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, 1997
------------------
[ ] 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 Section 12(b) of the Exchange Act: None
-----
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) 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: $7,081,700
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 5, 1997, was $16.7 million.
As of December 5, 1997, there were issued and outstanding 1,389,002
shares of the registrant's Common Stock.
Transitional Small Business Disclosure Format (check one):YES NO X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year
ended September 30, 1997. (Parts I and II)
2. Portions of the Proxy Statement for the Annual Meeting of
Stockholders for the Fiscal Year ended September 30, 1997. (Part III)
<PAGE>
PART I
Item 1. Description of Business
- --------------------------------
General
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.
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."
The 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.
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.
2
<PAGE>
Lending Activities
Loan Portfolio Data. 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,
----------------------------------------------------------------
1997 1996
---------------------------- -----------------------------
$ % $ %
------- ------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loans:
- --------------
Residential..................................... $72,195 89.59% $69,500 88.74%
Commercial (real estate)........................ 3,242 4.02 3,026 3.86
Construction loans.............................. 1,462 1.82 3,277 4.18
Lines of credit................................. 1,620 2.01 475 .61
Land/lot........................................ 682 .85 774 .99
Home improvement loans.......................... 7 .01 9 .01
Savings account loans........................... 300 .37 426 .55
Commercial loans secured by lease
finance receivables........................... 1,075 1.33 828 1.06
------ ------ ------ ------
80,583 100.00% 78,315 100.00%
====== ======
Less:
- -----
Undisbursed portion of loans in process......... (1,198) (1,613)
Deferred loan origination fees.................. (538) (603)
Allowance for loan losses....................... (250) (195)
Unamortized discount on loans purchased......... (147) (167)
-------- --------
Total loans, net.................................. $78,450 $75,737
====== ======
</TABLE>
3
<PAGE>
Loan Maturity Tables
The following table sets forth the estimated maturity of the Bank's
loan portfolio at September 30, 1997. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totalled $9.4 million for the year ended September 30, 1997.
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................... $ 591 $1,399 $71,093 $73,083
Other residential commercial...................... -- 534 2,502 3,036
Construction...................................... 505 957 -- 1,462
Consumer.......................................... 307 -- -- 307
Lines of credit................................... 675 945 -- 1,620
Commercial loans secured by lease
finance receivables............................. 77 998 -- 1,075
------ ------ -------- -------
2,155 4,833 73,595 $80,583
----- ----- ------
Less:
Undisbured portion of loans in process......... (1,198)
Deferred loan origination fees................. (538)
Allowance for loan losses...................... (250)
Unamortized discount on loans purchased........ (147)
-------
Loans receivable, net.......................... $78,450
======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1998, which have pre-determined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
<S> <C> <C> <C>
1-4 family real estate mortgage........................ $25,160 $47,332 $72,492
Other.................................................. 1,085 2,896 3,981
Construction........................................... -- 957 957
Commercial loans secured by lease finance
receivables.......................................... 998 -- 998
------ -------- -------
Total.............................................. $27,243 $51,185 $78,428
====== ====== ======
</TABLE>
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,
4
<PAGE>
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 the current fully indexed 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 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.
5
<PAGE>
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, 1997, the
Bank had $2,810,000 of commitments to cover originations and $1,198,000 in
undisbursed funds for loans in process. In addition, at September 30, 1997, the
Bank had $788,000 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 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,
1997.
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.
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,
1997 1996
------------------------------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units........................... $767 $405
Commercial.............................................................. 70 75
--- ---
Total non-accrual loans................................................... 837 480
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units........................... -- --
Non-mortgage loans:
Consumer................................................................ -- --
---- ----
Total accruing loans greater than 90 days past due........................ -- --
---- ----
Total non-performing loans................................................ $837 $480
=== ===
Foreclosed real estate.................................................... $ -- $ --
==== ====
Other non-performing assets............................................... $ -- $ --
==== ====
Total non-performing assets............................................... $ 837 $ 480
==== ====
Total non-accrual and accrual loans to net loans.......................... 1.07% .63%
==== ====
Allowance for loan losses to total non-performing loans,
including loans contractually past due 90 days or more.................. 29.86% 40.63%
===== =====
Total non-accrual and accrual loans to total assets....................... .85% .50%
=== ===
Total non-performing assets to total assets............................... .85% .50%
=== ===
</TABLE>
Interest income that would have been recorded and collected on loans
accounted for on a non-accrual basis under the original terms of such loans was
immaterial for the year ended September 30, 1997.
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.
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
7
<PAGE>
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.
On the basis of management's review of its assets at September 30,
1997, the Bank had classified $761,000 as substandard and $76,000 of assets as
doubtful.
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:
<TABLE>
<CAPTION>
At September 30,
1997 1996
---------------- ----------
(Dollars in thousands)
<S> <C> <C>
Total loans outstanding..................................... $78,450 $75,737
====== ======
Average loans outstanding................................... $78,643 $73,582
====== ======
Allowance balances (at beginning of period)................. $ 195 $ 140
Provision (credit):
Residential............................................... 61 55
Commercial real estate.................................... -- --
Consumer.................................................. -- --
Net (charge-offs) recoveries:
Residential............................................... (6) --
Commercial real estate.................................... -- --
Consumer.................................................. -- --
------ ------
Allowance balance (at end of period)........................ $ 250 $ 195
====== ======
Allowance for loan losses as a percent
of total loans outstanding................................ .32% .26%
Net loans charged off as a percent of
average loans outstanding................................. .01% --%
</TABLE>
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.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------
1997 1996
------------------------------ -----------------------------------
% of Loans in % of Loans in
Each Category Each Category
Amount To Total Loans Amount To Total Loans
------ -------------- ------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate:
Residential mortgage...................... $ 116 89.60% $ 90 88.75
Commercial (real estate).................. 51 4.02 40 3.86
Construction ............................. 68 1.82 53 4.18
Lines of credit........................... 4 2.01 3 .61
Land/lot.................................. 1 .85 1 .99
Consumer.................................. -- .37 -- .55
Commercial loans secured by lease
finance receivables..................... 10 1.33 8 1.06
---- ------ ---- ------
$ 250 100.00% $ 195 100.00%
==== ====== ==== ======
</TABLE>
9
<PAGE>
Interest-Bearing Accounts
At September 30, 1997, the Company held $3.9 million 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.
Investment Activities and Mortgage-Backed Securities
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 maintained a liquidity
portfolio 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 Bank classifies
its investments as securities available-for-sale or investments securities
held-to-maturity in accordance with SFAS No. 115. At September 30, 1997, the
Bank's investment portfolio policy allowed investments in instruments such as
U.S. Treasury obligations, U.S. federal agency or federally sponsored agency
obligations, municipal obligations, mortgage-backed securities, banker's
acceptances, certificates of deposit, federal funds, including FHLB overnight
and term deposits (up to six months), as well as investment grade corporate
bonds, commercial paper and the mortgage derivative products described below.
The Board of Directors may authorize additional investments.
The Bank's securities available-for-sale and investment securities
held-to-maturity portfolios at September 30, 1997 did not contain securities of
any issuer with an aggregate book value in excess of 10% of the Bank's equity,
excluding those issued by the United States Government or its agencies.
Mortgage-Backed Securities. To supplement lending activities, the Bank
has invested in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. 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 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, Government National Mortgage
Association ("GNMA"), and FNMA.
The Bank's mortgage-backed securities were classified as
held-to-maturity at June 30, 1997 and were all issued by GNMA or FHLMC,
representing participating interests in direct pass-through pools of long-term
mortgage loans originated and serviced by the issuers of the securities.
Expected maturities will differ from contractual maturities due to scheduled
repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
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 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
10
<PAGE>
underlying mortgages. Mortgage-backed securities issued by FHLMC 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.
