,613) (2.13) (371) (.53)
Deferred loan fees.................. (603) (.79) (522) (.74)
Allowance for loan losses........... (195) (.26) (140) (.20)
Unearned discount on loans purchased (167) (.22) (194) (.28)
-------- ------ ------- ------
Total loans, net...................... $75,737 100.00 $70,028 100.00%
====== ====== ====== ======
</TABLE>
(1) Lines of credit consist of loans secured by residential and commercial real
estate.
Loan Maturity Tables
The following table sets forth the estimated maturity of the Bank's loan
portfolio at September 30, 1996. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totalled $15.5 million for the year ended September 30, 1996.
Adjustable-rate mortgage loans are shown as maturing based on contractual
maturities.
<TABLE>
<CAPTION>
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In Thousands)
<S> <C> <C> <C> <C>
1-4 family real estate mortgage $ 204 $1,695 $70,336 $72,235
Other residential commercial... 650 280 3,157 4,087
Construction................... 3,277 -- -- 3,277
Consumer....................... 427 -- 8 435
Lines of Credit................ 475 -- -- 475
Investment in financing leases. 39 789 -- 828
---
$81,337
-------
Less:
Loans in process............ (1,613)
Unearned discount on loans
purchased................. (167)
Deferred loan fees.......... (603)
Allowance for loan losses.. (195)
------
Loans receivable, net (1)... $78,759
======
</TABLE>
- ------------------
(1) Includes mortgage backed securities
3
<PAGE>
The following table sets forth the dollar amount of all loans due after
September 30, 1997, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
1-4 family real estate mortgage $21,906 $50,125 $72,031
Other........................ 822 2,615 3,437
Construction................. -- -- --
Consumer..................... 8 -- 8
Lease financing receivables.. 789 -- 789
------ ----- ------
Total.................... $23,525 $52,740 $76,265
====== ====== ======
One-to Four-Family Residential Loans. The Bank's primary lending
activity consists of the origination of one-to four-family residential mortgage
loans secured by property located in the Bank's primary market area. The Bank
generally originates one-to four-family residential mortgage loans in amounts up
to 80% of the lesser of the appraised value or selling price of the mortgaged
property without requiring mortgage insurance. In certain instances, the Bank
will originate a mortgage loan in an amount up to 95% of the lesser of the
appraised value or selling price of a mortgaged property, however, mortgage
insurance for the borrower is required. The Bank primarily originates and
retains adjustable-rate mortgage loans and to a lesser extent, the Bank will
originate fixed-rate mortgage loans for retention in its portfolio. A mortgage
loan originated by the Bank, whether fixed- or adjustable-rate, can have a term
of up to 30 years.
The Bank requires for all adjustable-rate mortgage loans that the
borrower qualify at a rate that is 2% above the initial contractual interest
rate. The Bank's adjustable-rate mortgage loans provide for periodic interest
rate adjustments of plus or minus 2% with a maximum adjustment over the term of
the loan to 10.75% and a minimum adjustment to 6%, except during the first year
following origination. Adjustable-rate mortgage loans typically reprice every
year, and provide for terms of up to 30 years with most loans having terms of
between 15 and 30 years. The Bank originates loans with initial interest rates
set below market rates and also originates adjustable-rate mortgage loans with a
fixed interest rate for five years and adjustable each year thereafter. Mortgage
loans originated and held by the Bank in its portfolio generally include
due-on-sale clauses which provide the Bank with the contractual right to deem
the loan immediately due and payable in the event that the borrower transfers
ownership of the property without the Bank's consent.
The Bank offers adjustable-rate mortgage loans using the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity of one year.
Interest rates charged on mortgage loans are competitively priced based on
market conditions and the Bank's cost of funds. Generally, the Bank's standard
underwriting guidelines for mortgage loans conform to FHLMC guidelines. It is
the current policy of the Bank to remain a portfolio lender. The Bank typically
charges a 1% to 2% origination or commitment fee.
Adjustable-rate mortgage loans decrease the risks associated with
changes in interest rates by more closely reflecting these changes, but involve
other risks because as interest rates increase, the underlying payments by the
borrower increase, thus increasing the potential for default. At the same time,
the marketability of the underlying collateral may be adversely affected by
higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the adjustable-rate mortgage loan
4
<PAGE>
documents, thereby potentially limiting their effectiveness during periods of
rising interest rates. These risks have not had an adverse effect on the Bank.
Commercial Loans. Commercial loan portfolio consist solely of loans
secured by real estate, such as church loans and small office building loans.
Loans secured by commercial property may be in amounts up to 75% of the
appraised value for a maximum term of 25 years. Commercial lending entails
significant additional risks when compared with one-to four-family residential
lending. For example, commercial loans typically involve larger loan balances to
single borrowers or groups of related borrowers, the payment experience on such
loans typically is dependent on the successful operation of the project and
these risks can be significantly impacted by the cash flow of the borrowers and
supply and demand conditions in the market for commercial office, retail and
warehouse space.
Construction Loans. Construction loans are made on a long term basis and
are classified as construction/permanent loans. Approximately 95% of the Bank's
construction loan portfolio is for the construction of single-family residential
property to the individuals who will be the owners and occupants upon completion
of construction. These construction loans usually require no principal payments
during the first six months, after which the payments are set at an amount that
will amortize over the term of the permanent loan. The terms, including interest
rate, of single family residential construction loans are the same as those for
a loan to purchase or refinance a previously constructed single family
residence. The maximum loan to value for other construction loans is dependent
on the type of property that will be constructed.
Consumer Loans. Consumer and home equity loans are originated by Bankers
Affiliate, formerly known as Cash, Inc., a subsidiary of the Bank, of which the
Bank owns a one-third interest. The Bank also makes loans secured by savings
accounts in the Bank (share loans) which generally have rates that adjust with
the rate on the underlying account and are typically 2% above the rate on the
underlying savings account. Share loans are offered subject to a 90% loan to
collateral value limit.
Loan Approval Authority and Underwriting. All loans must be approved by
the Bank's loan committee and all loans over $500,000 must be approved by the
Bank's Board of Directors.
Upon receipt of a completed loan application from a prospective
borrower, a credit report is generally ordered, income and certain other
information is verified and, if necessary, additional financial information is
requested. An appraisal from an independent fee appraiser of the real estate
intended to be used as security for the proposed loan is obtained. The Bank
makes construction/permanent loans on individual properties. Funds advanced
during the construction phase are held in a loan-in-process account and
disbursed based upon various stages of completion in accordance with the results
of inspection reports that are based upon physical inspection of the
construction by a loan officer. For real estate loans, the Bank requires title
insurance. Borrowers must also obtain fire and casualty insurance (for loans on
property located in a flood zone, flood insurance is required) prior to the
closing of the loan.
Loan Commitments. The Bank issues written commitments to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 15 days of the date of issuance. At September 30, 1996, the
Bank had $1,072,000 of commitments to cover originations and $1,613,000 in
undisbursed funds for loans in process. In addition, at September 30, 1996, the
Bank had $3,814,100 in loan applications in process. Management believes that
virtually all of the Bank's commitments will be funded.
Loans to One Borrower. SAIF-insured savings bank are subject to certain
lending limitations to a single borrower or group of borrowers. Under current
law, the Bank's lending limits equals an
5
<PAGE>
amount equal to 15% of unimpaired capital and unimpaired surplus on an unsecured
basis and an additional amount equal to 10% of unimpaired capital and unimpaired
surplus if the loan is secured by readily marketable collateral. Savings
associations are authorized to make loans to one borrower, for any purpose, in
an amount up to $500,000. The Bank's maximum loan-to-one borrower limit was
approximately $1,000,000 at September 30, 1996.
At September 30, 1996, the Bank's largest amount of loans to one
borrower were all performing residential real estate loans aggregating $850,000,
secured by real estate located in the Bank's market area.
Non-Performing and Problem Assets
Loan Delinquencies. If a loan continues in a delinquent status for 90
days past due and no repayment plan is in effect, the account is turned over to
an attorney for foreclosure. Management meets regularly to determine when
foreclosure proceedings should be initiated and the borrower is notified when
foreclosure has been commenced. At September 30, 1996, loans past due greater
than 90 days totalled $480,000.
All balance sheet asset accounts and supporting subsidiary ledger
accounts are analyzed by management of the Bank on a monthly basis in order to
identify potential classifiable assets. A general valuation allowance was
established by the Bank. Assets classified as "loss" are considered
uncollectible and a specific allowance for losses in the amount of 100% of the
portion classified as loss is established for such assets or such amount is
charged against income. Loans are generally placed on a non-accrual status when
the loan becomes more than 90 days delinquent or when, in the opinion of
management, the collection of additional interest is doubtful. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent interest payments, if any, are either applied to the
outstanding principal and interest balance in accordance with the contractual
terms of the loan.
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned, and certain other repossessed
assets and loans. As of the dates indicated, the Bank had no loans categorized
as troubled debt restructuring within the meaning of SFAS 15.
6
<PAGE>
<TABLE>
<CAPTION>
At September 30,
----------------
1996 1995
---- ----
(Dollars In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4
<S> <C> <C>
dwelling units......................... $405 $ 82
Commercial............................... 75 85
--- ---
Total...................................... $480 $167
=== ===
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
Permanent loans secured by 1-4
dwelling units......................... $ -- $169
Non-mortgage loans:
Consumer................................. -- --
---- -----
Total...................................... $ -- $169
==== ===
Total non-accrual and accrual loans........ $480 $336
=== ===
Real estate owned.......................... $ -- $ --
==== =====
Other non-performing assets................ $ -- $ --
==== =====
Total non-performing assets................ $ -- $336
==== ===
Total non-accrual and accrual loans to
net loans................................ .63% .48%
==== ====
Allowance for loan losses to total non-performing
loans, including loans contractually past due
90 days or more.......................... 40.63% 46.67%
===== =====
Total non-accrual and accrual loans to
total assets............................. .50% .40%
=== ====
Total non-performing assets to total assets .50% .40%
=== ====
</TABLE>
Interest income that would have been recorded on loans accounted for on
a non-accrual basis under the original terms of such loans was immaterial for
the year ended September 30, 1996. Amounts included in the Bank's interest
income for the year ended September 30, 1996 were, likewise, immaterial.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions. Under this classification system,
problem assets of insured institutions are classified as "substandard,"
"doubtful," or "loss." An asset is considered substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as doubtful have all of
the weaknesses inherent in those classified substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
may be designated "special mention" because of potential weakness that does not
currently warrant classification in one of the aforementioned categories.
7
<PAGE>
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
At September 30, 1996, the Bank had no assets classified as doubtful or
loss, $480,000 of assets classified as substandard loans and $333,000 of assets
classified as special mention.
Foreclosed Real Estate. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired, it is recorded at the fair value at
the date of foreclosure less estimated costs of disposition.
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the losses that may
be incurred in the Bank's loan portfolio. Such evaluation, which includes a
review of all loans of which full collectibility of interest and principal may
not be reasonably assured, considers 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, estimated value of any underlying collateral, any
existing guarantees, past performance of the loan, available documentation for
the loan, legal impediments to collection, financial condition of the borrower,
and current economic conditions.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for losses will
be adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
8
<PAGE>
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
At September 30,
--------------------
1996 1995
---- ----
(Dollars in Thousands)
Total loans outstanding.......................... $75,737 $70,028
====== ======
Average loans outstanding........................ $73,582 $73,273
====== ======
Allowance balances (at beginning of
period)........................................ 140 80
Provision (credit):
Residential.................................... 55 60
Commercial real estate......................... -- --
Consumer....................................... -- --
Net (Charge-offs) recoveries:
Residential.................................... -- --
Commercial real estate......................... -- --
Consumer....................................... -- --
---- -----
Allowance balance (at end of period)............. $ 195 $140
==== ===
Allowance for loan losses as a percent
of total loans outstanding..................... .26% .20%
Net loans charged off as a percent of
average loans outstanding...................... --% --%
Analysis of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance by
category, which management believes can be allocated only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future loss and does not restrict the use of the allowance to
absorb losses in any category.
9
<PAGE>
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------
1996 1995
---------------------------- ---------------------------
% of Loans in % of Loans in
Each Category Each Category
Amount To Total Loans Amount To Total Loans
------ -------------- ------ --------------
(Dollars In Thousands)
Allocation of allowance for loan
losses(1)
Real estate:
<S> <C> <C> <C> <C>
Residential mortgage.............. $ 90 88.75 $ 84 92.14
Commercial (real estate).......... 40 3.86 30 4.22
Construction ..................... 53 4.18 19 1.24
Lines of credit................... 3 .61 3 .70
Land/lot.......................... 1 .99 -- .38
Consumer.......................... -- .55 -- .92
Investment in financing leases.... 8 1.06 4 .40
---- ------- ---- -------
$ 195 100.00% $140 100.00%
==== ====== === ======
</TABLE>
Interest-Bearing Accounts
At September 30, 1996, the Company held $4,077,000 in interest bearing
demand deposits in other financial institutions, principally the FHLB of
Atlanta. The Company maintains these accounts in order to maintain liquidity and
improve the interest-rate sensitivity of assets.
Mortgage-Backed Securities and Investment Activities
General. The Bank is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short-term
securities and certain other investments. The Bank has generally maintained a
liquidity portfolio well in excess of regulatory requirements. Liquidity levels
may be increased or decreased depending upon the yields on investment
alternatives and upon management's judgment as to the attractiveness of the
yields then available in relation to other opportunities and its expectation of
future yield levels, as well as management's projections as to the short-term
demand for funds to be used in the Bank's loan origination and other activities.
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities. SFAS No. 115 requires the Bank to
classify all of its investments in debt and equity securities ("securities")
into three categories. Debt securities which management has the positive intent
and ability to hold until maturity are to be classified as held-to-maturity.
Securities that are bought and held principally for the purpose of selling them
in the near term are to be classified as trading securities. All other
securities are to be classified as available-for-sale securities.
Unrealized holding gains and losses for trading securities are to be
included in earnings. Unrealized gains and losses for available-for-sale
securities are to be excluded from earnings and reported net of income tax
effect as a separate component of shareholders' equity until realized.
Investments classified as held to maturity are to be accounted for at amortized
cost.
10
<PAGE>
SFAS No. 115 requires the Bank to account for a portion of its holding
of debt securities at market value (as opposed to amortized cost) and may result
in greater volatility in its earnings and capital position. It also may
discourage investment in longer term debt securities, which tend to have higher
yields than short term debt securities, and hence reduce the earnings of the
Bank. No securities can be moved from a particular category without Board
approval.
The Bank anticipates having the ability to fund all of its investing
activities from funds held on deposit at FHLB of Atlanta. The Bank will continue
to seek high quality investments with short to intermediate maturities and
duration from one to five years.