<TABLE>
<CAPTION>
At September 30,
---------------------------
1997 1996
----------- -----------
(In thousands)
<S> <C> <C>
Investment securities:
Federal National Mortgage Association bonds.................. $ 500 $ --
Federal Home Loan Bank bonds................................. 2,250 1,500
Federal Home Loan Mortgage Corporation bonds................. 1,000 1,000
----- -----
Total investment securities............................... $3,750 $2,500
===== =====
Interest-bearing deposits in other banks..................... $3,899 $4,077
Federal funds sold........................................... 3,482 2,428
Securities purchased under agreements to resell.............. -- 2,000
Mortgage-backed securities................................... 2,845 3,022
FHLB stock................................................... 753 683
----- -----
Total .................................................... $10,979 $12,210
====== ======
</TABLE>
11
<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, 1997. 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, 1997
More than One to More than Five to More than
One Year or Less Five Years Ten Years 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Bank bonds.................. $ -- --% $ -- --% $ 750 7.41% $1,500 7.36% $ 2,250 7.38% $2,231
Federal National Mortgage
Association bonds........... -- -- -- -- 500 6.69 -- -- 500 6.69 492
Federal Home Loan
Mortgage Corporation bonds.. -- -- -- -- 1,000 7.67 -- -- 1,000 7.67 1,001
Interest-bearing deposits
in other banks.............. 3,656 5.65 243 5.78 -- -- -- -- 3,899 5.66 3,899
Federal funds sold............ 3,482 6.38 -- -- -- -- -- -- 3,482 6.38 3,482
Mortgage-backed securities.... 35 8.00 -- -- 322 7.47 2,488 6.61 2,845 6.73 2,845
FHLB stock.................... -- -- -- -- -- -- 753 7.25 753 -- 753
------- ------ ----- ----- ----- ----- ----- ----- ------ ----- ------
Total.................... $7,173 6.02% $ 243 5.78% $2,572 7.39% $4,741 6.94% $14,729 6.55% $14,703
===== ====== ===== ===== ===== ===== ===== ===== ====== ===== ======
</TABLE>
12
<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, 1997.
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, 1997, the Bank had no brokered accounts.
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, 1997.
Certificates
of Deposits
Maturity Period (In thousands)
- ---------------
Within three months.................... $ 140
Three through six months............... 1,129
Six through twelve months.............. 965
Over twelve months..................... 1,222
------
$3,456
======
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, 1997, the Bank had $4,000,000
borrowings from the FHLB of Atlanta.
13
<PAGE>
<TABLE>
<CAPTION>
During the Year Ended
September 30,
---------------------------
1997 1996
--------- --------
(In thousands)
<S> <C> <C>
Maximum amount of borrowings outstanding at
any month end:
Advances from Federal Home Loan Bank.................. $4,000 $2,000
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended
September 30,
-----------------------------
1997 1996
--------- -----------
(In thousands)
Approximate average short-term borrowings outstanding
with respect to:
<S> <C> <C>
Advances from Federal Home Loan Bank.................. $2,833 $ 1,321
Approximate weighted average rate paid on:
Advances from Federal Home Loan Bank.................. 5.71% 5.77%
</TABLE>
Subsidiary Activity
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, 1997,
the Bank had investments in two service corporation, incorporated under Maryland
law.
Bankers Affiliate (formerly named Cash, Inc.) - BA
BA was formed in April 1983 as a service corporation for the purpose of
originating consumer loans. BA is equally owned by the Bank as other local
thrift institutions. At September 30, 1997, the Bank's investment totalled
$25,000 and had a loan payable from this subsidiary of $2,900,000.
Mapleleaf Mortgage Corporation - MMC
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, 1997, the Bank's investment totalled $29,575.
Employees
At September 30, 1997, the Bank had 23 full-time and 10 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.
14
<PAGE>
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 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.
15
<PAGE>
Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, the Bank might have to convert to a different financial
institution charter and be regulated under federal law as a bank, including
being subject to the more restrictive activity limitations imposed on national
banks. The Bank cannot predict the impact of its conversion to, or regulation
as, a bank until the legislation requiring such change is enacted.
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). 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 poses a
serious threat to the SAIF.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund,
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 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 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. Prior to
September 30, 1996, savings associations paid within a range of .23% to .31% of
domestic deposits and the SAIF was substantially underfunded. By comparison,
prior to September 30, 1996, members of the Bank Insurance Fund ("BIF"),
predominantly commercial banks, 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. Beginning January 1, 1997,
deposit insurance assessments for SAIF members were reduced to approximately
.064% of deposits on an annual basis; this rate may continue through the end of
1999. During this same period, BIF members are expected to be annually assessed
approximately .013% 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. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance assessed the
Bank substantially declined.
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.
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.
16
<PAGE>
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, 1997, 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.
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, 1997, the Bank
was in compliance with its QTL requirement with 88.57% 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.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At September 30, 1997, the Bank's required
liquid asset ratio was 5%.
17
<PAGE>
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, 1997, 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
WOODLAWN OFFICE:
Gwynn Oak Avenue and Leased until
Windsor Mill Road January 2002
Baltimore, Maryland 21207
ELLICOTT CITY OFFICE:
9396 Baltimore National Pike Leased until
Ellicott City, Maryland May 2000
21042
GOLDEN RING OFFICE:
8767 K Philadelphia Road Leased until
Baltimore, Maryland 21237 May 2001
(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.
18
<PAGE>
(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.
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" of the Company's Annual Report to Stockholders for the fiscal
year ended September 30, 1997 (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" 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.
19
<PAGE>
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.
(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.
20
<PAGE>
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, 1997, are
incorporated herein by reference and also in Item 7 hereof.
Report of Independent Auditors
Consolidated Statements of Financial Condition as of September 30, 1997
and 1996.
Consolidated Statements of Operations for the Years Ended September 30,
1997 and 1996.
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1997 and 1996.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1997 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 *
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 Portions of Annual Report to Stockholders for the
fiscal year ended September 30, 1997
21 Subsidiaries of the Registrant (See Item 1 -
Description of Business and -- Subsidiary Activity)
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
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized as of
December 19, 1997.
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, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated as of December 19, 1997.
/s/Peggy J. Stewart /s/ Robin L. Taylor
- ---------------------------------- --------------------------------------------
Peggy J. Stewart Robin L. Taylor
President, Chief Executive Officer Controller
and Director (Principal Accounting and Financial Officer)
(Principal Executive Officer)
/s/John E. Lufburrow /s/Herbert A. Davis
- ---------------------------------- --------------------------------------------
John E. Lufburrow Herbert A. Davis
Chairman of the Board Director
/s/Philip W. Chase, Jr. /s/D. Edward Lauterbach, Jr.
- ---------------------------------- --------------------------------------------
Philip W. Chase, Jr. D. Edward Lauterbach, Jr.
Director Director
/s/Urban P. Francis, Jr. /s/Edwin C. Muhly, Jr.
- ---------------------------------- --------------------------------------------
Urban P. Francis, Jr. Edwin C. Muhly, Jr.
Director Director
/s/Hugh P. McCormick /s/Herbert W. Spath
- ---------------------------------- --------------------------------------------
Hugh P. McCormick Herbert W. Spath
Director Director
/s/August J. Seifert
- ----------------------------------
August J. Seifert
Director
EXHIBIT 11
<PAGE>
Statement re: Computation of Earnings Per Share
Net income.............................................. $ 754,147
Weighted average shares outstanding..................... 1,425,308
Common stock equivalents due to dilutive effect
on stock options....................................... 9,352
---------
Total weighted average common shares and
equivalents outstanding................................ 1,434,660
=========
Primary earnings per share.............................. $.53
Total weighted average common shares and equivalents
outstanding for fully diluted computation.............. 1,434,660
Fully diluted earnings per shared....................... $.53
EXHIBIT 13
<PAGE>
WHG BANCSHARES CORPORATION
PORTIONS OF THE ANNUAL REPORT
For the Fiscal Year Ended
September 30, 1997
-----------------------------------------------------------------------
<PAGE>
WHG BANCSHARES CORPORATION
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
October 1, 1996 to December 31, 1996 13.75 12.50 .05
January 1, 1997 to March 31, 1997 14.75 12.75 .05
April 1, 1997 to June 30, 1997 15.38 13.63 .05
July 1, 1997 to September 30, 1997 16.50 15.00 .05
-2-
<PAGE>
The number of shareholders of record of common stock as of the record date of
December 5, 1997, was approximately 262. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms. At December 5, 1997, there were 1,389,002 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.
Selected Financial Ratios and Other Data
For the Years Ended
September 30,
-------------------------
1997 1996
---- ----
Return on average assets.......................... .77% .49%
Return on average equity.......................... 3.49 2.68
Average equity to average assets ratios........... 22.03 18.45
Equity to assets at period end.................... 20.12 24.08
Net interest rate spread.......................... 2.89 2.70
Net yield on average interest-earnings assets..... 3.82 3.59
Non-performing loans to total assets.............. .85 .50
Allowance for loan loss to total loans............ .32 .26
Dividend payout ratio............................. .38 -
-3-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
WHG Bancshares Corporation (the "Company") was formed in March, 1996 by
Heritage Savings Bank, F.S.B. (the "Savings Bank") to become the holding company
of the Savings Bank following the stock conversion. The Company's 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.
Market Risk
Market risk is defined as the risk of loss due to adverse changes in market
rates and prices. 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.
. 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, 1997, such deposits totaled
$27.0 million or 36.2% 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
-4-
<PAGE>
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. Nevertheless, the
following table presents the Savings Bank's NPV at September 30, 1997, as
calculated by the OTS, based on information provided to the OTS by the Savings
Bank.
Changes NPV
in Rate Ratio(1) Change(2)
------- -------- ---------
+400 bp 11.93% -576 bp
+300 bp 13.65% -403 bp
+200 bp 15.23% -246 bp
+100 bp 16.59% -109 bp
0 bp 17.68%
-100 bp 18.44% +75 bp
-200 bp 18.94% +126 bp
-300 bp 19.35% +166 bp
-400 bp 19.96% +228 bp
- ----------------
(1) Calculated as the estimated NPV divided by present value of assets.
(2) 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.
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 decrease in market interest rates
of certificates of deposit, the Savings Bank's net interest rate spread
increased to 2.89% in fiscal 1997 from 2.70% in fiscal 1996.
In times of increasing interest rates, fixed rate assets could decrease
in value and the lag in repricing of interest rate sensitive assets could be
expected to have a negative effect on the Savings Bank.
-5-
<PAGE>
Average Balance Sheet
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------------
1997 1996
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable(1)......................... $78,643 $ 5,912 7.52% $73,581 $ 5,573 7.57%
Mortgage-backed securities.................. 2,937 199 6.78% 2,305 149 6.47%
Investment securities(2).................... 4,995 392 7.85% 2,854 196 6.87%
Other interest-earning assets(3)............ 9,292 547 5.89% 12,316 756 6.14%
------ ------ ------ ------
Total interest-earning assets............ $95,867 $ 7,050 7.35% $91,056 $ 6,674 7.33%
====== ====== ====== ======
Non-interest-earning assets.................... 2,124 1,804
------ ------
Total assets............................. $97,991 $92,860
====== ======
Interest-bearing liabilities:
Demand deposits............................. $27,661 $ 766 2.77% $27,863 $ 794 2.85%
Time deposits............................... 44,639 2,454 5.50% 44,924 2,582 5.75%
Other liabilities(4)........................ 3,651 168 4.60% 712 30 4.23%
------ ------ ------ ------
Total interest-bearing liabilities....... 75,951 $ 3,388 4.46% 73,499 $ 3,406 4.63%
====== ======
Non-interest bearing liabilities............... 454 2,232
------ ------
Total liabilities........................ 76,405 75,731
Stockholders' equity........................... 21,586 17,129
------ ------
Total liabilities and stockholders' equity $97,991 $92,860
====== ======
Net interest income............................ $ 3,662 $ 3,268
====== ======
Interest rate spread(5)........................ 2.89% 2.70%
====== ======
Net yield on interest-earning assets(6)........ 3.82% 3.59%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities....... 126.22% 123.89%
====== ======
</TABLE>
- --------------
(1) Average balances include non-accrual loans.
(2) Includes investment securities, ground rents and FHLB stock.
(3) Includes Federal Funds, interest-bearing deposits in other financial
institutions 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.
-6-
<PAGE>
Rate/Volume Analysis
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
1997 vs. 1996
-----------------------------------------------
Increase (Decrease)
-----------------------------------------------
Due to
-----------------------------------------------
Rate/
Volume Rate Volume Net
------ ---- ------ ---
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable .................. $ 378 $ (36) $ (3) $ 339
Investment securities.............. 147 28 21 196
Mortgage-backed securities......... 41 7 2 50
Other interest earning assets...... (186) (31) 8 (209)
----- ----- ----- -----
Total interest-earning assets... 380 (32) 28 376
Interest expense:
Deposits........................... (22) (134) 1 (155)
Other liabilities(1)............... 124 2 11 137
----- ----- ----- -----
Total interest-bearing
liabilities.................... 102 (132) 12 (18)
----- ----- ----- -----
Net change in net interest income..... $ 278 $ 100 $ 16 $ 394
===== ===== ===== =====
</TABLE>
(1) Includes interest on advances from the FHLB of Atlanta and advance payments
by borrowers for taxes and insurance.
Financial Condition
Total assets increased by $2.1 million to $98.6 million or 2.2% at
September 30, 1997 from $96.5 million at September 30, 1996, primarily due to an
increase in loans receivable of $2.7 million, federal funds sold of $1.1 million
and other investments of $1.2 million. These increases were partially offset by
a decrease in securities purchased under agreements to resell of $2.0 million.
New loan originations exceeded loan payments and repayments by $2.6 million
during the fiscal year, because of agressive loan marketing and solicitation
even though loan demand decreased during the year.
The Company's deposits increased by $2.1 million or 2.9% to $74.2
million at September 30, 1997 from $72.1 million at September 30, 1996. The
increase was a result of a $3.2 million increase in certificates of deposit, due
to an advertising campaign by management focusing on two and five year step-up
certificates of deposit. The increase was slightly off-set by declines in
transaction and passbook accounts.
The Company's net worth decreased by $3.3 million to $19.9 million at
September 30, 1997 from $23.2 million at September 30, 1996. The decline was
primarily due to the Company repurchasing $3.4 million of its own stock.
-7-
<PAGE>
Results of Operations
Net Income
Net income increased by $295,000 for the fiscal 1997 to $754,000 from
$459,000 for fiscal 1996. During fiscal 1996, net income was reduced by $310,000
(net of tax) due to a one-time FDIC assessment being imposed on the Savings
Bank. (See "--Non-Interest Expenses").
Net Interest Income
Net interest income increased by approximately $394,000 to $3.7 million
for fiscal 1997 from $3.3 million for fiscal 1996. The increase was the result
of an increase in the amount of average interest-earning assets exceeding
average interest-bearing liabilities (see Rate/Volume Analysis Table on page 7).
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, increased in fiscal 1997 to 2.89% from 2.70% for
fiscal 1996. The increase in interest rate spread is primarily the result of a
decline in the average cost of certificates of deposit.
Interest Income
Interest income on loans increased by approximately $339,000 to $5.9
million for fiscal 1997 from $5.6 million for fiscal 1996. The increase was due
to an increase in the average dollar amount of loans outstanding in fiscal 1997
over fiscal 1996 of approximately $5,062,000. During fiscal 1997, the average
balance increased only slightly over the four quarters but during fiscal 1996,
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 and dividend income on investment securities increased by
$196,000 or 100.0% to $392,000 in fiscal 1997 from $196,000 in fiscal 1996. The
increase was the result of an increase in the average dollar amount outstanding
of $2.1 million and an increase in the average yield to 7.85% for fiscal 1997
from 6.87% for fiscal 1996. The increase in yield was due in part to the
maturing of lower yielding investments and the use of the proceeds to purchase
higher yielding securities.
Interest income on mortgage backed securities increased by $50,000 or
33.6% to $199,000 for fiscal 1997 from $149,000 for fiscal 1996. The increase
was due to a slight increase in average dollar amount outstanding of mortgage
backed securities of $0.6 million, and by an increase in the average yield to
6.78% in fiscal 1997 from 6.47% in fiscal 1996. Management purchased
approximately $2.0 million in mortgage backed securities in the second half of
fiscal 1996. There were no new purchases or maturities of mortgage backed
securities during fiscal 1997.