The Revenue Reconciliation Act of 1993 added a Section 475 to the
Internal Revenue Code. Section 475 is a mark-to-market tax provision that is
different from SFAS No. 115. The term "securities" in the tax statute includes
not just traditional debt and equity securities, but mortgages as well. Section
475 and the temporary regulations issued thereunder apply to "dealer"
institutions that regularly buy or sell more than a nominal amount of securities
in the ordinary course of a trade or business. Section 475 requires the Bank to
identify securities held for sale within the meaning of the tax code and include
unrealized gains or losses on related security transactions with its fiscal tax
return. The tax reporting of unrealized gains and losses on securities held for
sale as defined by Section 475 and the related regulations, if different from
SFAS No. 115, is a temporary difference as defined under SFAS No. 109 and the
recording of a related deferred tax liability or asset will not affect generally
accepted accounting principles ("GAAP") basis net income. At September 30, 1996,
the Bank did not have any investments subject to Section 475.
Mortgage-Backed Securities
To supplement lending activities, in the past, the Bank has invested in
residential mortgage-backed securities. Mortgage-backed securities can serve as
collateral for borrowings (although the Bank has not used them as such ) and,
through repayments, as a source of liquidity.
At September 30, 1996, the mortgage-backed securities portfolio had a
fair value of $2,884,000 and an amortized cost of $3,022,000. Because the entire
portfolio is classified as held to maturity (the Bank had no mortgage-backed
securities classified as available for sale at September 30, 1995 and 1996), the
portfolio is recorded at amortized cost.
The Bank's mortgage-backed securities are all issued by the Government
National Mortgage Association ("GNMA"). Expected maturities will differ from
contractual maturities due to schedule repayments and because borrowers may have
the right to call or prepay obligations with or without prepayment penalties.
GNMA is a government agency within the Department of Housing and Urban
Development ("HUD") which is intended to help finance government assisted
housing programs. GNMA guarantees the timely payment of principal and interest,
and GNMA securities are backed by the full faith and credit of the United States
Government. Because GNMA was established to provide support for low- and
middle-income housing, there are limits to the maximum size of loans that
qualify for this program. GNMA limits its maximum loan size to $114,000 for
Veterans Administration ("VA") loans and, on average, $67,500 for Federal
Housing Administration ("FHA") loans.
Mortgage-backed securities represent a participation interest in a pool
of single-family or other type of mortgages, the principal and interest payments
on which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
11
<PAGE>
participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, GNMA and FNMA.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate mortgages or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC, FNMA, and GNMA make up a majority of the
pass-through certificates market.
Investment Activities
Investment Portfolio. The following table sets forth the carrying value
of the Company's investment securities portfolio, short term investments, FHLB
stock and mortgage-backed securities at the dates indicated.
At September 30,
----------------
1996 1995
---- ----
(In Thousands)
Investment Securities:
U.S. Government Securities........................ $ -- $ 498
Federal National Mortgage Association bonds....... 1,500 --
Federal Home Loan Bank bonds...................... 1,000 --
----- -----
Total Investment Securities.................... $2,500 $ 498
===== =====
Interest Bearing Deposits in Other Banks.......... $4,077 $6,809
Federal Funds Sold................................ 2,428 1,042
Securities Purchased under agreements to resell... 2,000 --
Mortgage-Backed Securities........................ 3,022 540
FHLB Stock........................................ 683 680
----- -----
Total ......................................... $12,210 $9,071
====== =====
12
<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, market value and weighted average yields for the
Bank's investment securities portfolio at September 30, 1996. The following
table does not take into consideration the effects of scheduled repayments or
the effects of possible prepayments.
<TABLE>
<CAPTION>
As of September 30, 1996
----------------------------------------------------------------------------------------------------------------
More than One to More than Five to Ten
---------------- ---------------------
One Year or Less Five Years Years More than Ten Years Total Investment Securities
---------------- ---------- ----- ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
U.S. Government
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations....... $ -- --% $ -- --% $ -- --% $ -- --% $ -- --% $ --
U.S. Agency
Obligations...... -- -- -- -- 1,500,000 7.42 1,000,000 7.15 2,500,000 7.31 2,385,000
Municipal
Obligations...... -- -- -- -- -- -- -- -- -- -- --
Corporate
Notes and Bonds.. -- -- -- -- -- -- -- -- -- -- --
Other Securities... -- -- -- -- -- -- -- -- -- -- --
---- --- ---- ---- ---------- ---- ---------- ---- ---- ---- ----
Total......... $ -- --% $ -- --% $1,500,000 7.42% $1,000,000 7.15% $2,500,000 7.31% $2,385,000
==== === ==== ==== ========== ==== ========== ==== ========= ==== =========
</TABLE>
13
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Bank's funds for
lending and other investment purposes. The Bank derives funds from amortization
and prepayment of loans and, to a much lesser extent, maturities of investment
securities, borrowings, mortgage-backed securities and operations. Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general interest rates and market conditions. The Bank had no FHLB advances at
September 30, 1996.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a selection
of deposit instruments including regular savings accounts, money market
accounts, and term certificate accounts. The Bank also offers IRA accounts.
Deposit account terms vary according to the minimum balance required, the time
period the funds must remain on deposit, and the interest rate, among other
factors. At September 30, 1996, the Bank had no brokered accounts.
The following table sets forth the average balances and interest rates
based on month-end balances for interest-bearing non-certificate deposits and
time deposits as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------------------
1996 1995
--------------------------------------------------------------------------------------
Interest-Bearing Interest-bearing
Non-Certificate Time Non-Certificate Time
Deposits Deposits Deposits Deposits
-------- -------- -------- --------
(Dollars in Thousands
<S> <C> <C> <C> <C>
Average Balance.... $27,426 $44,924 $29,317 $46,697
Average Rate....... 2.89% 5.75% 2.85% 5.37%
</TABLE>
Certificates of Deposit. The following table indicates the amount of the
Bank's certificates of deposit of $100,000 or more by time remaining until
maturity as of September 30, 1996.
Certificates
of Deposits
-----------
Maturity Period (In Thousands)
- ---------------
Within three months..................................... $ 529
Three through six months................................ 904
Six through twelve months............................... 229
Over twelve months...................................... 1,732
------
$3,394
======
14
<PAGE>
Borrowings
The Bank may obtain advances from the FHLB of Atlanta to supplement its
supply of lendable funds. Advances from the FHLB of Atlanta are typically
secured by a pledge of the Bank's stock in the FHLB of Atlanta and a portion of
the Bank's first mortgage loans and certain other assets. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The Bank, if the need arises, may also access the Federal Reserve
Bank discount window to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. At September 30, 1996 and September 30, 1995,
the Bank had no borrowings from the FHLB of Atlanta.
During the Year Ended
September 30,
---------------------
1996 1995
---- ----
(In Thousands)
Maximum amount of borrowings outstanding at any
month end:
Advances from Federal Home Loan Bank................. $2,000 $3,000
For the Year Ended
September 30,
------------------
1996 1995
---- ----
(In Thousands)
Approximate average short-term borrowings outstanding
with respect to:
Advances from Federal Home Loan Bank................. $ 1,321 $ 583
Approximate weighted average rate paid on: (1)
Advances from Federal Home Loan Bank................. 5.77% 6.06%
Subsidiaries Activities
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. At September 30, 1996,
the Bank had investments in two service corporation, incorporated under Maryland
law, Bankers Affiliate and Mapleleaf Mortgage Corporation.
Bankers Affiliate (formerly named Cash, Inc.) - Bankers Affiliate ("BA")
was formed in April 1983 as a service corporation for the purpose of originating
consumer loans. BA is equally owned by the Bank and two other local thrift
institutions. At September 30, 1996, the Bank's investment totalled $25,000 and
had a loan payable from this subsidiary of $2,800,000.
Mapleleaf Mortgage Corporation - Mapleleaf Mortgage Corporation ("MMC")
was formed in June 1996 and is a wholly-owned subsidiary of the Bank. The
purpose of MMC is to engage in mortgage brokerage activities. At September 30,
1996, the Bank's investment totalled $50,000.
15
<PAGE>
Employees
At September 30, 1996 the Bank had 23 full-time and 11 part-time employees.
None of the Bank's employees are represented by a collective bargaining group.
The Bank believes that its relationship with its employees is good.
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "-
Regulation of the Bank Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for
16
<PAGE>
the protection of the SAIF and depositors. The regulatory structure also gives
the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulations, whether by the OTS, the FDIC, or the Congress could have a material
adverse impact on the Company, the Bank, and their operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). If an institution has no tangible capital, the FDIC has the
authority, should it initiate proceedings to terminate an institution's deposit
insurance, to suspend the insurance of any such institution. However, if a
savings association has positive capital when it includes qualifying intangible
assets, the FDIC cannot suspend deposit insurance unless capital declines
materially, the institution fails to enter into and remain in compliance with an
approved capital plan, or the institution is operating in an unsafe or unsound
manner.
Regardless of an institution's capital level, insurance of deposits may
be terminated by the FDIC upon a finding that the institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the institution's primary regulator. The FDIC
may also prohibit an insured depository institution from engaging in any
activity the FDIC determines to pose a serious threat to the SAIF. The
management of the Bank is unaware of any practice, condition, or violation that
might lead to termination of its deposit insurance.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund.
Under this system, a savings association pays within a range of 23 cents to 31
cents per $100 of domestic deposits, depending upon the institution's risk
classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, the FDIC is authorized
to increase such deposit insurance rates on a semi-annual basis if it determines
that such action is necessary to cause the balance in the SAIF to reach the
designated reserve ratio of 1.25% of SAIF-insured deposits within a reasonable
period of time. The SAIF was substantially underfunded at September 30, 1996. In
addition, the FDIC may impose special assessments on SAIF members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed necessary
by the FDIC. The Bank's federal deposit insurance premium expense for the year
ended September 30, 1996 amounted to approximately $680,000. By comparison, at
September 30, 1996, members of the BIF were required to pay substantially lower,
or virtually no, federal deposit insurance premiums.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank recorded a $506,000 pre-tax
expense for this assessment at September 30, 1996, and such assessment is
payable on November 27, 1996. Beginning January 1, 1997, deposit insurance
assessments for SAIF members are expected to be reduced to approximately .064%
of deposits on an annual basis through the end of 1999. During this same period,
BIF members are expected to be assessed approximately 0.13% of deposits.
Thereafter, assessments for BIF and SAIF members should be the same and the SAIF
and BIF may be merged. It is expected that these continuing assessments for both
SAIF and BIF members will be used to repay outstanding Financing Corporation
bond obligations. Assuming these changes occur, beginning January 1, 1997, the
rate of deposit insurance assessed the Bank will decline by approximately 70%.
17
<PAGE>
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets.
The following table sets forth the Bank's regulatory capital position at
September 30, 1996, as compared to the minimum regulatory capital requirements
imposed on the Bank by the OTS at that date.
Percent of
Amount Adjusted Assets
------ ---------------
(Dollars in Thousands)
GAAP Capital........................ $15,331 16.35%
Tangible Capital:
Regulatory requirement............ $1,407 1.50%
Actual capital.................... 15,331 16.35
------ -----
Excess........................ $13,924 14.85%
====== =====
Core Capital:
Regulatory requirement............ $2,814 3.00%
Actual Capital.................... 15,331 16.35
------ -----
Excess......................... $12,517 13.35%
====== =====
Risk-Based Capital:
Regulatory requirement............ $ 3,880 8.00%
Actual capital.................... 15,527 32.00
------ -----
Excess......................... $11,647 24.00%
====== =====
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
September 30, 1996, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
18
<PAGE>
Qualified Thrift Lender Test. Savings institutions must meet a QTL test.
If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Atlanta. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the institution in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. An association must be in compliance with the QTL test on a
monthly basis in nine out of every 12 months. As of September 30, 1996, the Bank
was in compliance with its QTL requirement with 89% of its assets invested in
QTIs.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At
September 30, 1996, the Bank was in compliance with these Federal Reserve Board
requirements.
Item 2. Description of Property
- -------------------------------
(a) Properties.
The Bank operates from its main office and four branch offices.
Location Leased or Owned
-------- ---------------
MAIN OFFICE:
1505 York Road Owned
Lutherville, Maryland
21093
HAMILTON OFFICE:
4228 Harford Road Owned
Baltimore, Maryland 21214
19
<PAGE>
WOODLAWN OFFICE:
Gwynn Oak Avenue and Leased until
Windsor Mill Road December 1997
Baltimore, Maryland 21207
ELLICOTT CITY OFFICE:
9396 Baltimore National Pike Leased until
Ellicott City, Maryland May 1997
21042
GOLDEN RING OFFICE:
8767 K Philadelphia Road Leased until
Baltimore, Maryland 21237 June 1997
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. The Bank's investments are
primarily acquired to produce income, and to a lesser extent, possible capital
gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Business - Lending Activities and - Regulation of the Bank," and "Item 2.
Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Business - Lending
Activities and - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily Engaged
in Real Estate Activities. See "Item 1. Business - Lending Activities and -
Regulation of the Bank."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which the Company or the Bank
are periodically involved, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans, and other issues
incident to the Bank's business. In the opinion of management, no material loss
is expected from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
20
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The information contained under the section captioned "Market Price of
the Common Stock" on page 3 of the Company's Annual Report to Stockholders for
the fiscal year ended September 30, 1996 (the "Annual Report"), is incorporated
herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 5 to 18 of the Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Registrant's financial statements listed under Item 13 are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants On Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
- --------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
- ---------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nominees for Director, Directors Continuing in Office, and Executive Officers -
Election of Directors" and " - Biographical Information" in the "Proxy
Statement" is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
21
<PAGE>
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(c) Management of the Registrant knows of no arrangements, including
any pledge by any person of securities of the Registrant, the
operation of which may at a subsequent date result in a change in
control of the Registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
Item 13. Exhibits, List, and Reports on Form 8-K
- ------------------------------------------------
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of
independent accountants of the Registrant included in the Registrant's Annual
Report to Stockholders for the fiscal year ending September 30, 1996 are
incorporated herein by reference and also in Item 7 hereof.
Report of Independent Auditors
Consolidated Statements of Financial Condition as of September 30, 1995
and 1996.
Consolidated Statements of Operations for the Years Ended September 30,
1995 and 1996.
Consolidated Statements of Retained Earnings for the Years Ended
September 30, 1995 and 1996.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1995 and 1996.
Notes to Consolidated Financial Statements.
2. Other than as set forth below, Financial Statement Schedules
for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission ("SEC") are not required under the related
instructions or are inapplicable and therefore have been omitted.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3(i) Articles of Incorporation of WHG Bancshares Corporation *
3(ii) Bylaws of WHG Bancshares Corporation *
22
<PAGE>
10.1 Employment Agreement with Peggy J. Stewart *
10.2 Severance Agreement with Robin L. Taylor *
10.3 Severance Agreement with Diana Rohrback *
10.4 Severance Agreement with Nicholas Tracht *
10.5 1996 Stock Option Plan **
10.6 Management Stock Bonus Plan and Trust Agreement **
13 Annual Report to Stockholders for the fiscal year ended
September 30, 1996
21 Subsidiaries of the Registrant
27 Financial Data Schedule ***
- ---------------------
* Incorporated by reference to the registration statement on Form S-1 (File
No. 33-80487) declared effective by the SEC on February 7, 1996.
** Incorporated by reference to the proxy statement for the special meeting
of stockholders filed with the SEC on August 27, 1996.
*** Only included in electronic filing.
(b) Not applicable
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized as of
December 26, 1996.
WHG BANCSHARES CORPORATION
By: /s/ Peggy J. Stewart
----------------------------
Peggy J. Stewart
President, Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of December 26, 1996.
/s/ Peggy J. Stewart /s/ Robin L. Taylor
- ---------------------------------- -----------------------------
Peggy J. Stewart Robin L. Taylor
President, Chief Executive Officer Controller
and Director (Principal Accounting Officer)
(Principal Executive Officer)
/s/ John E. Lufburrow /s/ Robin L. Taylor
- ---------------------------------- -----------------------------
John E. Lufburrow Robin L. Taylor
Chairman of the Board (Principal Financial Officer)
/s/ Philip W. Chaser, Jr. /s/ Herbert A. Davis
- ---------------------------------- -----------------------------
Philip W. Chase, Jr. Herbert A. Davis
Director Director
<PAGE>
/s/ Urban P. Francis, Jr. /s/ D. Edward Lauterbach, Jr.
- ---------------------------------- -----------------------------
Urban P. Francis, Jr. D. Edward Lauterbach, Jr.
Director Director
/s/ Hugh P. McCormick /s/ Edwin C. Muhly, Jr.
- ---------------------------------- -----------------------------
Hugh P. McCormick Edwin C. Muhly, Jr.
Director Director
/s/ August J. Seifer /s/ Herbert W. Spath
- ---------------------------------- -----------------------------
August J. Seifert Herbert W. Spath
Director Director
EXHIBIT 13
<PAGE>
WHG BANCSHARES CORPORATION
ANNUAL REPORT
For the Fiscal Year Ended
September 30, 1996
----------------------------------------------------------
<PAGE>
WHG BANCSHARES CORPORATION
ANNUAL REPORT
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Letter to Stockholders.......................................... 1
Corporate Profile and Stock Market Information................. 3
Selected Financial Ratios and Other Data....................... 4
Management's Discussion and Analysis........................... 5
Independent Auditors' Reports.................................. 19
Consolidated Financial Statements.............................. 20
Notes to Consolidated Financial Statements..................... 25
Office Locations and Other Corporate Information............... 49
<PAGE>
[WHG LETTERHEAD]
[WHG BANCSHARES CORPORATION LOGO]
December 20, 1996
To Our Stockholders:
On behalf of our Board of Directors and employees, we are pleased to
present the first Annual Report to Stockholders of WHG Bancshares Corporation
(the "Company"). As you will see from the Report, 1996 was an eventful year for
the Company and its wholly-owned subsidiary, Heritage Savings Bank, F.S.B. (the
"Bank")
On March 29, 1996, the Bank successfully completed its conversion from
the mutual to stock form of organization and the concurrent public offering of
1,620,062 shares of the Company's common stock (the "Conversion"). Net proceeds
to the Company and the Bank from the Conversion were approximately $15 million.
While the Company is in the early stages of investing the net proceeds from the
Conversion, we expect that the investment of these proceeds will generate
increased core earnings.
An additional significant event in 1996 affecting your investment in the
Company was the enactment of the Economic Growth and Paperwork Reduction Act of
1996. This federal law was enacted on September 30, 1996, and, among other
things, levied a special assessment on deposits of the Bank as of March 31,
1995, of 65.7 basis points. The effect of this assessment on the Company's
results of operations and financial condition is discussed below. The
legislation recapitalized the Savings Association Insurance Fund (SAIF) which
insures the deposits of all savings associations such as the Bank. As a result,
the Bank will pay lower premiums to the SAIF for deposit insurance. We are
pleased that this issue has finally been resolved by the Congress as we will no
longer be at a significant competitive disadvantage to commercial banks which
were, prior to the legislation, paying significantly less for deposit insurance.
1505 YORK ROAD. LUTHERVILLE, MARYLAND. 21093-5651
PHONE 410-583-8700 FAX 410-583-1863
<PAGE>
December 20, 1996
Page 2
For the fiscal year ended September 30, 1996, the Company earned
$458,617 as compared to $672,858 for the fiscal year ended September 30, 1995.
Earnings per share data is not presented as the Conversion was completed on
March 29, 1996. Earnings for the September 30, 1996 fiscal year and fourth
fiscal quarter were adversely impacted by the special assessment of $310,583,
net of taxes. Without the imposition of the special assessment, the Company
would have earned $769,200 for the 1996 fiscal year.
At September 30, 1996, the Company's assets totalled $96,528,114, as
compared to $85,026,575 at September 30, 1995. Stockholders' equity was
$23,246,058 or $14.35 per share at September 30, 1996, as compared to retained
earnings of $8,452,817 at September 30, 1995. The increase in assets and
stockholders' equity was primarily attributable to the net proceeds received
from the Conversion.
We sincerely appreciate the confidence in us shown by our customers and
local community in the Conversion. As you may know, our stock offering was
significantly oversubscribed. We are pleased to report that our stock has
consistently traded above its issue price of $10 per share since the completion
of the Conversion.
The goal of your Board of Directors and Management is to continuously
strive to enhance your investment in the Company. We expect to report progress
in this regard in our future reports to you.
Sincerely,
/s/ John E. Lufburrow
John E. Lufburrow
Chairman of the Board
/s/ Peggy J. Stewart
Peggy J. Stewart
President and Chief Executive Officer
<PAGE>
WHG BANCSHARES CORPORATION
Corporate Profile
WHG Bancshares Corporation (the "Company") is a Maryland corporation organized
in December of 1995 at the direction of Heritage Savings Bank, F.S.B. (the
"Savings Bank" or "Heritage") to acquire all of the capital stock that the
Savings Bank issued in its conversion from the mutual to stock form of ownership
(the "Conversion"). On March 29, 1996, the Savings Bank completed the Conversion
and became a wholly owned subsidiary of the Company. The Company is a unitary
savings and loan holding company which, under existing laws, generally is not
restricted in the types of business activities in which it may engage provided
that the Savings Bank retains a specified amount of its assets in
housing-related investments. The Company conducts no significant business or
operations of its own other than holding all of the outstanding stock of the
Savings Bank and investing the Company's portion of the net proceeds obtained in
the conversion.
The Savings Bank, founded in 1902 under the name West Baltimore Building
Association, is a federally chartered stock savings bank headquartered in
Lutherville, Maryland. The Savings Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and its
deposits are federally insured by the Savings Association Insurance Fund
("SAIF"). The Savings Bank is a member of and owns capital stock in the FHLB of
Atlanta, which is one of the 12 regional banks in the FHLB System. The Savings
Bank has investments in two service corporations.
The Savings Bank operates a traditional savings bank business, attracting
deposit accounts from the general public and using those deposits, together with
other funds, primarily to originate and invest in loans secured by single-family
residential real estate. Since the middle of the 1980s, the Savings Bank's
lending activities have emphasized adjustable rate mortgage loans.
Stock Market Information
The Company's common stock has been traded on the Nasdaq SmallCap Market under
the trading symbol of "WHGB" since it commenced trading in April 1996. The
following table reflects high and low bid quotations as published by The Wall
Street Journal. The quotations reflect inter-dealer prices, without retail
mark-up, markdown, or commission, and may not represent actual transactions.
Dividends
Date High Low Declared
---- ---- --- --------
April 1, 1996 to June 30, 1996 $11.75 $10.75 $0
July 1, 1996 to September 30, 1996 13.00 11.00 $0
The number of shareholders of record of common stock as of the record date of
December 6, 1996, was approximately 274. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms. At December 6, 1996, there were 1,620,062 shares outstanding.
The Company's ability to pay dividends to stockholders is dependent upon the
dividends it receives from the Savings Bank. The Savings Bank may not declare or
pay a cash dividend on any of its stock if the effect thereof would cause the
Savings Bank's regulatory capital to be reduced below (1) the amount required
for the liquidation account established in connection with the Conversion, or
(2) the regulatory capital requirements imposed by the OTS. The Company did not
pay any dividends during the fiscal years ended September 30, 1995 and 1996.
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<PAGE>
Selected Financial Ratios and Other Data
<TABLE>
<CAPTION>
For the Years Ended September 30,
---------------------------------
1996 1995
---- ----
<S> <C> <C>
Return on average assets................. .49% .77%
Return on average equity................. 2.68 8.32
Average equity to average assets ratios.. 18.45 9.29
Equity to assets at period end........... 24.08 9.94
Net interest rate spread................. 2.70 3.02
Net yield on average interest-earnings
assets.................................. 3.59 3.41
Non-performing loans to total assets..... .50 .40
Allowance for loan loss to total loans... .26 .20
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
WHG Bancshares Corporation (the "Company") was recently formed, therefore
its results from operations consist primarily of interest income from the
investing of funds from the proceeds generated by the sale of common stock and
expense incurred in the maintaining of the investment portfolio. Heritage
Savings Bank, F.S.B.'s (the "Savings Bank" or "Heritage") results of operations
are primarily dependent on its net interest income, which is the difference
between the interest income earned on its assets, primarily loans and
investments, and the interest expense on its liabilities, primarily deposits and
borrowings. Net interest income may be affected significantly by general
economic and competitive conditions and policies of regulatory agencies,
particularly those with respect to market interest rates. The results of
operations are also influenced by the level of non-interest expenses, such as
employee salaries and benefits and other income, such as loan-related fees and
fees on deposit-related services.
Asset/Liability Management
The Savings Bank's net interest income is sensitive to changes in interest
rates, as the rates paid on its interest-bearing liabilities generally change
faster than the rates earned on interest-earning assets. As a result, net
interest income will frequently decline in periods of rising interest rates and
increase in periods of falling interest rates.
To mitigate the impact of changing interest rates on its net interest
income, the Savings Bank manages its interest sensitivity and asset/liability
products through a committee which meets weekly and consists of department
supervisors, overseen by the President and Chairman of the Board of Directors.
The Chairman reports to the Board of Directors of the Savings Bank on behalf of
the Committee.
In an effort to reduce interest rate risk and protect itself from the
negative effects of rapid or prolonged changes in interest rates, the Savings
Bank has instituted certain asset and liability management measures, including
the following measures:
. Maintains a large base of adjustable rate residential mortgage loans.
Such loans have been emphasized by Heritage. However, recently the
Savings Bank has begun to offer fixed rate residential mortgage loans in
addition to ARMs to balance the loan portfolio.
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<PAGE>
. Maintains moderate levels of interest-bearing deposits, federal funds
and U.S. Government securities with short to intermediate terms to
maturities.
. Maintains a high proportion of lower-costing, non-certificate accounts
in the deposit portfolio. At September 30, 1996, such deposits totaled
$28.0 million or 38.8% of total deposits.
The Committee manages the interest rate sensitivity of the Savings Bank
through the determination and adjustment of asset/liability composition and
pricing strategies. The Committee then monitors the impact of the interest rate
risk and earnings consequences of such strategies for consistency with the
Savings Bank's liquidity needs, growth and capital adequacy. The Savings Bank's
principal strategies to reduce the interest rate sensitivity of its
interest-earning assets are the origination of adjustable-rate mortgage loans
("ARMs") and the Savings Bank's objective is to maintain 75% of its mortgage
loan portfolio in ARMs. However, this objective may become more difficult to
achieve during periods when consumers perceive interest rates are declining and
consumer demand shifts towards fixed rate mortgage loans and away from ARMs. The
interest rates on the Savings Bank's liabilities generally change faster than
rates earned on assets, because the Savings Bank's deposit liabilities consist
primarily of demand, money market and passbook savings accounts, and
certificates of deposit that mature in one year or less. The Savings Bank seeks
to mitigate the interest rate sensitivity of its liabilities by offering higher
rates on longer term certificate accounts. However, depositors have not sought
such longer terms during recent periods. The Savings Bank does not currently
engage in, or intend to engage in, trading activities or use derivative
instruments to control interest rate risk.
Net Portfolio Value
In order to encourage savings associations to reduce their interest rate
risk, the OTS adopted a rule, that is not yet in effect, incorporating an
interest rate risk ("IRR") component into the risk-based capital rules. The IRR
component is a dollar amount that will be deducted from total capital for the
purpose of calculating an institution's risk-based capital requirement and is
measured in terms of the sensitivity of its net portfolio value ("NPV") to
changes in interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
An institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point ("bp") change in market interest rates. A resulting
change in NPV of more than 2% of the estimated market value of its assets will
require the institution to deduct from its capital 50% of that excess change.
The rules provide that the OTS will calculate the IRR component quarterly for
each institution. The Savings Bank, based on asset size and risk-based capital,
has been informed by the OTS that it is exempt from this rule.
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<PAGE>
Nevertheless, the following table presents the Savings Bank's NPV at September
30, 1996, as calculated by the OTS, based on information provided to the OTS by
the Savings Bank.
<TABLE>
<CAPTION>
NPV as % of PV
Net Portfolio Value of Assets
------------------- ---------
Changes NPV
in Rate $ Amount $Change(1) %Change(2) Ratio(3) Change(4)
- ------- -------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
+400 bp $ 9,119 $ -7,483 -45% 10.54% -684 bp
+300 bp 11,045 -5,557 -33% 12.43% -495 bp
+200 bp 12,992 -3,609 -22% 14.25% -313 bp
+100 bp 14,902 -1,700 -10% 15.95% -143 bp
0 bp 16,602 17.38%
- -100 bp 18,028 1,426 +9% 18.52% +114 bp
- -200 bp 19,038 2,437 +15% 19.29% +191 bp
- -300 bp 19,987 3,386 +20% 19.98% +261 bp
- -400 bp 21,021 4,419 +27% 20.73% +336 bp
</TABLE>
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by average total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming
no change in interest rates.
At
September 30,
1996
-------------
***Risk Measures: 200 bp rate shock***
Pre-Shock NPV Ratio: NPV as % of PV of Assets............ 17.38%
Exposure Measure: Post Shock NPV Ratio................... 14.25%
Sensitivity Measure: Change in NPV Ratio................. -313 bp
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<PAGE>
Although the OTS has informed the Savings Bank that it is not subject to
the IRR component discussed above, the Savings Bank is still subject to interest
rate risk and, as can be seen above, changes in interest rates may reduce the
Savings Bank's NPV. The OTS has the authority to require otherwise exempt
institutions to comply with the rule concerning interest rate risk.
Certain shortcomings are inherent in the preceding NPV tables since the
data reflect hypothetical changes in NPV based upon assumptions used by the OTS
to evaluate the Savings Bank as well as other institutions. Nonetheless, the
experience of the Savings Bank has been that net interest income declines with
increases in interest rates and that net interest income increases with
decreases in interest rates. Generally, during periods of increasing interest
rates, the Savings Bank's interest rate sensitive liabilities would reprice
faster than its interest rate sensitive assets causing a decline in the Savings
Bank's interest rate spread and margin. This would result from an increase in
the Savings Bank's cost of funds that would not be immediately offset by an
increase in its yield on earning assets. An increase in the cost of funds
without an equivalent increase in the yield on earning assets would tend to
reduce net interest income. As a result of the increase in market interest
rates, the Savings Bank's net interest rate spread decreased between the fiscal
years ended September 30, 1996 and September 30, 1995 to 2.70% from 3.02%.