Other interest income decreased by $209,000 or 27.6% to $547,000 in
fiscal 1997 from $756,000 in fiscal 1996. The decline was due to the decrease in
the average dollar amount invested in other interest-earning assets of $3.0
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. Most of the $3.0
million decline was due to $2.0 million in securities purchased under agreements
to resell maturing. The average yield on these investments, which decreased to
5.89% for fiscal 1997 from 6.14% for fiscal 1996, also contributed to the
decrease in other interest income.
The yield on the average balance of interest-earning assets increased
to 7.35% for fiscal 1997 from 7.33% for fiscal 1996.
-8-
<PAGE>
Interest on Deposits
Interest on deposits decreased by $155,000 or 4.6% to $3,220,000 in
fiscal 1997 from $3,375,000 in fiscal 1996. The decline was due to a decrease in
the average cost of these funds to 4.46% in fiscal 1997 from 4.63% in fiscal
1996. In addition, the Savings Bank experienced a small decline in the average
dollar amount of deposits outstanding by $487,000 or .7% to 72.3 million in
fiscal 1997 from $72.8 million in fiscal 1996. The decrease is the result of
depositors withdrawing interest-earning deposits for investment in higher
yielding stocks.
Interest on short-term borrowings, which was a less significant portion
of interest expense in prior years, increased $138,000 or 460.0% to $168,000 in
fiscal 1997 from $30,000 in fiscal 1996. The increase was due to the Savings
Bank using FHLB advances as a funding source during fiscal 1997. The use of this
funding source increased the average amount of borrowings by $2,939,000 and
rates paid by 37 basis points.
The weighted average cost paid on interest-bearing liabilities
decreased to 4.46% for fiscal 1997 from 4.63% for fiscal 1996.
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 .85% and .50% for fiscal 1997 and 1996. The provision
for loan losses for fiscal 1997 was a $5,000 increase to $60,000 from the fiscal
1996 provision of $55,000. The Savings Bank experienced one $5,000 charge-off
during fiscal 1997 and no charge-offs during fiscal 1996.
Non-Interest Income
Non-interest income decreased $10,000 or 7.2% to $129,000 for fiscal
1997 from $139,000 for fiscal 1996. Fees and charges on loans remained
relatively unchanged in fiscal 1997 from fiscal 1996.
Fees on transaction accounts increased by approximately $5,000 or 10.0%
to $55,000 in fiscal 1997 from $50,000 in fiscal 1996. The increase is due to
the Savings Bank's aggressively charging service fees on transaction accounts.
Other income decreased for fiscal 1997 by approximately $17,000 or
29.3% to $41,000 from $58,000 in fiscal 1996. The decrease was due to the
decline in rental income when the Savings Bank's second floor tenant did not
renew their lease.
Non-Interest Expenses
Non-interest expenses decreased $118,000 or 4.5% to $2,475,000 for
fiscal 1997 from $2,593,000 for fiscal 1996. Salaries and related expenses
increased $361,000 or 30.6% to $1,540,000 for fiscal 1997 from $1,179,000 for
fiscal 1996. Salaries and related expenses increased as a result of increased
compensation expense due to the adoption of the Employee Stock Ownership Plan
("ESOP") and as a result of the Management Stock Bonus Plan ("MSBP").
Occupancy expense increased $12,000 or 8.1% to $160,000 for fiscal 1997
from $148,000 is fiscal 1996. The increase was due to an increase in monthly
rentals for the Savings Bank's branches and an increase in repairs and
maintenance.
-9-
<PAGE>
The Savings Association Insurance Fund ("SAIF") deposit insurance
premiums decreased by approximately $612,000 to $68,000 for fiscal 1997 from
$680,000 in fiscal 1996. During fiscal 1996, 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 amount was accrued as of September 30, 1996. In addition, the Savings
Bank's premiums were reduced from .23% of insured deposits to .064% as of
January 1, 1997.
Depreciation of equipment expense decreased $19,000 or 28.4% to $48,000
for fiscal 1997 from $67,000 for fiscal 1996. The decrease for fiscal 1997 was
the result of certain equipment becoming fully depreciated in fiscal 1996.
Advertising expense increased by $14,000 or 36.8% to $52,000 for fiscal
1997 from $38,000 for fiscal 1996. During fiscal 1997, the Savings Bank
conducted an aggressive advertising campaign for loans and step-up certificates
of deposits.
Data processing costs increased slightly by $1,000 to $77,000 in fiscal
1997 from $76,000 in fiscal 1996.
Professional services increased $74,000 or 53.6% to $212,000 for fiscal
1997 from $138,000 for fiscal 1996. 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 $50,000 or 18.8% to $316,000
for fiscal 1997 from $266,000 in fiscal 1996. The increase in fiscal 1997 was
primarily due to two robberies that occurred in which the Savings Bank lost
approximately $15,000 after insurance proceeds.
A great deal of publicity has been made about the Computer Year 2000.
It is feared that many computers can only read the last two digits of a year
and, therefore, would not be able to distinguish between the year 2000 and 1900.
This would cause inaccurate calculation and processing of payments, interest and
delinquencies. The Savings Bank uses a third party service bureau to process
these transactions for them. The service bureau of the Savings Bank has advised
the Bank that the problem is being resolved and that the year 2000 will not
affect the Bank's operations. However, if the service bureau fails to resolve
this problem, the Savings Bank could experience significant delays, errors or
failures in their daily operations. These occurrences could have a significant
adverse effect on the Savings Bank's financial condition and results of
operations.
Provision for Income Taxes
Provision for income taxes increased by approximately $200,000 or 66.4%
to $501,000 for fiscal 1997 from $301,000 for fiscal 1996. The increase in
fiscal 1997 compared to fiscal 1996 was primarily the result of an increase 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, nor materially impact the Savings Bank's cash
flows.
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
-10-
<PAGE>
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 9.79% and 10.5% at
September 30, 1997 and 1996, respectively.
The Company's sources of liquidity have historically included income
earned from operations, principal and interest payments and prepayments on loans
and securities, maturities of investment securities, deposit inflows and
periodically borrowings from the FHLB of Atlanta.
Net cash provided by operating activities was $724,000 and $980,000 for
fiscal 1997 and 1996. Cash flows from operations in fiscal 1997 decreased from
fiscal 1996 because loan fees collected in cash but deferred for financial
statement purposes decreased significantly as loan originations declined. In
addition, there was a decline in the changes in taxes payable and other
liabilities. The decreases were off-set by an increase in earnings for fiscal
1997 and non-cash compensation under stock-based benefit plans established in
fiscal 1997.
Net cash used by investment activities for fiscal 1997 totaled $1.6
million, a decrease from fiscal 1996 of $11.8 million. The decrease in cash used
was due to a decrease in net loan originations of $2.9 million, a reduction of
$4.0 million in securities purchased under agreement to resell, and reductions
of $2.6 million in net purchases of mortgage backed securities and $700,000 in
net purchases of investment securities.
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. In
fiscal 1997, the Savings Bank did not sell new loan originations due to the
decline in loan demand. Management decided to retain all new loans for the
Savings Bank's portfolio.
Net cash provided by financing activities for fiscal 1997 totaled $1.6
million. This is a result of a net increase in deposits of $2.0 million, an
increase in FHLB advances of $4.0 million offset by stock repurchases of $3.4
million, stock purchased for the MSBP of $900,000 and dividends paid of
$300,000.
Management believes it has ample cash flows and liquidity to meet its
loan commitments of $2.8 million at September 30, 1997. 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, 1997, the Savings Bank had
risk-based capital of $15.6 million compared to its requirement of $3.8 million,
an excess of $11.8 million. Each of the Savings Bank's tangible and core capital
was $15.3 million at September 30, 1997, compared to the requirements of $1.4
million for tangible capital and $2.9 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. 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.
-11-
<PAGE>
Anderson Associates, LLP
Certified Public Accountants
7621 Fitch Lane
Baltimore, Maryland 21236
410-822-8050
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, 1997 and 1996,
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,
1997. These consolidated financial statements are the responsibility of the
Company'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, 1997 and 1996, and the
consolidated results of its operations and cash flows for each of the two years
in the two year period ended September 30, 1997, in conformity with generally
accepted accounting principles.