In times of decreasing interest rates, fixed rate assets could increase
in value and the lag in repricing of interest rate sensitive assets could be
expected to have a positive effect on the Savings Bank.
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<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of daily
average balances has caused any material differences in the information
presented.
<TABLE>
<CAPTION>
Year Ended September 30, 1996
------------------------------------------------------
1996 1995
---------------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earnings assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable(1)......................... $73,581 $ 5,573 7.57% $73,273 $ 5,541 7.56%
Mortgage-backed securities.................. 2,305 149 6.46% 579 44 7.60%
Investment securities(2).................... 2,854 196 6.87% 1,146 102 8.92%
Other interest-earning assets(3)............ 12,316 756 6.14% 9,799 597 6.10%
------ ------ ------ ------
Total interest-earning assets............ $91,056 6,674 7.33% $84,797 6,284 7.41%
====== ======
Non-interest-earning assets.................... 1,804 2,190
------ ------
Total assets............................. $92,860 $86,987
====== ======
Interest-bearing liabilities:
Demand deposits............................. $27,863 $ 794 2.85% $29,733 $ 837 2.82%
Time deposits............................... 44,924 2,582 5.75% 46,697 2,509 5.37%
Other liabilities(4)........................ 712 30 4.21% 817 43 5.20%
------ ------ ------ ------
Total interest-bearing liabilities....... $73,499 3,406 4.63% $77,247 3,389 4.39%
====== ------ ====== ------
Non-interest bearing liabilities............... 2,232 1,656
------ ------
Total liabilities........................ 75,731 78,903
Stockholders' equity........................... 17,129 8,084
------ ------
Total liabilities and stockholders' equity $92,860 $86,987
====== ======
Net interest income............................ $ 3,268 $ 2,895
====== ======
Interest rate spread(5)........................ 2.70% 3.02%
====== ======
Net yield on interest-earning assets(6)........ 3.59% 3.41%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities....... 123.89% 109.77%
====== ======
</TABLE>
- ---------------------
(1) Average balances include non-accrual loans.
(2) Includes investment securities, ground rents and FHLB stock.
(3) Includes interest-bearing deposits in other financial institutions, Federal
Funds, securities purchased under agreements to resell and interest on
loans to affiliated corporations.
(4) Includes FHLB advances and interest-earning advance payments by borrowers
for taxes and insurance.
(5) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(6) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
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<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended September 30,
1996 vs. 1995
-------------------------------------
Increase (Decrease)
Due to
-------------------------------------
Rate/
Volume Rate Volume Net
------ ---- ------ ---
(Dollars in Thousands)
Interest income:
<S> <C> <C> <C> <C>
Loans receivable .................. $ 23 $ 9 $ - $ 32
Mortgage-backed securities......... 131 (7) (19) 105
Investment securities.............. 152 (23) (35) 94
Other interest earning assets...... 154 4 1 159
----- ----- ----- -----
Total interest-earning assets... $ 460 $ (17) $ (53) $ 390
===== ===== ===== =====
Interest expense:
Deposits........................... $ (159) $ 198 $ (9) $ 30
Other liabilities(1)............... (6) (8) 1 (13)
----- ----- ----- -----
Total interest-bearing
liabilities.................... $ (165) $ 190 $ (8) $ 17
===== ===== ===== =====
Net change in net interest income..... $ 625 $ (207) $ (45) $ 373
===== ===== ===== =====
</TABLE>
(1) Includes interest on advances from the FHLB of Atlanta and advance payments
by borrowers for taxes and insurance.
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<PAGE>
Financial Condition
Total assets increased by $11.5 million to $96.5 million or 13.5% at
September 30, 1996 from $85.0 million at September 30, 1995, primarily due to an
increase in loans receivable of $5.7 million, federal funds sold of $1.3
million, other investments and securities purchased under agreement to resell of
$2.0 million each and mortgage backed securities of $2.5 million. This was
partially offset by a decrease in interest-bearing deposits in other banks of
$2.7 million. New loan originations exceeded loan payments and prepayments as
the demand for new housing project loans increased. All of the increases were
primarily the result of investing funds raised due to the stock conversion and
the use of interest-bearing deposits in other banks.
The Company's deposits decreased by $4.1 million or 5.4% to $72.1 million at
September 30, 1996 from $76.2 million at September 30, 1995. Demand accounts
decreased by $.4 million along with time deposits which decreased by $3.7
million as certain depositors converted their accounts to shares of stock during
the conversion.
The Company's net worth increased by $14.7 million to $23.2 million at
September 30, 1996 from $8.5 million at September 30, 1995. The increase was the
result of the sale of stock from the conversion in the amount of $14.3 million
and earnings for the 1996 fiscal year. The Savings Bank's net worth was equal to
24.1% of total assets at September 30, 1996.
Results of Operations
Net Income
Net income decreased by $214,000 for fiscal 1996 to $459,000 from $673,000
for fiscal 1995. Net income was reduced by $310,000 (net of tax) due to a
one-time assessment being imposed on the Savings Bank. (See "--Non-Interest
Expenses"). If the Savings Bank had not had this special assessment, the Company
would have had net income of $769,000 for fiscal 1996. The earnings of the
Savings Bank and the Company depend primarily on the level of its net interest
income which is the difference between interest earned on the Company's
interest-earning assets and the interest expense incurred on its
interest-bearing liabilities. Earnings are also affected by the provision for
loan losses, fees and other charges, the level of non-interest expenses and
provisions for income taxes.
Net Interest Income
Net interest income increased by approximately $373,000 to $3.3 million for
fiscal 1996 from $2.9 million for fiscal 1995. The increase was the result of an
increase in the amount of average interest-earning assets exceeding average
interest-bearing liabilities.
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<PAGE>
Interest-earning assets primarily consist of mortgage loans, mortgage backed
securities, investment securities, securities purchased under agreement to
resell, interest-bearing deposits in other institutions and loans to an
affiliated corporation. Interest-bearing liabilities consist of deposits and
other borrowings.
The interest rate spread which is the difference between the yield on average
interest-earning assets and the percentage cost of average interest-bearing
liabilities declined in fiscal 1996 to 2.70% from 3.02% for fiscal 1995. The
decline in interest rate spread is primarily the result of changes in the cost
of interest-bearing liabilities being greater than changes in the yields on
interest-earning assets. Although the conversion resulted in an increase in
interest-earning assets, there was a decline in the yield received, while the
yield on the interest-bearing liabilities increased for the period.
Interest Income
Interest income on loans increased by approximately $32,000 to $5.6 million
for fiscal 1996 from $5.5 million for fiscal 1995. The slight increase for
fiscal 1996 was largely the result of an increase in the average dollar amount
of loans outstanding of approximately $300,000. The average yield remained
substantially the same. The average dollar amount of loans outstanding was lower
in the first half of the fiscal year and increased during the second part of the
year.
Interest income on mortgage backed securities increased by $105,000 or 238.6%
to $149,000 for fiscal 1996 from $44,000 for fiscal 1995. The increase was
primarily due to an increase in average dollar amount outstanding of mortgage
backed securities of $1.7 million, off-set in part by a decrease in the average
yield to 6.46% in fiscal 1996 from 7.60% in fiscal 1995. The decline in the
average yield is the result of purchasing $2.6 million in mortgage backed
securities at a lower yielding rate, than those previously on the books.
Interest income on investment securities increased by $94,000 or 92.2% to
$196,000 in fiscal 1996 from $102,000 in fiscal 1995. The increase was largely
the result of an increase in the average dollar amount outstanding of $1.7
million. This was partially off-set by a decrease in the average yield to 6.87%
for fiscal 1996 from 8.92% for fiscal 1995. The decrease in yield was due in
part to the maturing of a higher yielding investment and the use of the proceeds
to purchase additional securities at lower yields.
Other interest income increased by $159,000 or 26.6% to $756,000 in fiscal
1996 from $597,000 in fiscal 1995. The increase in fiscal 1996 was largely the
result of an increase in the average dollar amount of other interest-earning
assets of $2.5 million. Other interest-earning assets consist of federal funds
sold, interest-bearing deposits in other banks, securities purchased under
agreement to resell, FHLB stock and a loan to affiliated corporation. Proceeds
from the stock conversion and the maturing of interest-bearing deposits in other
banks were used to purchase additional assets. The average yield on these
investments,
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<PAGE>
which increased to 6.14% for fiscal 1996 from 6.10% for fiscal 1995, also
contributed to the increase in other interest income.
The yield on the average balance of interest-earning assets decreased to
7.33% for fiscal 1996 from 7.41% for fiscal 1995.
Interest on Deposits
Interest on deposits was similar between fiscal 1996 and fiscal 1995 with an
increase in interest expense of approximately $29,000 or .87%. The increase for
fiscal 1996 was due to an increase in the average cost of these funds to 4.64%
in fiscal 1996 from 4.38% in fiscal 1995. These rates increased as interest
rates in general rose in fiscal 1996. The increase in average cost is the result
of certain time deposits repricing, increasing average cost to 5.75% for fiscal
1996 from an average cost of 5.37% for fiscal 1995. This increase was off-set by
the decrease in the average dollar amount of deposits outstanding by $3.6
million or 4.71% to $72.8 million for fiscal 1996 from 76.4% for fiscal 1995.
The decrease is the result of depositors withdrawing funds to be used to
purchase stock during Heritage's stock conversion, and a withdrawal of maturing
certificates of deposit by depositors for investment in higher yielding mutual
funds.
Interest on short-term borrowings, which is a less significant portion of
interest expense, decreased $12,000 or 28.6% for fiscal 1996 to $30,000 from
$42,000 for fiscal 1995, as the average amount of borrowings outstanding
decreased by $105,000 and rates paid decreased by 97 basis points. The Savings
Bank uses FHLB advances as a funding source and generally uses short-term
borrowings with no prepayment penalties. The decrease in average balance is a
direct result of the Company using proceeds from the conversion to repay
outstanding advances.
The weighted average cost paid on interest-bearing liabilities increased to
4.63% for fiscal 1996 from 4.39% for fiscal 1995.
Provision for Loan Losses
The Savings Bank's management monitors and adjusts its loan loss reserves
based upon its analysis of the loan portfolio. Reserves are increased by a
charge to income, the amount of which depends upon an analysis of the changing
risks inherent in the Savings Bank's loan portfolio and the relative status of
the real estate market and the economy in general. The Savings Bank has
historically experienced a limited amount of loan charge-offs and delinquencies.
However, there can be no assurance that additions to the loan loss allowance
will not be required in future periods, or that actual losses will not exceed
estimated amounts. The Savings Bank's ratio of non-performing loans to total
assets was .50% and .40% for fiscal 1996 and 1995. The provision for loan losses
for fiscal 1996 was a $5,000 decrease to $55,000 from the fiscal 1995 provision
of $60,000. The Savings Bank had no charge-offs in fiscal 1996 and 1995.
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<PAGE>
Non-Interest Income
Non-interest income increased $19,000 or 15.8% to $139,000 for fiscal 1996
from $120,000 for fiscal 1995. Fees and charges on loans decreased slightly for
fiscal 1996 to $31,000 from $33,000 for fiscal 1995. The decrease was the result
of a decrease in inspection fee income.
Fees on transaction accounts increased by approximately $6,000 or 13.6% to
$50,000 for fiscal 1996 from $44,000 for fiscal 1995. The increase is due to an
overall increase in the NOW account portfolio of deposits.
Other income increased for fiscal 1996 by approximately $13,000 or 28.9% to
$58,000 from $45,000 for fiscal 1995. The increase was the result of an
insurance recovery for storm damage and rental income on a portion of the Bank's
premises that was rented in 1996, but vacant in 1995.
Non-Interest Expenses
Non-interest expense increased $718,000 or 38.3% to $2,593,000 for fiscal
1996 from $1,875,000 for fiscal 1995. Salaries and related expenses increased
$160,000 or 15.7% to $1,179,000 for fiscal 1996 from $1,019,000 for fiscal 1995.
Salaries and related expenses increased as a result of increased pension expense
and the adoption of the Employee Stock Ownership Plan ("ESOP"). Salaries and
related expenses are expected to continue to increase in future periods as a
result of increases in those benefits and the implementation of the Management
Stock Bonus Plan ("MSBP"), and revisions to the Savings Bank's pension plan
required by the Retirement Protection Act.
Occupancy expense for fiscal 1996 did not fluctuate significantly from fiscal
1995.
The Savings Association Insurance Fund ("SAIF") deposit insurance premium
increased by approximately $504,000 to $680,000 for fiscal 1996 from $176,000
for fiscal 1995. This increase is the result of legislation passed that required
the Savings Bank to pay a one-time Federal Deposit Insurance assessment of
approximately $506,000 which was .657% of insured deposits at March 31, 1995.
This was offset slightly due to a decrease in deposits at the time the regular
Federal Deposit Insurance assessments were made. It is expected that the Savings
Bank's SAIF premiums will be reduced to approximately .064% of insured deposits
beginning January 1, 1997 from the current rate of .23%.
Depreciation of equipment expense decreased $6,000 or 8.2% to $67,000 for
fiscal 1996 from $73,000 for fiscal 1995. The decrease for fiscal 1996 was the
result of certain equipment becoming fully depreciated in fiscal 1995.
Advertising expense decreased by $46,000 or 54.8% to $38,000 for fiscal 1996
from $84,000 for fiscal 1995. Advertising expense was reduced for fiscal 1996,
to allow funds raised by the conversion to be
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<PAGE>
invested before additional deposits were desired. In fiscal 1995, the Savings
Bank conducted an aggressive advertising campaign for loans and deposits and
participation in the MOST Automated Teller Machine ("ATM") network.
Data processing costs increased $5,000 or 7.0% to $76,000 for fiscal 1996
from $71,000 for fiscal 1995.
Professional services increased $87,000 or 170.6% to $138,000 for fiscal 1996
from $51,000 for fiscal 1995. The increase in professional services is primarily
the direct result of the stock conversion which resulted in additional services
being required for filings with the Securities and Exchange Commission and also
with the implementation of the ESOP and MSBP.
Other expenses increased by approximately $20,000 or 8.1% to $266,000 for
fiscal 1996 from $246,000 for fiscal 1995. The increase in fiscal 1996 is the
result of an increase in ATM expense of $11,000 to $13,000 for fiscal 1996 from
$2,000 for fiscal 1995, due to the Savings Bank going "on-line" for all of
fiscal 1996, after having been on-line only for the last part of fiscal 1995.
Other increases in expense could also be found in stationery, printing and
office supplies, computer supplies, telephone, telegraph and postage totaling
approximately $10,000, offset by decreases in dues and subscriptions and Savings
Bank service charges.
Provision for income taxes decreased by approximately $108,000 or 26.4% to
$301,000 for fiscal 1996 from $409,000 for fiscal 1995. The decrease in fiscal
1996 compared to fiscal 1995 was primarily the result of a decrease in pretax
income.
In August of 1996 legislation was passed that eliminated the percentage of
taxable income method of computing the Savings Bank's bad debt deduction and
requires the recapture over a six year period of the excess balance in the
reserve for bad debts above the December 31, 1987 reserve balance. This amount
is approximately $339,000 at September 30, 1996 with an income tax effect of
approximately $131,000. The legislation will not impact the Savings Bank's
provisions for income taxes, but will have an immaterial negative impact on cash
flows of the Savings Bank because of increased income taxes payable.
Liquidity and Capital Resources
The Company is required by OTS regulations to maintain, for each calendar
month, a daily average balance of cash and eligible liquid investments of not
less than 5% of the average daily balance of its net withdrawable savings and
borrowings (due in one year or less) during the preceding calendar month. This
liquidity requirement may be changed from time to time by the OTS to any amount
within the range of 4% to 10%. The Savings Bank's average liquidity ratio was
10.5% and 12.6% at September 30, 1996 and 1995, respectively.
The Company's sources of liquidity have historically included income earned
from operations, principal and interest payments and prepayments
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<PAGE>
on loans and securities, maturities of investment securities, deposit inflows
and periodically borrowings from the FHLB of Atlanta. For fiscal 1996, the
Company also had the proceeds from the stock conversion as a source of funds.
Cash flows from operating activities were $980,000 and $517,000 for fiscal
1996 and 1995. Cash flows from operations in fiscal 1996 increased from fiscal
1995 because loan fees collected in cash but deferred for financial statements
purposes increased significantly as loan originations increased. There was also
an increase in cash flows from an increase in other liabilities. This was offset
by the decline in earnings for fiscal 1996.
Loan prepayments and repayments were $16.1 million and $10.2 million for
fiscal 1996 and 1995.
Cash disbursed for new loan origination was $21.6 million and $8.7 million
for fiscal 1996 and 1995. Loan demand increased in fiscal 1996 and 1995 created
by economic conditions.
In fiscal 1996, management used a portion of the proceeds generated from the
conversion to invest $8.4 million in investment securities, $2.6 million in
mortgage backed securities and $2.0 million in securities purchased under
agreement to resell. These were also funded by the maturing of $6.5 million in
investment securities and interest-bearing deposits in other banks.
The Company primarily originates loans for its own portfolio and does not
sell loans to secondary market participants such as Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA"),
but does occasionally sell loans to other financial institutions. The Savings
Bank may in the future sell loans to secondary market participants. However, in
fiscal 1996 and 1995, certain loan origination programs generated more loans
than the Savings Bank could retain in its portfolio without borrowing from
external sources. As a result, the Savings Bank sold $.5 million in fiscal 1996
of new loan maturities and $3.2 million in fiscal 1995. The Savings Bank had no
loans held for sale at September 30, 1996. All of the above loans were sold at
their carrying amount with no gain or loss incurred. The Savings Bank does not
rely on the sale of loans as a source of cash flows or on the resulting
servicing fee income as a revenue source.
During fiscal 1996, cash outflows from deposits were $4.0 million, primarily
the result of depositors withdrawing funds to be used in the purchase of stock
during the conversion, and the investing of the funds in higher yielding mutual
funds. In addition, in the latter part of the 1995 fiscal year, the Savings Bank
began an advertising campaign for one year certificates of deposit at the upper
end of competitive interest rates during a period of increasing rates. This
campaign was initiated in anticipation of seasonal disbursements for payments
and borrowers' real estate taxes.
The Company completed the stock conversion during the second quarter
of fiscal 1996 which generated $16.2 million of gross proceeds. After
-16-
<PAGE>
adjusting for the leveraged loan to the ESOP, which purchased approximately
$1,296,040 or 8.0% of the outstanding shares, and the expenses related to the
conversion of approximately $640,000, the net proceeds from the conversion were
approximately $14.3 million. The net cash provided to the Company from the
conversion was $12.9 million after adjusting for $1.4 million of deposits which
were used to purchase stock.
Management believes it has ample cash flows and liquidity to meet its loan
commitments of $1,071,600 at September 30, 1996. The Savings Bank has the
ability to reduce its commitments for new loan originations, adjust other cash
outflows, and borrow from the FHLB of Atlanta, or others, should the need arise.
The Savings Bank is subject to federal regulations that impose certain
minimum capital requirements. At September 30, 1996, the Savings Bank had
risk-based capital of $15.5 million compared to its requirement of $3.9 million,
an excess of $11.6 million. Each of the Savings Bank's tangible and core capital
was $15.3 million at September 30, 1996, compared to the requirements of $1.4
million for tangible capital and $2.8 million for core capital. See Note 13 to
the Consolidated Financial Statements.
Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, adverse publicity relating to the savings
and loan industry and similar matters. Further, the disparity in insurance
premiums as described herein could result in the Savings Bank losing deposits to
the Bank Insurance Fund ("BIF") members who have lower costs of funds and
therefore are able to pay higher rates of interest on deposits. Management
monitors projected liquidity needs and determines the level desirable, based in
part on the Savings Bank's commitments to make loans and management's assessment
of the Savings Bank's ability to generate funds.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
was issued by the Financial Accounting Standards Board ("FASB") in March 1995,
and will become effective for fiscal years beginning after December 15, 1995.
This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability is evaluated based upon the estimated
future cash flows expected to result from the use of the asset and its eventual
disposition. If expected cash flows are less than the carrying amount of the
asset, an impairment loss is recognized. Additionally, this Statement requires
that long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell.
However, based on existing conditions, and a preliminary review, management
believes that the impact of adopting this Statement will not be material to the
Savings Bank's financial statements.
-17-
<PAGE>
In May 1995, the FASB issued the Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights", which will become
effective, on a prospective basis, for years beginning after December 31, 1995.
This Statement requires mortgage banking enterprises to recognize as separate
assets rights to service mortgage loans, however those servicing rights are
acquired. When mortgage loans, acquired either through a purchase transaction or
by origination, are sold or securitized with servicing rights retained an
allocation of the total cost of the mortgage loans should be made between the
mortgage servicing rights and the loans based on their relative fair values. In
subsequent periods, all mortgage servicing rights capitalized must be
periodically evaluated for impairment based on the fair value of those rights,
and any impairments recognized through a valuation allowance. The impact of
adopting this Statement is not expected to be material to the Savings Bank's
financial statements.
In October 1995, the FASB issued the Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). This
statement defines a "fair value based method" of accounting for an employee
stock option whereby compensation cost is measured at the grant date based on
the value of the award and is recognized over the service period. FASB
encourages all entities to adopt the fair value based method, however, it will
allow entities to continue the use of the "intrinsic value based method"
prescribed by Accounting Principles Board ("APB") Opinion No. 25. Under the
intrinsic value based method, compensation cost is the excess of the market
price of the stock at the grant date over the amount an employee must pay to
acquire the stock. However, most stock option plans have no intrinsic value at
the grant date and, as such, no compensation cost is recognized under APB
Opinion No. 25. Entities electing to continue use of the accounting treatment of
APB Opinion No. 25 must make certain pro forma disclosures as if the fair value
based method had been applied. The accounting requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years beginning after December
15, 1995. Pro forma disclosures must include the effects of all awards granted
in fiscal years beginning after December 15, 1994. The Savings Bank anticipates
to continue using the "intrinsic value based method" as prescribed by APB
Opinion No. 25. Accordingly, the impact of adopting this Statement will not be
material to the Savings Bank's financial statements.
In June 1996, the FASB issued the Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", which will become effective on a
prospective basis for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This Statement
will require the Savings Bank to record at fair value assets and liabilities
resulting from a transfer of financial assets. The impact of adopting this
Statement is not expected to be material to the Savings Bank's financial
statements.
-18-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
WHG Bancshares Corporation
Lutherville, Maryland
We have audited the consolidated statements of financial condition of WHG
Bancshares Corporation and Subsidiaries as of September 30, 1996 and 1995, and
the related consolidated statements of operations, retained earnings and cash
flows for each of the two years in the two year period ended September 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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 WHG
Bancshares Corporation and Subsidiaries at September 30, 1996 and 1995, and the
consolidated results of its operations and cash flows for each of the two years
in the two year period ended September 30, 1996, in conformity with generally
accepted accounting principles.
/s/Anderson Associates, LLP
November 22, 1996
Baltimore, Maryland
-19-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30,
-------------
1996 1995
---- ----
Assets
------
<S> <C> <C>
Cash $ 1,583,482 $ 1,105,528
Interest bearing deposits in other banks 4,076,776 6,808,528
Federal funds sold 2,427,851 1,042,225
Securities purchased under agreements to resell 2,000,000 -
Other investments - fair value ($2,385,000 and
$507,117, respectively) (Note 3) 2,500,000 497,825
Mortgage backed securities - fair value ($2,884,212
and $546,001, respectively) (Note 4) 3,021,998 540,046
Loans receivable - net (Note 5) 75,736,786 70,028,255
Accrued interest receivable - loans 373,792 351,008
- investments 62,755 21,736
- mortgage backed
securities 17,030 3,422
Premises and equipment - net (Note 8) 734,443 807,626
Federal Home Loan Bank of Atlanta stock,
at cost (Note 6) 682,800 679,800
Investment in and loans to affiliated
corporation (Note 7) 2,825,000 2,975,000
Prepaid income taxes 5,198 -
Deferred income taxes (Note 14) 273,589 3,848
Other assets 206,614 161,728
---------- ----------
Total assets $96,528,114 $85,026,575
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
- -----------
Deposits (Note 9) $72,100,572 $76,180,631
Advance payments by borrowers for taxes
and insurance 322,610 254,841
Income taxes payable (Note 14) 237,456 20,965
Other liabilities 621,419 117,321
---------- ----------
Total liabilities 73,282,057 76,573,758
Commitments and contingencies (Notes 5, 8 and 11)
Stockholders' Equity (Notes 12 and 13)
Common stock .10 par value; authorized 1,620,062
shares; issued and outstanding 1,620,062 shares 162,006 -
Additional paid-in capital 15,403,857 -
Retained earnings (substantially restricted) 8,911,434 8,452,817
---------- ----------
24,477,297 8,452,817
Employee Stock Ownership Plan (1,231,240) -
---------- ----------
Total stockholders' equity 23,246,057 8,452,817
---------- ----------
Total liabilities and stockholders' equity $96,528,114 $85,026,575
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-20-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
Interest and fees on loans (Note 5) $5,572,411 $5,540,450
Interest and dividends on investment securities 196,132 102,235
Interest on mortgage backed securities 149,050 43,970
Other interest income 756,069 597,448
--------- ---------
Total interest income 6,673,662 6,284,103
Interest on deposits (Note 9) 3,375,289 3,346,312
Interest on short-term borrowings 30,138 42,536
--------- ---------
Total interest expense 3,405,427 3,388,848
--------- ---------
Net interest income 3,268,235 2,895,255
Provision for loan losses (Note 5) 55,161 59,839
--------- ---------
Net interest income after provision for loan losses 3,213,074 2,835,416
Non-Interest Income
- -------------------
Fees and charges on loans 30,809 32,657
Fees on transaction accounts 50,222 43,506
Other income 57,786 44,685
--------- ---------
Total non-interest income 138,817 120,848
Non-Interest Expenses
- ---------------------
Salaries and related expenses 1,179,072 1,019,499
Occupancy 148,241 145,544
SAIF deposit insurance premium 679,625 176,425
Depreciation of equipment 67,379 73,213
Advertising 38,452 84,157
Data processing costs 75,700 71,089
Professional services 138,295 51,490
Loss on foreclosed real estate - 7,265
Other expenses 265,994 245,917
--------- ---------
Total non-interest expenses 2,592,758 1,874,599
--------- ---------
Income before tax provision 759,133 1,081,665
Provision for income taxes (Note 14) 300,516 408,807
--------- ---------
Net income $ 458,617 $ 672,858
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-21-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR YEARS ENDED SEPTEMBER 30, 1996 AND 1995
-------------------------------------------
<TABLE>
<CAPTION>
Employee
Additional Stock Total
Common Paid-In Retained Ownership Stockholders'
Stock Capital Earnings Plan Equity
----- ------- -------- ---- ------
<S> <C> <C> <C> <C> <C>
Balance - September 30, 1994 $ - $ - $7,779,959 $ - $ 7,779,959
Net income for year ended September 30, 1995 - - 672,858 - 672,858
------- --------- --------- --------- ----------
Balance - September 30, 1995 - - 8,452,817 - 8,452,817
Issuance of common stock 162,006 15,398,998 - - 15,561,004
Funds borrowed to purchase stock by
Employee Stock Ownership Plan - - - (1,296,040) (1,296,040)
Compensation under stock-based benefit plan - 4,859 - 64,800 69,659
Net income - - 458,617 - 458,617
------- ---------- --------- ---------- ----------
Balance - September 30, 1996 $162,006 $15,403,857 $8,911,434 $(1,231,240) $23,246,057
======= ========== ========= ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-22-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1996 1995
---- ----
Operating Activities
<S> <C> <C>
Net income $ 458,617 $ 672,858
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
-------------------------------------
Amortization of discount of mortgage backed securities (592) -
Amortization of deferred loan fees (195,680) (207,391)
Loan fees deferred 275,956 92,119
Decrease in discount on loans purchased (26,579) (23,809)
Other amortization (57,800) (53,309)
Provision for loan losses 55,161 59,839
Non-cash compensation under stock-based benefit plans 69,659 -
Increase in accrued interest receivable (77,411) (38,586)
Loss on foreclosed real estate - 7,265
Provision for depreciation 80,984 86,429
Loans sold 560,000 -
Loans originated for sale (560,000) -
Increase in prepaid income taxes (5,198) -
(Increase) decrease in deferred income taxes (269,741) 54,614
Increase in other assets (44,885) (50,671)
Increase (decrease) in accrued interest payable (2,925) 251
Increase in income taxes payable 216,491 15,215
Increase (decrease) in other liabilities 504,097 (97,336)
---------- ----------
Net cash provided by operating activities 980,154 517,488
Cash Flows from Investment Activities
- -------------------------------------
Proceeds from maturing interest-bearing deposits 1,076,000 193,000
Purchases of interest-bearing deposits (783,000) (1,076,000)
Purchase of mortgage backed securities (2,614,902) -
Increase in securities purchased under agreement to resell (2,000,000) -
Proceeds from maturing other investments 6,525,000 -
Purchase of other investments (8,469,375) -
Principal collected on mortgage backed securities 133,542 93,326
Net increase in shorter term loans (324,572) (13,552)
Longer term loans originated or acquired (21,592,489) (8,746,690)
Principal collected on longer term loans 16,099,672 10,202,333
Loans sold - 3,217,867
Net proceeds from sale of foreclosed real estate - 153,179
Investment in foreclosed assets - (14,317)
Investment in premises and equipment (7,801) (76,702)
Purchase of stock in Federal Home Loan Bank of Atlanta (3,000) (16,600)
(Increase) or decrease on investment in and loans
to joint ventures 150,000 (250,000)
---------- ----------
Net cash provided (used) by investment activities (11,810,925) 3,665,844
</TABLE>
-23-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1996 1995
---- ----
Cash Flows from Financing Activities
Net decrease in demand deposits, money
market, passbook accounts and advances by
<S> <C> <C>
borrowers for taxes and insurance $ (328,104) $(4,369,224)
Net increase (decrease) in certificates of deposit (3,681,261) 1,501,629
Sale of common stock 15,561,004 -
Employee Stock Ownership Plan obligation (1,296,040) -
---------- ----------
Net cash provided (used) by financing activities 10,255,599 (2,867,595)
---------- ----------
Increase (decrease) in cash and cash equivalents (575,172) 1,315,737
Cash and cash equivalents at beginning of year 7,880,281 6,564,544
---------- ----------
Cash and cash equivalents at end of year $ 7,305,109 $ 7,880,281
=========== ===========
The following is a Summary of Cash and Cash Equivalents:
- --------------------------------------------------------
Cash $ 1,583,482 $ 1,105,528
Interest bearing deposits in other banks 4,076,776 6,808,528
Federal funds sold 2,427,851 1,042,225
---------- ----------
Balance of cash items reflected on
Statement of Financial condition 8,088,109 8,956,281
Less - certificates of deposit with original
maturities of more than three months that
are included in interest bearing deposits
in other banks 783,000 1,076,000
---------- ----------
Cash and cash equivalents reflected on the
Statement of Cash Flows $ 7,305,109 $ 7,880,281
========== ==========
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid during the year for:
Interest $ 3,408,352 $ 3,388,597
========== ==========
Taxes $ 352,466 $ 338,978
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-24-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 1996
------------------
Note 1 - Summary of Significant Accounting Policies
------------------------------------------
A. Principles of Consolidation - The consolidated financial statements
include the accounts of WHG Bancshares Corporation ("the Company")
and its wholly-owned subsidiary, Heritage Savings Bank, FSB ("the
Bank") and the Bank's subsidiary, Mapleleaf Mortgage Corporation. All
intercompany accounts and transactions have been eliminated in the
accompanying consolidated financial statements.