/s/Anderson Associates LLP
November 24, 1997
Baltimore, Maryland
-12-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30,
----------------------------------
1997 1996
------------- ------------
<S> <C> <C>
Assets
------
Cash $ 1,003,528 $ 1,583,482
Interest bearing deposits in other banks 3,898,946 4,076,776
Federal funds sold 3,481,833 2,427,851
Securities purchased under agreements to
resell (Note 2) - 2,000,000
Other investments (Note 3) 3,750,000 2,500,000
Mortgage backed securities (Note 4) 2,845,210 3,021,998
Loans receivable - net (Note 5) 78,450,370 75,736,786
Accrued interest receivable - loans 374,561 373,792
- investments 69,230 62,755
- mortgage backed
securities 15,998 17,030
Premises and equipment - net (Note 8) 721,932 734,443
Federal Home Loan Bank of Atlanta stock,
at cost (Note 6) 753,200 682,800
Investment in and loans to affiliated
corporation (Note 7) 2,925,000 2,825,000
Deferred income taxes (Note 14) 116,394 278,787
Other assets 150,517 206,614
---------- ----------
Total assets $98,556,719 $96,528,114
========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
- -----------
Deposits (Note 9) $74,186,112 $72,100,572
Federal Home Loan Bank advances (Note 10) 4,000,000 -
Advance payments by borrowers for taxes
and insurance 330,671 322,610
Income taxes payable (Note 14) 64,284 237,456
Other liabilities 146,519 621,419
---------- ----------
Total liabilities 78,727,586 73,282,057
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 1,392,415 shares in
1997 and 1,620,062 shares in 1996 139,241 162,006
Additional paid-in capital 11,390,312 15,403,857
Retained earnings (substantially restricted) 9,381,773 8,911,434
---------- ----------
20,911,326 24,477,297
Employee Stock Ownership Plan (1,082,193) (1,231,240)
---------- ----------
Total stockholders' equity 19,829,133 23,246,057
---------- ----------
Total liabilities and stockholders' equity $98,556,719 $96,528,114
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-13-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------
1997 1996
----------- ----------
<S> <C> <C> <C>
Interest and fees on loans (Note 5) $5,911,569 $5,572,411
Interest and dividends on investment securities 391,584 196,132
Interest on mortgage backed securities 199,192 149,050
Other interest income 547,182 756,069
--------- ---------
Total interest income 7,049,527 6,673,662
Interest on deposits (Note 9) 3,219,849 3,375,289
Interest on short-term borrowings 167,538 30,138
--------- ---------
Total interest expense 3,387,387 3,405,427
--------- ---------
Net interest income 3,662,140 3,268,235
Provision for loan losses (Note 5) 60,644 55,161
--------- ---------
Net interest income after provision for loan losses 3,601,496 3,213,074
Non-Interest Income
Fees and charges on loans 32,173 30,809
Fees on transaction accounts 55,194 50,222
Other income 41,167 57,786
--------- ---------
Total non-interest income 128,534 138,817
Non-Interest Expenses
Salaries and related expenses 1,540,065 1,179,072
Occupancy 160,616 148,241
SAIF deposit insurance premium 67,822 679,625
Depreciation of equipment 48,473 67,379
Advertising 52,743 38,452
Data processing costs 77,049 75,700
Professional services 211,848 138,295
Other expenses 316,433 265,994
--------- ---------
Total non-interest expenses 2,475,049 2,592,758
--------- ---------
Income before tax provision 1,254,981 759,133
Provision for income taxes (Note 14) 500,834 300,516
--------- ---------
Net income $ 754,147 $ 458,617
========= =========
Earnings per share $ .53 $ N/A
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-14-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR YEARS ENDED SEPTEMBER 30, 1997 AND 1996
-------------------------------------------
<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, 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
Purchase of 227,647 shares of
common stock (22,765) (3,347,408) -- -- (3,370,173)
Compensation under Stock-Based
Benefit Plan -- 64,572 -- 149,047 213,619
Deferred compensation -
Management Stock Bonus Plan -- (882,927) -- -- (882,917)
Compensation under Stock
Bonus Plan -- 152,218 -- -- 152,218
Dividends paid ($.05 per share) -- -- (283,808) -- (283,808)
Net income -- -- 754,147 -- 754,147
------------ ------------ ------------ ------------ ------------
Balance - September 30, 1997 $ 139,241 $ 11,390,312 $ 9,381,773 $ (1,082,193) $ 19,829,133
============ ============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-15-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Operating Activities
Net income $ 754,147 $ 458,617
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
Amortization of discount of mortgage backed securities (826) (592)
Amortization of deferred loan fees (170,241) (195,680)
Loan fees deferred 105,511 275,956
Decrease in discount on loans purchased (20,560) (26,579)
Other amortization -- (57,800)
Provision for loan losses 60,644 55,161
Non-cash compensation under stock-based benefit plans 365,837 69,659
Increase in accrued interest receivable (6,212) (77,411)
Provision for depreciation 66,782 80,984
Loans sold -- 560,000
Loans originated for sale -- (560,000)
Decrease (increase) in deferred income taxes 162,393 (274,939)
Decrease (increase) in other assets 56,097 (44,885)
Decrease in accrued interest payable (1,580) (2,925)
(Decrease) increase in income taxes payable (173,172) 216,491
(Decrease) increase in other liabilities (474,900) 504,097
------------ ------------
Net cash provided by operating activities 723,920 980,154
Cash Flows from Investment Activities
Proceeds from maturing interest-bearing deposits 783,000 1,076,000
Purchases of interest-bearing deposits (437,679) (783,000)
Purchase of mortgage backed securities -- (2,614,902)
Decrease (increase) in securities purchased under
agreement to resell 2,000,000 (2,000,000)
Proceeds from maturing other investments 2,000,000 6,525,000
Purchase of other investments (3,250,000) (8,469,375)
Principal collected on mortgage backed securities 177,614 133,542
Net increase in shorter term loans (119,079) (324,572)
Longer term loans originated or acquired (11,963,341) (21,592,489)
Principal collected on longer term loans 9,393,482 16,099,672
Investment in premises and equipment (54,271) (7,801)
Purchase of stock in Federal Home Loan Bank of Atlanta (70,400) (3,000)
(Increase) decrease on investment in and
loans to joint ventures (100,000) 150,000
------------ ------------
Net cash used by investment activities (1,640,674) (11,810,925)
</TABLE>
-16-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------
1997 1996
------------- --------------
<S> <C> <C>
Cash Flows from Financing Activities
- ------------------------------------
Net decrease in demand deposits, money
market, passbook accounts and advances by
borrowers for taxes and insurance $ (1,130,148) $ (328,104)
Net increase (decrease) in certificates of deposit 3,225,329 (3,681,261)
Federal Home Loan Bank advances 4,000,000 --
Sale of common stock -- 15,561,004
Employee Stock Ownership Plan -- (1,296,040)
Stock repurchase (3,370,173) --
Stock purchased for Management Stock Bonus Plan (882,927) --
Dividends (283,808) --
------------ ------------
Net cash provided by financing activities 1,558,273 10,255,599
------------ ------------
Increase (decrease) in cash and cash equivalents 641,519 (575,172)
Cash and cash equivalents at beginning of year 7,305,109 7,880,281
------------ ------------
Cash and cash equivalents at end of year $ 7,946,628 $ 7,305,109
============ ============
The following is a Summary of Cash and Cash Equivalents:
- --------------------------------------------------------
Cash $ 1,003,528 $ 1,583,482
Interest bearing deposits in other banks 3,898,946 4,076,776
Federal funds sold 3,481,833 2,427,851
------------ ------------
Balance of cash items reflected on
Statement of Financial condition 8,384,307 8,088,109
Less - certificates of deposit with original
maturities of more than
three months that are included
in interest bearing deposits in other banks 437,679 783,000
------------ ------------
Cash and cash equivalents reflected on the
Statement of Cash Flows $ 7,946,628 $ 7,305,109
============ ============
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid during the year for:
Interest $ 3,388,967 $ 3,408,352
============ ============
Taxes $ 420,714 $ 352,466
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-17-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 1997
------------------
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 - 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. Amortization of
premiums and accretion of discounts on purchases is computed using the
interest method, since management had the ability and intention to
hold them to maturity.
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.
-18-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
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, 1997
and 1996.
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.