B. Business - The Bank's primary business activity is the acceptance of
deposits from the general public and using the proceeds for
investments and loan originations. The Bank is subject to competition
from other financial institutions. The Bank is subject to the
regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
C. Basis of Financial Statement Presentation - The consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the
statement of financial condition and revenues and expenses for the
period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the
allowance for loan losses and the valuation of foreclosed real estate.
See Note G & H below for a discussion of the determination of that
estimate.
D. Federal Funds - Federal funds sold are carried at cost which
approximates market.
E. Investments and Mortgage Backed Securities - As of October 1, 1994,
the Bank adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt
and Equity Securities". Non-equity investments and mortgage backed
securities will be held to maturity and, accordingly, are carried at
amortized cost since management has the ability and intention to hold
them to maturity. As of September 30, 1994, non-equity investments and
mortgage backed securities were carried at cost, adjusted for
amortization of premiums and accretion of discounts on purchases using
the interest method, since management had the ability and intention to
hold them to maturity. Accordingly, the implementation of SFAS No. 115
had no effect on the accompanying consolidated financial statements.
F. Loans Receivable - Net - Loans receivable are stated at unpaid
principal balances, less undisbursed portion of loans in process,
unamortized discounts on loans purchased, deferred loan origination
fees and the allowance for loan losses, since management has the
ability and intention to hold them to maturity.
-25-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
F. Loans held for sale are carried at the lower of cost or estimated
market value, determined in the aggregate. In computing cost, deferred
loan origination fees are deducted from the principal balances of the
related loans. There were no loans held for sale at September 30, 1996
and 1995.
The Savings Bank services loans for others and pays the participant
its share of Savings Bank's collections, net of a stipulated servicing
fee. Loan servicing fees are credited to income when earned and
servicing costs are charged to expense as incurred.
G. Allowance for Loan Losses - An allowance for loan losses is provided
through charges to income in an amount that management believes will
be adequate to absorb losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem
loans, and current economic conditions that may affect the borrowers'
ability to pay. Determining the amount of the allowance for loan
losses requires the use of estimates and assumptions, which is
permitted under generally accepted accounting principles. Actual
results could differ significantly from those estimates. Management
believes the allowance for losses on loans is adequate. While
management uses available information to estimate losses on loans,
future additions to the allowances may be necessary based on changes
in economic conditions, particularly in the State of Maryland. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances for
losses on loans. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination.
For the fiscal year ended September 30, 1996, the Bank implemented the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
114, as amended by SFAS No. 118. The Statement addresses the
accounting by creditors for impairment of certain loans. It is
generally applicable for all loans except large groups of smaller
balance homogeneous loans that are collectively evaluated for
impairment, including residential mortgage loans and consumer
installment loans. It also applies to all loans that are restructured
in a troubled debt restructuring involving a modification of terms.
SFAS No. 114 requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate, or at the loan's observable market price or
the fair value of the collateral if the loan is collateral dependent.
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
The impact of adoption of SFAS No. 114 and as amended by SFAS No. 118
was not material.
-26-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
G. Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition is such
that collection of interest is doubtful. When a payment is received on
a loan on non-accrual status, the amount received is allocated to
principal and interest in accordance with the contractual terms of the
loan.
Loan origination fees have been reflected in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 91. This Statement
requires that loan origination fees and certain direct loan
origination costs be deferred and be recognized by the interest method
over the contractual life of the related loan as an adjustment of
yield.
Premiums and discounts on loans purchased are recognized in income
over the estimated life of the related loans using the level yield
method.
H. Foreclosed Real Estate - Real estate acquired through or in the
process of foreclosure is recorded at the lower of cost or fair value.
Management periodically evaluates the recoverability of the carrying
value of the real estate acquired through foreclosure using estimates
as described under the caption "Allowance for Loan Losses". In the
event of a subsequent decline, management provides an additional
allowance to reduce real estate acquired through foreclosure to its
fair value less estimated disposal cost.
I. Premises and Equipment - Premises and equipment are carried at cost
less accumulated depreciation. Depreciation and amortization of
premises and equipment are accumulated by the use of the straight-line
method over the estimated useful lives of the assets. Additions and
improvements are capitalized, and charges for repairs and maintenance
are expensed when incurred. The related cost and accumulated
depreciation are eliminated from the accounts when an asset is sold or
retired and the resultant gain or loss is credited or charged to
income.
J. Investment In and Loans To Affiliated Corporation - Investments in and
loans to affiliated corporation represents common stock owned and
advances to a company formed for the purpose of making consumer
installment loans. The Bank has a 33-1/3% interest in this company and
its proportionate share of income or losses has not been recorded on
the equity method, since such amounts are not material to the
accompanying consolidated financial statements. The Bank is using the
cost method of accounting to record this investment. (See Note 7)
-27-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
K. Defined Benefit Pension Plan - The Bank accounts for its Pension Plan
in accordance with Statement of Financial Accounting Standards No. 87.
Funding is limited to amounts that are available for deduction under
the Internal Revenue Code (See Note 11).
L. Income Taxes - Deferred income taxes are recognized for temporary
differences between the financial reporting basis and income tax basis
of assets and liabilities based on enacted tax rates expected to be in
effect when such amounts are realized or settled. Deferred tax assets
are recognized only to the extent that is more likely than not that
such amounts will be realized based on consideration of available
evidence. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
M. Statement of Cash Flows - In the statement of cash flows, cash and
equivalents include cash, Federal Home Loan Bank of Atlanta overnight
deposits, federal funds and certificates of deposit with a maturity
date less than ninety days.
N. Earnings Per Share - Earnings per share data is not presented for the
year ended September 30, 1996, since the Bank converted to stock form
in March 1996, and such information would not be meaningful.
O. Employee Stock Ownership Plan - The Corporation accounts for its
Employee Stock Ownership Plan ("ESOP") in accordance with Statement of
Position 93-6 of the Accounting Standards Division of the American
Institute of Certified Public Accountants. (See Note 12)
P. Reclassification and Restatement - Certain prior years' amounts have
been reclassified to conform to the current year's method of
presentation.
-28-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 2 - Securities Purchased Under Agreements to Resell
-----------------------------------------------
The Company enters into purchases of mortgage backed securities under
agreements to resell substantially identical securities. Securities purchased
under agreements to resell at September 30, 1996 consist of mortgage backed
securities.
The amounts advanced under these agreements represent short-term loans and
are reflected as a receivable in the statement of financial condition. The
securities underlying the agreements are book-entry securities. During the
period, the securities were delivered by appropriate entry into a third-party
custodian's account designated by the Company under a written custodial
agreement that explicitly recognizes the Corporation's interest in the
securities. At September 30, 1996, these agreements matured within 90 days and
no material amount of agreements to resell securities purchased was outstanding
with any individual dealer. Securities purchased under agreements to resell
averaged approximately $2,400,000 during the fiscal year ended September 30,
1996, and the maximum amounts outstanding at any month-end during the fiscal
year ended September 30, 1996 was $6,000,000.
Note 3 - Other Investments
The amortized cost and fair values of other investments are as follows:
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
---- ---- ------ -----
Federal National
Mortgage Association
<S> <C> <C> <C> <C>
Bonds $1,500,000 $ - $ 66,875 $1,433,125
Federal Home Loan
Bank Bonds 1,000,000 - 48,125 951,875
--------- --------- --------- ---------
$2,500,000 $ - $ 115,000 $2,385,000
========= ========= ========= =========
</TABLE>
-29-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 3 - Other Investments - Continued
-----------------
September 30, 1995
-----------------------------------------
Gross
Amortized Unrealized Fair
Cost Gain Value
---- ---- -----
U.S. Treasury Bonds $497,825 $ 9,292 $507,117
======= ======= =======
No gains or losses were realized during the years ended September 30, 1996
or 1995.
The scheduled maturities of other investments at September 30, 1996:
Amortized Fair
Cost Value
---- -----
Due after five years through
ten years $1,500,000 $1,433,125
Due after ten years 1,000,000 951,875
--------- ---------
$2,500,000 $2,385,000
========= =========
Note 4 - Mortgage Backed Securities
--------------------------
Mortgage backed securities at September 30, consist of the following:
1996 1995
---- ----
GNMA participating certificates $2,405,906 $ 540,046
FNMA participating certifcates 623,760 -
--------- ---------
3,029,666 540,046
Net - unamortized premiums
and discounts 7,668 -
--------- ----------
$3,021,998 $ 540,046
========= =========
-30-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 4 - Mortgage Backed Securities - Continued
--------------------------
The amortized cost and fair value of mortgage backed securities are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
September 30, 1996
---------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA participating certificates $2,398,423 $ 1,754 $ 104,736 $2,295,441
FNMA participating certifcates 623,575 - 34,804 588,771
--------- --------- --------- ---------
$3,021,998 $ 1,754 $ 139,540 $2,884,212
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA participating certificates $ 540,046 $ 6,101 $ 146 $ 546,001
======== ======== ========= =========
</TABLE>
No gains or losses were realized during the years ended September 30, 1996
and 1995.
Note 5 - Loans Receivable
----------------
Loans receivable at September 30, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
One to four family residential mortgage loans $69,212,623 $65,349,372
Multifamily residential mortgage loans 286,950 306,809
Commercial mortgage loans 3,026,330 3,004,969
Construction loans 3,277,500 887,000
Lines of credit 475,000 500,000
Land/lot loans 773,730 268,854
Home improvement loans 8,586 12,842
Share loans 425,783 641,421
Lease finance receivables 828,126 283,660
---------- ----------
78,314,628 71,254,927
Less - undisbursed portion of loans
in process (1,613,088) (370,776)
- unamortized discount on loans
purchased (167,074) (193,653)
- deferred loan origination fees (602,680) (522,404)
- allowance for loan losses (195,000) (139,839)
---------- ----------
$75,736,786 $70,028,255
========== ==========
-31-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 5 - Loans Receivable - Continued
----------------
The following is a summary of the allowance for loan losses:
September 30,
-------------
1996 1995
---- ----
Beginning balance $139,839 $ 80,000
Provision for loan losses 55,161 59,839
Charge-offs - -
------- -------
Balance end $195,000 $139,839
======= =======
Residential lending is generally considered to involve less risk than other
forms of lending, although payment experience on these loans is dependent to
some extent on economic and market conditions in the Bank's lending area.
Multifamily residential, commercial, construction and other loan repayments are
generally dependent on the operations of the related properties or the financial
condition of its borrower or guarantor. Accordingly, repayment of such loans can
be more susceptible to adverse conditions in the real estate market and the
regional economy.
Substantially all of the Bank's loans receivable are mortgage loans secured
by residential and commercial real estate properties located in the State of
Maryland. Loans are extended only after evaluation by management of customers'
creditworthiness and other relevant factors on a case-by-case basis. The Bank
generally does not lend more than 90% of the appraised value of a property and
requires private mortgage insurance on residential mortgages with loan-to-value
ratios in excess of 80%. In addition, the Bank generally obtains personal
guarantees of repayment from borrowers and/or others for multifamily
residential, commercial and construction loans and disburses the proceeds of
construction and similar loans only as work progresses on the related projects.
Non-accrual loans for which interest has been reduced totaled approximately
$480,345 and $166,925 at September 30, 1996 and 1995. There were no impaired
loans as defined by SFAS No. 114 at September 30, 1996. There was no interest
income recognized on impaired loans during these periods.
Interest income that would have been recorded under the original terms of
such loans and the interest actually recognized for the years ended September
30, are summarized below:
1996 1995
---- ----
Interest income that would have
been recognized $ 57,085 $ 26,106
Interest income recognized 25,073 9,373
------- -------
Interest income not recognized $ 32,012 $ 16,733
======= =======
</TABLE>
-32-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 5 - Loans Receivable - Continued
----------------
Loans outstanding to officers and directors and their affiliates of the
Bank at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Balance At Balance At Balance At
September Loans Principal September Loans Principal September
30, 1996 Made Repayment 30, 1995 Made Repayment 30, 1994
---------- ----- --------- ---------- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
$1,110,156 $16,472 $ 39,890 $1,133,574 $ 8,484 $ 94,099 $1,219,189
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of these loans
at September 30, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Mortgage loan portfolios serviced for:
<S> <C> <C>
Other investors $10,650,449 $12,870,484
========== ==========
</TABLE>
Custodial Escrow balances maintained in connection with the foregoing loan
servicings were approximately $48,845 and $52,541 at September 30, 1996 and
1995.
Unless otherwise noted, the Bank requires collateral or other security to
support financial instruments with off-balance-sheet credit risk.
<TABLE>
<CAPTION>
Financial Instruments Whose Contract Contract Amount
Amounts Represent Credit Risk At September 30,
----------------------------- ----------------
1996 1995
---- ----
<S> <C> <C>
Standby letters of credit $ 13,460 $ 13,460
Loan commitments 1,071,600 197,000
Line of credit 475,000 500,000
</TABLE>
Standby letters of credit are conditional commitments issued by the Bank
guaranteeing performance by a customer to various municipalities. These
guarantees are issued primarily to support performance arrangements, limited to
real estate transactions.
Mortgage loan commitments not reflected in the accompanying financial
statements at September 30, 1996 are $325,000 for an adjustable rate mortgage at
10.75% and fixed rate mortgages totaling $746,600 ranging from 7.5% to 8.00%.
Lines of credit are loan commitments to individuals and companies as long
as there is no violation of any condition established in the contract. Lines of
credit have a fixed expiration date. The Bank evaluates each customer's credit
worthiness on a case-by-case basis.
The credit risk involved in these financial instruments is essentially the
same as that involved in extending loan facilities to customers. No amount has
been recognized in the statement of financial condition at September 30, 1996 as
a liability for credit loss.
-33-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 6 - Investment in Federal Home Loan Bank of Atlanta Stock
-----------------------------------------------------
The Bank is required to maintain an investment in the stock of the Federal
Home Loan Bank of Atlanta ("FHLB") in an amount equal to at least 1% of the
unpaid principal balances of the Bank's residential mortgage loans or 1/20 of
its outstanding advances from the FHLB, whichever is greater. Purchases and
sales of stock are made directly with the FHLB at par value.
Note 7 - Investment in and Loans to Affiliated Corporation
-------------------------------------------------
Cash, Inc. was organized in April 1983 as a service corporation. It is
equally owned by the Bank and two other thrift institutions and makes consumer
loans to their customers. Loans to Cash, Inc. are due on demand and bear an
adjustable interest rate. The Bank has a 33-1/3% interest in this company and
its proportionate share of income or losses has not been recorded on the equity
method, since such amounts are not material to the accompanying consolidated
financial statements. The Bank is using the cost method of accounting to record
this investment.
The Bank's investment in and loans to an affiliated corporation, Cash,
Inc. (See Note 1) are summarized as follows:
September 30,
-------------
1996 1995
---- ----
Capital stock, at cost $ 25,000 $ 25,000
Loan payable 2,800,000 2,950,000
--------- ---------
$2,825,000 $2,975,000
========= =========
Summarized financial information as of June 30, 1996 and 1995 and for the
years ended June 30, 1996 and 1995 for Cash, Inc. are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash $ 233,189 $ 157,999
Finance receivables 8,035,536 8,277,384
Real estate acquired through foreclosure 117,729 199,722
Other assets 113,667 38,834
--------- ---------
$8,500,121 $8,673,939
========= =========
Loans payable $8,400,000 $8,573,000
Other liabilities 34,162 37,679
--------- ---------
8,434,162 8,610,679
Stockholders' equity 65,959 63,260
--------- ---------
$8,500,121 $8,673,939
========= =========
</TABLE>
-34-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 7 - Investment in and Loans to Affiliated Corporation - Continued
-------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
Income and Expense
- ------------------
Income:
<S> <C> <C>
Interest $ 897,767 $ 852,817
Other income 33,866 28,920
--------- ---------
931,633 881,737
Expenses:
Interest 686,482 594,761
Provision for losses on loans 40,392 73,694
Salaries and related expenses 135,909 133,137
Other expenses 63,101 65,181
--------- ---------
925,884 866,773
--------- ---------
Income before income tax provision 5,749 14,964
Income tax provision 3,050 15,688
--------- ---------
Net income (loss) 2,699 (724)
Retained earnings (deficit) at beginning
of fiscal year (11,740) (11,016)
--------- ---------
Retained earnings (deficit) at end of
fiscal year $ (9,041) $ (11,740)
========= =========
</TABLE>
-35-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 8 - Premises and Equipment
----------------------
Premises and equipment at September 30, 1996 and 1995 are summarized by
major classification as follows:
<TABLE>
<CAPTION>
Useful Life
1996 1995 in Years
---- ---- ---------
<S> <C> <C> <C>
Land $ 224,056 $ 224,056 -
Office buildings 602,549 604,267 5-50
Furniture, fixtures and equipment 769,652 768,080 3-20
--------- ---------
1,596,257 1,596,403
Accumulated depreciation (861,814) (788,777)
--------- ---------
$ 734,443 $ 807,626
========= =========
</TABLE>
The provision for depreciation for the periods ended September
30, 1996 and 1995 was $80,984 and $86,429, respectively.
The Bank has entered into several operating leases for the
premises of its branch offices. Rental expense under these leases for the years
ended September 30, 1996 and 1995 was $54,964 and $52,190, respectively. At
September 30, 1996, the minimum rental commitments under noncancellable leases
are as follows:
Year Ended September 30, Total
------------------------ -----
1997 $ 40,351
1998 22,218
1999 22,218
2000 22,218
2001 9,257
-------
$116,262
=======
Note 9 - Deposits
--------
Deposits are summarized as follows at September 30:
<TABLE>
<CAPTION>
1996 1995
---------------------------- -------------------------------
Weighted- Weighted-
Type of Account Amount Average Rate Amount Average Rate
- --------------- ------ ------------ ------ ------------
NOW and money market accounts
including non-interest bearing
deposits of $516,213 in 1996
<S> <C> <C> <C> <C> <C> <C>
and $431,950 in 1995 $12,338,661 2.59% $12,191,909 2.72%
Passbook savings 15,636,722 3.04% 16,179,347 3.04%
Certificates of deposit 44,123,348 5.72% 47,804,609 5.93%
---------- ----------
72,098,731 76,175,865
Accrued interest 1,841 4,766
---------- ----------
$72,100,572 $76,180,631
========== ==========
</TABLE>
-36-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 9 - Deposits - Continued
--------
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $3,394,313 and $3,720,138 at
September 30, 1996 and 1995. Deposits in excess of $100,000 are not insured by
the Savings Association Insurance Fund.
1996 1995
----------- -------
Amount Amount
Certificates accounts mature as follows:
One year or less $25,337,111 $29,818,941
More than 1 year through 2 years 10,948,754 4,940,715
More than 2 years through
3 years 4,561,182 7,627,319
More than 3 years 3,276,301 5,417,634
---------- ----------
$44,123,348 $47,804,609
========== ==========
Interest expense on deposits is summarized as follows for the
years ended September 30:
1996 1995
---- ----
Certificates $2,581,651 $2,509,445
NOW and money market 315,593 329,876
Passbook 478,045 506,991
--------- ---------
$3,375,289 $3,346,312
========== ==========
Deposit Insurance Reform. Currently, there are two deposit
insurance funds maintained by the Federal Deposit Insurance Corporation
("FDIC"), the Bank Insurance Fund ("BIF") and the Savings Association Insurance
Fund ("SAIF"). The Bank's deposits are insured by SAIF. Legislation has been
passed concerning the Deposit Insurance Reform that required the Bank to pay a
one-time assessment of .657% of insured deposits at March 31, 1995, which was
approximately $506,000. The Bank's SAIF deposit insurance premiums will be
reduced to .064% of insured deposits beginning January 1, 1997 from the current
rate of .23% of insured deposits. BIF and SAIF may be merged on January 1, 1999.
Note 10 - Borrowings
The Bank had no advances from the Federal Home Loan Bank of
Atlanta at September 30, 1996 and 1995. During the fiscal year ended September
30, 1996, the Bank had a line of credit totaling $10,000,000 from the Federal
Home Loan Bank of Atlanta.
Outstanding advances are secured by Federal Home Loan Bank of
Atlanta stock and the principal balance of home mortgage loans equal to 165% of
the advances.
-37-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 11 - Pension Plan
------------
Substantially all employees of the Bank are included in a
non-contributory defined benefit pension plan. The Bank's policy is to fund
pension costs accrued. There were no unfunded or unamortized prior service costs
at September 30, 1996 and 1995. The costs of funding this plan were $37,694 and
$19,102 for the years ended September 30, 1996 and 1995, respectively.
The following table sets forth the plan's related costs at
September 30:
1996 1995
---- ----
Service cost $ 32,075 $ 23,615
Interest cost 48,995 36,803
Actual return on plan assets (39,168) (23,344)
Other components (4,208) (17,972)
------- -------
Net period pension costs $ 37,694 $ 19,102
======= =======
The following table sets forth the plan's funded status at
September 30:
<TABLE>
<CAPTION>
1996 1995
---- ----
Accumulated Benefit Obligation
- ------------------------------
<S> <C> <C>
Vested $465,738 $417,695
Non-vested 4,200 2,087
------- -------
Total $469,038 $419,782
======= =======
Projected benefit obligation $677,176 $657,849
Fair value of plan assets as of September 30 657,912 568,011
------- -------
Plan assets in deficit of projected
benefit obligation (19,264) (89,838)
Unrecognized net loss 89,765 144,679
Unrecognized net transition obligation 2,429 2,631
------- -------
Prepaid pension cost $ 72,930 $ 57,472
======= =======
Reconciliation of Projected Benefit Obligation
- ----------------------------------------------
Projected benefit obligation beginning of year $657,849 $490,774
Interest cost for the fiscal year 48,995 36,803
Service cost for the fiscal year 32,075 23,615
Benefit payments for the fiscal year (2,419) -
Actuarial (gain) loss for the fiscal year (59,324) 106,657
------- -------
Projected benefit obligation as of September 30 $677,176 $657,849
======= =======
</TABLE>
The following interest rate assumptions were used for September
30:
1996 1995
---- ----
Weighted-average discount rate 7.5% 7.5%
Long term rate of return 8.0% 8.0%
Rate of compensation increase 4.5% 4.5%
-38-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 12 - Common Stock and Stock Benefit Plans
------------------------------------
On March 29, 1996, the Bank converted from a federally chartered
mutual savings bank to a federally chartered stock savings bank. Simultaneously,
the Bank consummated the formation of a new holding company, WHG Bancshares
Corporation, of which the Bank is a wholly-owned subsidiary. In connection with
the conversion, the Company issued 1,620,062 shares of its common stock, par
value $.10 per share (the "Common Stock") for gross proceeds of $16,200,620 and
net proceeds of $15,560,905, of which $6,484,461 was contributed to the Bank in
exchange for all of its outstanding common stock.
At the same time of conversion, the Bank established an
Employee Stock Ownership Plan ("ESOP"), and acquired 129,604 shares of the
Corporation's common stock. Funds used to acquire the shares were borrowed from
the Company by the ESOP with a direct loan from the Company requiring annual
payments of $129,604.
The ESOP holds the common stock in a Trust for allocation among
participating employees.
All employees of the Bank who have completed one year of service
and attained the age of 21 are eligible to participate. Participants will become
100% vested in their accounts after five years of service with the Bank or
earlier upon death, disability or retirement.
The ESOP is funded by contributions made by the Bank in cash or
common stock and dividends on the shares held in the Trust. The Bank recognizes
compensation expense as shares are committed for release from collateral at
their current market price. Dividends on allocated shares are recorded as a
reduction of retained earnings and dividends on unallocated shares are recorded
as a reduction of Debt. Compensation cost for the year ended September 30, 1996
was $69,659.
The ESOP shares as of June 30, 1996 were as follows:
1996
----
Allocated shares 4,320
Shares earned, but unallocated 2,160
Unearned shares 123,124
Fair value of unearned shares at September 30 $1,600,612
On October 8, 1996, the stockholders of the Company approved the 1996
Stock Option Plan (the "Plan") whereby 162,006 shares of common stock were
reserved for issuance under the Plan. Options granted under the Plan may be
Incentive Stock Options within the meaning of Section 422 of the Internal
Revenue Code of 1986 as amended or Non-Incentive Stock Options. Options are
exercisable in five annual installments at the market price of common stock at
the date of grant. The Options must be exercised within ten years from the date
of grant. On October 8th, options for 131,402 shares of common stock were
granted at $13.69 per share.
-39-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 12 - Common Stock and Stock Benefit Plans - Continued
------------------------------------
On October 8, 1996, the stockholders of the Company also approved a
Management Stock Bonus Plan (the "Stock Bonus Plan" or "MSBP") to encourage
directors, officers and key employees to remain in the service of the Savings
Bank. Up to 64,802 shares of common stock may be awarded under the terms of the
Stock Bonus Plan. Shares of common stock awarded under the plan vest in five
annual installments at a rate of 20% each year following the date of grant. On
October 8, 1996, awards of 55,860 shares of common stock were granted. On
November 22, 1996, the Savings Bank funded the purchase of 64,802 shares of its
common stock at a price of $13.625 to provide shares for distribution under the
Stock Bonus Plan.
Note 13- Retained Earnings
-----------------
Under the regulatory capital requirements of the Office of Thrift
Supervision ("OTS"), savings banks are required to maintain minimal capital
requirements by satisfying three capital standards: a tangible capital
requirement, a leverage ratio requirement and a risk-based capital requirement.
Under the tangible capital requirement, the Bank's tangible capital (the amount
of stock and retained earnings computed under generally accepted accounting
principles) must be equal to 1.5% of adjusted total assets. Under the leverage
ratio requirement, the Bank's core capital must be equal to 3.0% of adjusted
total assets. In addition, under the risk-based capital requirement, the Bank
must maintain core and supplemental capital (core capital plus any general loss
reserves) equal to 8% of risk-weighted assets (total assets plus off-balance-
sheet items multiplied by the appropriate risk weights).
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991
was signed into law on December 19, 1991, and regulations implementing the
prompt corrective action provisions became effective on December 12, 1992. The
prompt corrective action regulations define specific capital categories based on
an institution's capital ratios. The capital categories, in declining order, are
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized". Institutions categorized
as "undercapitalized" or lower are subject to certain restrictions, including
the requirement to file a capital plan with its primary federal regulator,
prohibitions on the payment of dividends and management fees, restrictions on
executive compensation, and increased supervisory monitoring, among other
things. To be considered "well capitalized," an institution must generally have
a leverage capital ratio of at least 5%, a tier one risk-based capital ratio of
at least 6% and a total risk-based capital ratio of at least 10%. At September
30, 1996, the Bank met the criteria required to be considered "well capitalized"
under this regulation.
-40-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 13- Retained Earnings - Continued
-----------------
The following table presents the Bank's capital position based on the
September 30, 1996 financial statements.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- ---------------------- -------------------------
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Tangible (A) $15,331,778 16.3% $ 1,406,904 1.5% $ 4,689,679 5.0%
Core (B) 15,331,778 16.3% 2,813,807 3.0% 2,910,120 6.0%
Risk-weighted (C) 15,526,778 32.0% 3,880,160 8.0% 4,850,200 10.0%
</TABLE>
(A) Percentage of capital to assets at September 30, 1996.
(B) Percentage of capital to assets at September 30, 1996 for actual
and capital adequacy purposes and percentage of capital to risk- weighted
assets to be well capitalized under prompt corrective action provisions.
(C) Percentage of capital to risk-weighted assets.
The following table presents the calculation of risk-based capital and
tangible assets used to determine the Bank's capital position.
Current Requirements
--------------------
Total stockholders' equity $23,246,057
Less: Non-allowable items
Equity of parent company 7,914,279
---------
Tangible and core capital 15,331,778
General valuation allowance 195,000
----------
Risk-based capital $15,526,778
==========
Total assets $96,528,114
Add: pro-rata share of non-consolidated
subsidiary 11,069
Less: Non-includable
Asset of parent company 2,745,613
---------
Tangible and adjusted tangible assets $93,793,570
==========
Risk-weighted assets $48,502,000
==========
The OTS has adopted an interest rate component to the regulatory capital
requirements effective January 1, 1994. The rule requires additional capital to
be maintained if the Bank's interest rate risk exposure, measured by the decline
in the market value of the Bank's net portfolio value, exceeds 2% of assets as a
result of a 200 basis point shift in interest rates. As of September 30, 1996,
the Bank is not subject to the interest rate risk requirement.