-19-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
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 and certain direct loan origination costs are
deferred and are 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 fair
value less estimated disposal cost in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". Expenses incurred on foreclosed real estate prior to
disposition are charged to expense. Gains on the sale of foreclosed
real estate are recognized upon disposition of the property. Sale of
the real estate acquired through foreclosure is expected to occur
within the next twelve months.
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)
-20-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
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. Employee Stock Ownership Plan - The Company 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)
M. 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. Management decided to continue using the "intrinsic
value based method" as prescribed by APB Opinion No. 25. (See Note 12)
N. 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.
O. 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.
P. Earnings Per Share - Earnings per share for September 30, 1997 has
been computed based on 1,434,660 weighted average shares of common
stock and common stock equivalents outstanding. 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.
Q. Reclassification - Certain prior years' amounts have been reclassified
to conform to the current year's method of presentation.
-21-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 2 - Securities Purchased Under Agreements to Resell
-----------------------------------------------
The Company enters into purchases of mortgage backed securities under
agreements to resell substantially identical securities. As of September 30,
1997, the Company had no outstanding agreements to resell. 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 Company'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 $2,000,000 and $2,400,000 during the fiscal years ended September
30, 1997 and 1996, respectively, and the maximum amounts outstanding at any
month-end during the fiscal years ended September 30, 1997 and 1996 were
$2,000,000 and $6,000,000, respectively.
Note 3 - Other Investments
-----------------
The amortized cost and fair values of other investments are as follows:
<TABLE>
<CAPTION>
September 30, 1997
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Federal National
Mortgage Association
Bonds $ 500,000 $ - $ 8,000 $ 492,000
Federal Home Loan
Bank Bonds 2,250,000 3,000 21,850 2,231,150
Federal Home Loan
Mortgage Corporation
Bonds 1,000,000 1,000 - 1,001,000
--------- --------- --------- ---------
$3,750,000 $ 4,000 $ 29,850 $3,724,150
========= ========= ========= =========
</TABLE>
-22-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 3 - Other Investments - Continued
-----------------
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Federal National
Mortgage Association
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>
No gains or losses were realized during the years ended September 30, 1997
or 1996.
The scheduled maturities of other investments at September 30, 1997:
Amortized Fair
Cost Value
--------- ---------
Due after five years through
ten years $2,250,000 $2,246,000
Due after ten years 1,500,000 1,478,150
--------- ---------
$3,750,000 $3,724,150
========= =========
Note 4 - Mortgage Backed Securities
--------------------------
Mortgage backed securities at September 30, consist of the following:
1997 1996
---------- ----------
GNMA participating certificates $2,246,061 $2,405,906
FNMA participating certifcates 605,991 623,760
--------- ---------
2,852,052 3,029,666
Net - unamortized discounts (6,842) (7,668)
--------- ---------
$2,845,210 $3,021,998
========= =========
-23-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
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, 1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA participating certificates $2,239,384 $ 16,551 $ - $2,255,935
FNMA participating certifcates 605,826 - 16,863 588,963
--------- --------- --------- ---------
$2,845,210 $ 16,551 $ 16,863 $2,844,898
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
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>
No gains or losses were realized during the years ended September 30, 1997
and 1996.
Note 5 - Loans Receivable
----------------
Loans receivable at September 30, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
One to four family residential mortgage loans $71,185,272 $69,212,623
Multifamily residential mortgage loans 98,855 286,950
Commercial mortgage loans 3,292,479 3,026,330
Construction loans 1,462,000 3,277,500
Lines of credit 1,036,125 475,000
Land/lot loans 2,126,751 773,730
Home improvement loans 6,632 8,586
Share loans 299,795 425,783
Commercial loans secured by lease
finance receivables 1,075,147 828,126
---------- ----------
80,583,056 78,314,628
Less - undisbursed portion of loans
in process (1,198,222) (1,613,088)
- unamortized discount on loans
purchased (146,514) (167,074)
- deferred loan origination fees (537,950) (602,680)
- allowance for loan losses (250,000) (195,000)
---------- ----------
$78,450,370 $75,736,786
========== ==========
</TABLE>
-24-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 5 - Loans Receivable - Continued
----------------
The following is a summary of the allowance for loan losses:
September 30,
------------------------
1997 1996
---- ----
Beginning balance $195,000 $139,839
Provision for loan losses 60,644 55,161
Charge-offs (5,644) -
------- --------
Balance end $250,000 $195,000
======= =======
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.
Impaired loans as defined by SFAS No. 114 are summarized as follows for the
year ended September 30, 1997.
Recorded investment $76,036
Allowance for loan losses -
Impaired loans as defined by SFAS No. 114 for which interest income has
been reduced are as follows for the year ended September 30, 1997.
Interest income that would have been recorded $ 7,095
Interest income recognized -
------
Total income not recognized $ 7,095
======
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 that
period.
-25-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 5 - Loans Receivable - Continued
----------------
The Bank was not committed to fund additional amounts on these loans.
Non-accrual loans that are not subject to SFAS No. 114 for which interest
has been reduced totaled approximately $761,249 and $480,345 at September 30,
1997 and 1996.
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:
1997 1996
---- ----
Interest income that would have
been recognized $ 93,191 $ 57,085
Interest income recognized 53,151 25,073
------- -------
Interest income not recognized $ 40,040 $ 32,012
======= =======
Loans outstanding to officers and directors and their affiliates of the
Bank at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Balance At Balance At Balance At
September Loans Principal September Loans Principal September
30, 1997 Made Repayment 30, 1996 Made Repayment 30, 1995
---------- ----- --------- ---------- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
$1,377,658 $127,500 $ 29,545 $1,279,703 $186,472 $ 40,343 $1,133,574
</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:
1997 1996
---- ----
Mortgage loan portfolios serviced for:
Other investors $ 8,601,204 $10,650,449
========== ==========
Custodial Escrow balances maintained in connection with the foregoing loan
servicings were approximately $44,019 and $48,845 at September 30, 1997 and
1996.
-26-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 5 - Loans Receivable - Continued
----------------
Unless otherwise noted, the Bank requires collateral or other security to
support financial instruments with off-balance-sheet credit risk.
Financial Instruments Whose Contract Contract Amount
Amounts Represent Credit Risk At September 30,
- ------------------------------------ ------------------------------
1997 1996
---- ----
Standby letters of credit $ - $ 13,460
Loan commitments 2,809,700 1,071,600
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, 1997 are $1,000,000 for adjustable rate mortgages
ranging from 7.00% to 10.00% and fixed rate mortgages totaling $1,809,700
ranging from 7.00% to 9.05%.
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 7.50% to 8.00%.
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, 1997 as
a liability for credit loss.
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
-------------------------------------------------
Bankers Affiliate, Inc., formerly "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
Bankers Affiliate, 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.
-27-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 7 - Investment in and Loans to Affiliated Corporation - Continued
-------------------------------------------------
The Bank's investment in and loans to an affiliated corporation, Bankers
Affiliate, Inc. (See Note 1) are summarized as follows:
September 30,
-----------------------------
1997 1996
---- ----
Capital stock, at cost $ 25,000 $ 25,000
Loan payable 2,900,000 2,800,000
--------- ---------
$2,925,000 $2,825,000
========= =========
Summarized financial information as of June 30, 1997 and 1996 and for the
years ended June 30, 1997 and 1996 for Bankers Affiliate, Inc. are as follows:
1997 1996
---- ----
Cash $ 191,991 $ 233,189
Finance receivables 8,319,201 8,035,536
Real estate acquired through foreclosure 101,851 117,729
Other assets 46,729 113,667
--------- ---------
$8,659,772 $8,500,121
========= =========
Loans payable $8,550,000 $8,400,000
Other liabilities 27,670 34,162
--------- ---------
8,577,670 8,434,162
Stockholders' equity 82,102 65,959
--------- ---------
$8,659,772 $8,500,121
========= =========
-28-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 7 - Investment in and Loans to Affiliated Corporation - Continued
-------------------------------------------------
1997 1996
---- ----
Income and Expense
Income:
Interest $ 830,949 $ 897,767
Other income 37,865 33,866
--------- ---------
868,814 931,633
Expenses:
Interest 588,769 686,482
Provision for losses on loans 67,788 40,392
Salaries and related expenses 143,175 135,909
Other expenses 60,575 63,101
--------- ---------
860,307 925,884
--------- ---------
Income before income tax provision 8,507 5,749
Income tax provision (benefit) (7,636) 3,050
--------- ---------
Net income 16,143 2,699
Retained earnings (deficit) at beginning
of fiscal year (9,041) (11,740)
--------- ---------
Retained earnings (deficit) at end of
fiscal year $ 7,102 $ (9,041)
========= =========
Note 8 - Premises and Equipment
----------------------
Premises and equipment at September 30, 1997 and 1996 are summarized by
major classification as follows:
<TABLE>
<CAPTION>
Useful Life
1997 1996 in Years
---- ---- ---------
<S> <C> <C>
Land $ 224,056 $ 224,056 -
Office buildings 602,549 602,549 5-50
Furniture, fixtures and
equipment 823,253 769,652 3-20
--------- ---------
1,649,858 1,596,257
Accumulated depreciation (927,926) (861,814)
--------- ---------
$ 721,932 $ 734,443
========= =========
</TABLE>
The provision for depreciation for the periods ended September 30, 1997
and 1996 was $66,782 and $80,984, respectively.
-29-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 8 - Premises and Equipment - Continued
----------------------
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, 1997 and 1996 was $62,262 and $54,964, respectively. At September 30, 1997,
the minimum rental commitments under noncancellable leases are as follows:
Year Ended September 30, Total
------------------------ -----
1998 $ 55,818
1999 55,818
2000 48,218
2001 34,129
2002 29,150
-------
$223,133
=======
Note 9 - Deposits
--------
Deposits are summarized as follows at September 30:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- -----------------------------------
Weighted- Weighted-
Type of Account Amount Average Rate Amount Average Rate
- --------------- ------ ------------ ------ ----------------
<S> <C> <C> <C> <C>
NOW and money market accounts
including non-interest bearing
deposits of $352,330 in 1997
and $516,213 in 1996 $11,628,286 1.22% $12,338,661 2.59%
Passbook savings 15,208,888 3.05% 15,636,722 3.04%
Certificates of deposit 47,348,677 5.74% 44,123,348 5.72%
---------- ----------
74,185,851 72,098,731
Accrued interest 261 1,841
---------- ----------
$74,186,112 $72,100,572
========== ==========
</TABLE>
The aggregate amount of certificates of deposit with a
minimum denomination of $100,000 was approximately $3,455,658 and $3,394,313 at
September 30, 1997 and 1996. Deposits in excess of $100,000 are not insured by
the Savings Association Insurance Fund.
<TABLE>
<CAPTION>
1997 1996
----------- -------
Amount Amount
------ ------
<S> <C> <C>
Certificates accounts mature as follows:
One year or less $28,718,790 $25,337,111
More than 1 year through 2 years 9,654,831 10,948,754
More than 2 years through
3 years 3,518,357 4,561,182
More than 3 years 5,456,699 3,276,301
---------- ----------
$47,348,677 $44,123,348
========== ==========
</TABLE>
-30-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 9 - Deposits - Continued
--------
Interest expense on deposits is summarized as follows for the
years ended September 30:
1997 1996
---- ----
Certificates $2,454,305 $2,581,651
NOW and money market 292,045 315,593
Passbook 473,499 478,045
--------- ---------
$3,219,849 $3,375,289
========= =========
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 was 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 and was accrued at September 30, 1996. The Bank's SAIF
deposit insurance premiums were 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- Federal Home Loan Bank Advances
-------------------------------
Federal Home Loan Bank advances at September 30, 1997 consist
of short term fixed rate advances bearing interest at 5.72% to 6.19% per annum
and due within one year.
The Bank's stock in the Federal Home Loan Bank of Atlanta is
pledged as security for the loan and under a blanket floating lien security
agreement with the Federal Home Loan Bank of Atlanta, the Bank is required to
maintain as collateral for its advances, qualified home mortgage loans in an
amount equal to 175% of the advances.
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, 1997 and 1996. The costs of funding this plan were $18,534 and
$37,694 for the years ended September 30, 1997 and 1996, respectively.
-31-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 11- Pension Plan - Continued
------------
The following table sets forth the plan's related costs at
September 30:
1997 1996
---- ----
Service cost $ 21,599 $ 32,075
Interest cost 44,363 48,995
Actual return on plan assets (44,093) (39,168)
Other components (3,335) (4,208)
-------- --------
Net period pension costs $ 18,534 $ 37,694
======== ========
The following table sets forth the plan's funded status at
September 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accumulated Benefit Obligation
- ------------------------------
Vested $ 444,441 $ 465,738
Non-vested 3,133 4,200
--------- ---------
Total $ 447,574 $ 469,038
========= =========
Projected benefit obligation $ 701,623 $ 677,176
Fair value of plan assets as of September 30 664,051 657,912
--------- ---------
Plan assets in deficit of projected
benefit obligation (37,572) (19,264)
Unrecognized net loss 129,729 89,765
Unrecognized net transition obligation 2,227 2,429
--------- ---------
Prepaid pension cost $ 94,384 $ 72,930
========= =========
Reconciliation of Projected Benefit Obligation
- ----------------------------------------------
Projected benefit obligation beginning of year $ 677,176 $ 657,849
Interest cost for the fiscal year 44,363 48,995
Service cost for the fiscal year 21,599 32,075
Benefit payments for the fiscal year -- (2,419)
Actuarial (gain) loss for the fiscal year 69,301 (59,324)
--------- ---------
Projected benefit obligation as of September 30
before settlement 812,439 677,176
Effect of settlement (110,816) --
--------- ---------
Projected benefit obligation as of Septemeber
30 after settlement $ 701,623 $ 677,176
========= =========
</TABLE>
-32-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 11- Pension Plan - Continued
------------
The following interest rate assumptions were used for
September 30:
1997 1996
---- ----
Weighted-average discount rate 7.25% 7.50%
Long term rate of return 8.00% 8.00%
Rate of compensation increase 4.00% 4.50%
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 $15,561,004, 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
Company'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, 1997 and 1996 was $213,619 and $69,659, respectively.
The ESOP shares as of September 30 were as follows:
1997 1996
---- ----
Allocated shares 17,132 4,320
Shares earned, but unallocated 2,160 2,160
Unearned shares 108,220 123,124
Fair value of unearned shares at September 30 $1,785,630 $1,600,612
-33-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 12- Common Stock and Stock Benefit Plans - Continued
------------------------------------
On October 8, 1996, the Company established a 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.
Information with respect to options is as follows:
Weighted
Average
Exercise
Shares Price
------ -----
Outstanding at beginning of year - $ -
Granted 162,006 13.30
Exercised -
Forfeited -
-------
Outstanding at end of year 162,006
=======
Exercisable at end of year -
=======
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the
Savings Bank to make certain disclosures as if the fair value method of
accounting had been applied to the Savings Bank's stock option grants made
subsequent to 1994. Accordingly, the Savings Bank estimated the grant date fair
value of each option awarded in fiscal 1997 using the Black-Scholes
Option-Pricing model with the following relevant assumtions: dividend yield of
1.3%, risk-free interest rate of 6.67% and expected lives of 10 years. The
assumption for expected volatility was 18.17%. Had 1997 compensation cost been
determined including the weighted-average estimate of fair value of each option
granted of $5.31, the Savings Bank's net income would be reduced to proforma
amount of $226,125. Proforma earnings per share would be $.16 in fiscal 1997.
On October 8, 1996, the Company established 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
$13.62 to provide shares for distribution under the Stock Bonus Plan.
-34-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
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%. As of
September 30, 1997, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action.
The following table presents the Bank's capital position based on the
September 30, 1997 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>
Tangible (1) $15,332,292 16.10% $ 1,428,818 1.50% $ N/A N/A %
Tier I capital (2) $15,332,292 32.66% $ N/A N/A% $ 2,816,820 6.00%
Core (1) $15,332,292 16.10% $ 2,857,676 3.00% $ 4,762,794 5.00%
Risk-weighted (2) $15,582,292 33.19% $ 3,755,760 8.00% $ 4,694,700 10.00%
</TABLE>
(1) To adjusted total assets.
(2) To risk-weighted assets.