-41-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 13- Retained Earnings - Continued
-----------------
For the purpose of granting to eligible savings account holders a priority
in the event of future liquidation, the Bank established a special account at
the time of conversion to the stock form of ownership in an amount equal to its
total retained income at March 29, 1996. In the event of future liquidation of
the Bank (and only in such an event), an eligible account holder who continues
to maintain his savings account shall be entitled to receive a distribution from
the special account. The amount of the special account will be decreased in an
amount proportionately corresponding to decreases in the savings account
balances of eligible account holders on each subsequent annual determination
date. The balance of the special account at September 30, 1996 is included in
retained earnings. No dividends may be paid to the stockholders if such
dividends would reduce regulatory capital of the Bank below the amount required
for the special account.
OTS regulations limit the payment of dividends and other capital
distributions by the Bank. The Bank is able to pay dividends during a calendar
year without regulatory approval to the extent of the greater of (i) an amount
which will reduce by one-half its surplus capital ratio at the beginning of the
year plus all its net income determined on the basis of generally accepted
accounting principles for that calendar year or (ii) 75% of net income for the
last four calendar quarters.
The Bank is restricted in paying dividends on its stock to the greater of
the restrictions described in the preceding paragraph, or an amount that would
reduce its retained earnings below its regulatory capital requirement, the
accumulated bad debt deduction, or the liquidation account described in the
second preceding paragraph.
Note 14- Income Taxes
------------
The income tax provision consists of the following:
For Years Ended
September 30,
------------------------
1996 1995
---- ----
Current
Federal $467,752 $289,000
State 102,505 65,193
------- -------
570,257 354,193
Deferred
Federal (220,848) 44,715
State (48,893) 9,899
------- -------
(269,741) 54,614
-------- --------
$300,516 $408,807
======= =======
-42-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 14- Income Taxes - Continued
------------
The amount computed by applying the statutory federal income tax rate to
income before taxes differs from the taxes provided for the following reasons:
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------
1996 1995
------------------------ -----------------------
Percent Percent
of Pretax of Pretax
Amount Income Amount Income
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax at statutory rate $258,105 34.00 $367,766 34.00
Increases (Decreases)
Resulting From
State income tax net of federal
income tax benefit 35,384 4.66 49,561 4.58
Other 7,027 .93 (8,520) (.79)
------- ----- ------- -----
$300,516 39.59 $408,807 37.79
======= ===== ======= =====
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
September 30, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
Deferred Tax Assets:
<S> <C> <C>
Deferred loan origination fees $232,755 $201,753
Allowance for loan losses 75,309 54,006
Reserve for uncollected interest 12,363 6,462
SAIF one-time assessment 195,417 -
------- -------
Total gross deferred tax assets 515,844 262,221
Deferred Tax Liabilities:
Tax reserve for bad debts in excess of
base year amount 131,061 146,651
Federal Home Loan Bank of Atlanta stock
dividends 56,965 56,965
Depreciation 24,426 30,630
Pension plan 29,803 24,127
------- -------
Total gross deferred tax liabilities 242,255 258,373
------- -------
Net deferred tax assets $273,589 $ 3,848
======= =======
</TABLE>
The Corporation and its Subsidiaries file their income tax
returns on a calendar year basis.
-43-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 15- Disclosure About Fair Value of Financial Instruments
----------------------------------------------------
The estimated fair values of the Bank's financial instruments
are summarized below. The fair values of a significant portion of these
financial instruments are estimates derived using present value techniques
prescribed by the FASB and may not be indicative of the net realizable or
liquidation values. Also, the calculation of estimated fair values is based on
market conditions at a specific point in time and may not reflect current or
future fair values.
The carrying amount is a reasonable estimate of fair value for
cash, federal funds, interest-bearing deposits in other banks and securities
purchased under agreements to resell due to the short-term nature of these
investments. Fair value is based upon market prices quoted by dealers for
investment securities and estimates using bid prices published in financial
newspapers for mortgage backed securities. The carrying amount of Federal Home
Loan Bank of Atlanta stock is a reasonable estimate of fair value. Loans
receivable were discounted using a single discount rate, comparing the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities, except for adjustable rate
mortgages which were considered to be at market rates. These rates were used for
each aggregated category of loans as reported on the Office of Thrift
Supervision Quarterly Report. The fair value of demand deposits, savings
accounts and money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered on deposits of similar remaining
maturities.
It is not practicable to estimate the fair value of outstanding
loan commitments, unused lines and letters of credit.
The estimated fair values of the Bank's financial instruments
are as follows:
September 30, 1996
----------------------------
Carrying Estimated
Value Fair Value
----- ----------
Financial Assets
- ----------------
Cash, interest-bearing deposits
in other banks, federal funds
and securities purchased under
agreements to resell $10,088,109 $10,088,109
Investment securities 2,500,000 2,385,000
Mortgage backed securities 3,021,998 2,884,212
Loans receivable 75,736,786 75,621,000
Federal Home Loan Bank of Atlanta
stock 682,800 682,800
Financial Liabilities
- ---------------------
Deposits $72,100,572 $72,337,000
-44-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 16- Condensed Financial Information (Parent Company Only)
----------------------------------------------------
Information as to the financial position of WHG Bancshares
Corporation as of September 30, 1996 and results of operations and cash flows
for the year ended September 30, 1996 is summarized below. During the year ended
September 30, 1996, the parent did not receive any dividends from its
subsidiary, the Bank.
<TABLE>
<CAPTION>
September 30,
1996
-------------
Statement of Financial Condition
<S> <C>
Cash $ 26,254
Federal funds sold 711,001
Securities purchased under agreement to resell 2,000,000
Loans receivable 5,252,839
Accrued interest receivable 8,358
Equity in net assets of subsidiary 15,331,778
----------
$23,330,230
==========
Taxes payable $ 84,173
Stockholders' equity 23,246,057
----------
$23,330,230
==========
For the year ended September 30, 1996:
Statement of Operations
Interest Income $ 233,437
Equity in net income of subsidiary 324,841
----------
Total Income 558,278
General and administrative expenses 15,488
----------
Net income before income taxes 542,790
Provision for income taxes 84,173
----------
Net income $ 458,617
==========
</TABLE>
-45-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 16- Condensed Financial Information (Parent Company Only) - Continued
----------------------------------------------------
For the year ended September 30, 1996:
<TABLE>
<CAPTION>
Statement of Cash Flows
Cash Flows from Operating Activities:
<S> <C>
Net income $ 458,617
Adjustment to Reconcile Net Income to Net Cash
Provided by Operating Activities
Equity in net income of subsidiary (324,841)
Amortization of discounts on investments (30,625)
Increase in accrued interest receivable (8,358)
Increase in taxes payable 84,173
----------
Net cash provided by operating activities 178,966
Cash Flows from Investing Activities:
Proceeds from maturing other investments 6,000,000
Purchase of other investments (5,969,375)
Purchase of stock from subsidiary (6,484,461)
Securities purchased under agreement to resell (2,000,000)
Loans originated (5,796,040)
Principal collected on loans 543,201
----------
Cash used by investing activities (13,706,675)
Cash Flows from Financing Activities:
Proceeds from sale of common stock $15,561,004
Employee Stock Ownership Plan (1,296,040)
Net cash provided by financing activities 14,264,964
----------
Increase in cash and cash equivalents 737,255
Cash and cash equivalents at beginning at end of year -
-----------
$ 737,255
==========
</TABLE>
Supplemental Disclosures of Cash Flows Information:
There was no cash paid during the year ended September 30, 1996 for income
taxes or interest.
-46-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 17- Recent Accounting Pronouncements
--------------------------------
FASB Statement on Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of - In March 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 121, which will become effective for fiscal years beginning after
December 15, 1995. This Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability is evaluated
based upon the estimated future cash flows expected to result from the use of
the asset and its eventual disposition. If expected cash flows are less than the
carrying amount of the asset, an impairment loss is recognized. Additionally,
this Statement requires that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. However, based on existing conditions, and a
preliminary review, management believes that the impact of adopting this
Statement will not be material to the Bank's financial statements.
FASB Statement on Accounting for Mortgage Servicing Rights - In May 1995,
FASB issued Statement of Financial Accounting Standards No. 122, which will
become effective, on a prospective basis, for years beginning after December 31,
1995. This Statement requires mortgage banking enterprises to recognize as
separate assets rights to service mortgage loans, however those servicing rights
are acquired. When mortgage loans, acquired either through a purchase
transaction or by origination, are sold or securitized with servicing rights
retained an allocation of the total cost of the mortgage loans should be made
between the mortgage servicing rights and the loans based on their relative fair
values. In subsequent periods, all mortgage servicing rights capitalized must be
periodically evaluated for impairment based on the fair value of those rights,
and any impairments recognized through a valuation allowance. The impact of
adopting this Statement is not expected to be material to the Bank's financial
statements.
FASB Statement on Accounting for Stock-Based Compensation - In October
1995, FASB issued SFAS No. 123, "Accounting for Stock Based Compensation." SFAS
No. 123 defines a "fair value based method" of accounting for an employee stock
option whereby compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period. FASB encourages
all entities to adopt the fair value based method, however, it will allow
entities to continue the use of the "intrinsic value based method" prescribed by
Accounting Principles Board ("APB") Opinion No. 25. Under the intrinsic value
based method, compensation cost is the excess
-47-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1996
- ------------------
Note 17- Recent Accounting Pronouncements - Continued
--------------------------------
of the market price of the stock at the grant date over the amount an employee
must pay to acquire the stock. However, most stock option plans have no
intrinsic value at the grant date and, as such, no compensation cost is
recognized under APB Opinion No. 25. Entities electing to continue use of the
accounting treatment of APB Opinion No. 25 must make certain pro forma
disclosures as if the fair value based method had been applied. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years beginning after December 15, 1995. Pro forma disclosures must
include the effects of all awards granted in fiscal years beginning after
December 15, 1994. The Bank anticipates to continue using the "intrinsic value
based method" as prescribed by APB Opinion No. 25. Accordingly, the impact of
adopting this Statement will not be material to the Bank's financial statements.
FASB Statement on Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities - In June 1996, FASB issued Statement
of Financial Accounting Standards ("SFAS") No. 125, which will become effective
on a prospective basis for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This Statement
will require the Bank to record at fair value assets and liabilities resulting
from a transfer of financial assets. The impact of adopting this Statement is
not expected to be material to the Bank's financial statements.
-48-
<PAGE>
WHG BANCSHARES CORPORATION
1505 York Road
Lutherville, Maryland 21093
(410) 583-8700
HERITAGE SAVINGS BANK, F.S.B.
<TABLE>
<CAPTION>
<S> <C> <C>
Hamilton Office Main Office Woodlawn Office
4228 Harford Road 1505 York Road Gwynn Oak Avenue and Windsor
Baltimore, Maryland Lutherville, Maryland Mill Road
Baltimore, Maryland
</TABLE>
Ellicott City Office Golden Ring Office
9396 Baltimore National Pike 876K Philadelphia Road
Ellicott City, Maryland Baltimore, Maryland
Board of Directors of WHG Bancshares Corporation
and
Heritage Savings Bank, F.S.B.
<TABLE>
<CAPTION>
<S> <C>
John E. Lufburrow Philip W. Chase, Jr.
Chairman of the Board Owner - Chase, Fitzgerald & Co
Herbert A. Davis (real estate brokerage)
President - Herbert Davis Assoc. Urban P. Francis, Jr.
(real estate brokerage and development) Retired - electrical contractor
D. Edward Lauterbach, Jr. Edwin C. Muhly, Jr.
Consultant - insurance company Retired - baker
Hugh P. McCormick Herbert W. Spath
Retired - McCormick & Co. (spices) Retired - bank executive
August J. Seifert Peggy J. Stewart
Chairman - Seifert's Florist President and Chief Executive Officer
</TABLE>
Executive Officers of WHG Bancshares Corporation and
Heritage Savings Bank, F.S.B.
Peggy J. Stewart
President and Chief Executive Officer
<TABLE>
<CAPTION>
<S> <C>
Robin L. Taylor Diana L. Rohrback
Controller Vice President and Corporate Secretary
Nicholas C. Tracht Harry E. Finck
Vice President and Security Office Vice President
</TABLE>
-----------------------
Corporate Counsel Independent Auditors
Robert L. Stocksdale, Esquire Anderson Associates, LLP
Stocksdale, Jarrell & Cvach Certified Public Accountants
6717 Harford Road 7621 Fitch Lane
Baltimore, Maryland 21234 Baltimore, Maryland 21236
Special Counsel Transfer Agent and Registrar
Malizia, Spidi, Sloane & Fisch, P.C. American Stock Transfer & Trust
One Franklin Square Company, 40 Wall Street
1301 K Street, N.W., Suite 700 East New York, New York 10005
Washington, D.C. 20005 (718) 921-8208
-----------------------
The Company's Annual Report for the year ended September 30, 1996 on Form 10-KSB
is available without charge upon written request. For a copy of the Form 10-KSB
or any other investor information, please write or call Mrs. Peggy J. Stewart,
President and Chief Executive Officer at the Company's Office. The Annual
Meeting of Stockholders will be held on January 21, 1997 at 10:00 a.m. at the
Holiday Inn, 2004 Greenspring Drive, Timonium, Maryland.
-49-
EXHIBIT 21
<PAGE>
EXHIBIT 21
Subsidiaries of the Company
Percentage Jurisdiction of
Subsidiaries Owned Incorporation
Heritage Savings Bank, F.S.B. 100.00% United States
Mapleleaf Mortgage Corporation(1) 100.00% Maryland
- ----------------------
(1) Wholly-owned subsidiary of Heritage Savings Bank, F.S.B.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,583
<INT-BEARING-DEPOSITS> 4,077
<FED-FUNDS-SOLD> 4,428
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 2,500
<INVESTMENTS-MARKET> 2,385
<LOANS> 75,737
<ALLOWANCE> 195
<TOTAL-ASSETS> 96,528
<DEPOSITS> 72,101
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,181
<LONG-TERM> 0
0
0
<COMMON> 162
<OTHER-SE> 23,084
<TOTAL-LIABILITIES-AND-EQUITY> 96,528
<INTEREST-LOAN> 5,722
<INTEREST-INVEST> 196
<INTEREST-OTHER> 756
<INTEREST-TOTAL> 6,674
<INTEREST-DEPOSIT> 3,375
<INTEREST-EXPENSE> 3,406
<INTEREST-INCOME-NET> 3,268
<LOAN-LOSSES> 55
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,593
<INCOME-PRETAX> 759
<INCOME-PRE-EXTRAORDINARY> 759
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 459
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.59
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 140
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 195
<ALLOWANCE-DOMESTIC> 195
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