-35-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 13- Retained Earnings - Continued
-----------------
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 $19,829,133
Less: Non-allowable items
Equity of parent company (4,495,232)
Intangible assets (1,609)
----------
Tangible and core capital 15,332,292
General valuation allowance 250,000
-----------
Risk-based capital $15,582,292
==========
Total assets $98,556,719
Less: Assets of non-includable subsidiaries (2,925,000)
Intangible assets (1,609)
Asset of parent company (374,224)
-----------
Tangible and adjusted tangible assets $95,255,886
==========
Risk-weighted assets $46,947,000
==========
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, 1997,
the Bank is not subject to the interest rate risk requirement.
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 earnings at December 31, 1995. 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.
-36-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 13- Retained Earnings - Continued
-----------------
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,
---------------------------
1997 1996
---- ----
Current
- -------
Federal $276,262 $467,752
State 62,179 102,505
------- -------
338,441 570,257
Deferred
- --------
Federal 133,736 (220,848)
State 28,657 (48,893)
------- -------
162,393 (269,741)
------- -------
$500,834 $300,516
======= =======
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,
----------------------------------------------------
1997 1996
---- ----
Percent Percent
of Pretax of Pretax
Amount Income Amount Income
<S> <C> <C> <C> <C>
Tax at statutory rate $426,693 34.00 $258,105 34.00
Increases (Decreases)
Resulting From
State income tax net of federal
income tax benefit 59,951 4.78 35,384 4.66
Other 14,190 1.13 7,027 .93
-------- ----- -------- -----
$500,834 39.91 $300,516 39.59
======== ===== ======== =====
</TABLE>
-37-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 14- Income Taxes - Continued
------------
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
September 30, 1997 and 1996 are presented below:
1997 1996
---- ----
Deferred Tax Assets:
Deferred loan origination fees $207,757 $232,755
Allowance for loan losses 96,550 75,309
Reserve for uncollected interest 13,639 12,363
SAIF one-time assessment -- 195,417
ESOP contribution 8,331 --
NOL carryfoward of subsidiary 14,834 5,198
-------- --------
Total gross deferred tax assets 341,111 521,042
Deferred Tax Liabilities:
Tax reserve for bad debts in excess of
base year amount 106,098 131,061
Federal Home Loan Bank of Atlanta stock
dividends 56,965 56,965
Depreciation 25,203 24,426
Pension plan 36,451 29,803
-------- --------
Total gross deferred tax liabilities 224,717 242,255
-------- --------
Net deferred tax assets $116,394 $278,787
======== ========
One of the Company's subsidiaries had a NOL carryforward in
the amount of $18,956 that expires in 2004.
The Company and its Subsidiaries file their income tax
returns on a calendar year basis.
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
-38-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 15- Disclosure About Fair Value of Financial Instruments- Continued
----------------------------------------------------
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.
The Savings Bank is a party to financial instruments with off-balance
sheet risk in the normal course of business, including loan commitments. The
loan commitments were a blended rate based on the relative risk of the
properties involved and the lines of credit are at adjustable rates.
The estimated fair values of the Bank's financial instruments are as
follows:
September 30, 1997
-----------------------
Carrying Estimated
Value Fair Value
----- ----------
Financial Assets
- ----------------
Cash, interest-bearing deposits
in other banks and federal funds $ 8,384,000 $ 8,384,000
Investment securities 3,750,000 3,724,000
Mortgage backed securities 2,845,000 2,845,000
Loans receivable 78,450,000 78,662,000
Federal Home Loan Bank of Atlanta
stock 753,000 753,000
Financial Liabilities
- ---------------------
Deposits $74,186,000 $74,339,000
Commitments -- 2,854,000
-39-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 16- Condensed Financial Information (Parent Company Only)
-----------------------------------------------------
Information as to the financial position of WHG Bancshares Corporation as
of September 30, 1997 and 1996 and results of operations and cash flows for the
two years ended September 30, 1997 is summarized below. During the years ended
September 30, 1997 and 1996, the parent did not receive any dividends from its
subsidiary, the Bank.
1997 1996
---- ----
Statement of Financial Condition
Cash $ 21,465 $ 26,254
Federal funds sold 206,935 711,001
Interest-bearing deposits 145,679 --
Securities purchased under agreement
to resell -- 2,000,000
Loans receivable 4,103,794 5,252,839
Equity in net assets of subsidiary 15,333,901 15,331,778
Other assets 24,554 8,358
----------- -----------
$19,836,328 $23,330,230
=========== ===========
Taxes payable $ 6,195 $ 84,173
Other liabilities 1,000 --
Stockholders' equity 19,829,133 23,246,057
----------- -----------
$19,836,328 $23,330,230
=========== ===========
For the years ended September 30:
1997 1996
----------- -----------
Statement of Operations
Interest Income $ 428,415 $ 233,437
Equity in net income of subsidiary 519,213 324,841
----------- -----------
Total Income 947,628 558,278
Non-interest expenses 57,645 15,488
----------- -----------
Net income before income taxes 889,983 542,790
Provision for income taxes 135,836 84,173
----------- -----------
Net income $ 754,147 $ 458,617
=========== ===========
-40-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 16- Condensed Financial Information (Parent Company Only) - Continued
-----------------------------------------------------
For the years ended September 30:
1997 1996
------------ ------------
Statement of Cash Flows
Cash Flows from Operating Activities:
Net income $ 754,147 $ 458,617
Adjustment to Reconcile Net Income to Net
Cash Provided by Operating Activities
Equity in net income of subsidiary (519,213) (324,841)
Amortization of discounts on investments -- (30,625)
Increase in other assets (16,196) (8,358)
(Decrease) increase in taxes payable (77,978) 84,173
Increase in other liabilities 1,000 --
------------ ------------
Net cash provided by operating
activities 141,760 178,966
Cash Flows from Investing Activities:
Purchase of interest-bearing deposits (145,679) --
Proceeds from maturing other investments -- 6,000,000
Purchase of other investments -- (5,969,375)
Purchase of stock from subsidiary -- (6,484,461)
Decrease (increase) in securities
purchased under agreement to resell 2,000,000 (2,000,000)
Loans originated (2,000,000) (5,796,040)
Principal collected on loans 3,149,045 543,201
------------ ------------
Cash provided (used) by investing
activities 3,003,366 (13,706,675)
Cash Flows from Financing Activities:
Proceeds from sale of common stock -- 15,561,004
Employee Stock Ownership Plan -- (1,296,040)
Repurchase of common stock (3,370,173) --
Dividends paid (283,808) --
------------ ------------
Net cash provided (used) by financing
activities (3,653,981) 14,264,964
------------ ------------
-41-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1997
- ------------------
Note 16- Condensed Financial Information (Parent Company Only) - Continued
-----------------------------------------------------
1997 1996
--------- ---------
(Decrease) increase in cash and cash
equivalents $(508,855) $ 737,255
Cash and cash equivalents at beginning
at end of year 737,255 --
--------- ---------
$ 228,400 $ 737,255
========= =========
Supplemental Disclosures of Cash Flows Information:
Income taxes $ 121,714 $ --
========= =========
There was no cash paid during the years ended September 30, 1997 and 1996
for interest.
Note 17- Recent Accounting Pronouncements
--------------------------------
FASB Statement on Earnings per Share - In February 1997, FASB issued
Statement of Financial Accounting Standards ("SFAS") No. 128, which is effective
for financial statements issued for periods ending after December 15, 1997. This
Statement establishes standards for computing and presenting earnings per share
("EPS"). It replaces the presentation of primary EPS with a presentation of
basic EPS. Management believes the adoption of this Statement will not have a
significant effect on the Company's EPS.
FASB Statement on Reporting Comprehensive Income - In June 1997, FASB
issued SFAS No. 130, which establishes standards for reporting and display of
comprehensive income and its components. This Statement is effective for fiscal
years beginning after December 15, 1997. Management believes the adoption of
this Statement will not have a material effect on the Company's financial
statements.
FASB Statement on Disclosures About Segments of an Enterprise and Related
Income - In June 1997, FASB issued SFAS No. 131, which establishes standards for
the way public companies report information about operating segments in the
annual and interim financial statements. This Statement is effective for fiscal
years beginning after December 15, 1997. Management believes the adoption of
this Statement will not have a material effect on the financial statements of
the Company.
-42-
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