EXHIBIT 13
<PAGE>
WHG BANCSHARES CORPORATION
Corporate Profile
We are the holding company for Heritage Savings Bank, F.S.B. (the "Heritage
Savings"). Heritage Savings is a federally chartered stock savings bank which
conducts business through five full service offices located in Howard and
Baltimore counties and Baltimore City, Maryland.
Heritage Savings was founded in 1902 as West Baltimore Building Association. The
Bank is, and continues to be, a community -oriented institution whose business
consists of accepting deposits from customers and investing those funds,
together with borrowings, primarily in residential loans, including those
secured by single-family residential properties. Heritage Savings is subject to
examination and comprehensive regulation by the Office of Thrift Supervision and
its deposits are insured by the Savings Association Insurance Fund.
Stock Market Information
Our common stock is traded on the Nasdaq SmallCap Market under the trading
symbol of "WHGB", We began trading in April 1996, upon completion of the
conversion of Heritage Savings. The following table reflects high and low bid
quotations. The quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission, and may not represent actual transactions.
Dividends
Date High Low Declared
---- ---- --- --------
October 1, 1998 to December 31, 1998 12.06 10.13 .09
January 1, 1999 to March 31, 1999 12.25 10.75 .09
April 1, 1999 to June 30, 1999 11.25 8.44 .09
July 1, 1999 to September 30, 1999 9.25 8.63 .09
October 1, 1999 to December 31, 1999 9.03 7.13 .09
January 1, 2000 to March 31, 2000 7.87 6.37 .09
April 1, 2000 to June 30, 2000 8.37 6.75 .09
July 1, 2000 to September 30, 2000 8.62 7.75 .09
The number of shareholders of record of common stock as of the record date of
November 30, 2000, was approximately 216. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms. At November 30, 2000, there were 1,285,609 shares outstanding.
Our ability to pay dividends to stockholders is dependent upon the dividends we
receive from Heritage Savings. Heritage Savings may not declare or pay a cash
dividend on any of its stock if the effect of the declaration or payment of
dividends would cause their 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 Office of
Thrift Supervision.
2
<PAGE>
Selected Financial Ratios and Other Data
For the Years Ended
September 30,
----------------------
2000 1999
------- -------
Return on average assets ....................... .51% .50%
Return on average equity ....................... 5.30 4.66
Average equity to average assets ratios ........ 9.61 10.69
Equity to assets at period end ................. 9.66 9.63
Dividend payout ratio .......................... 52.94 60.00
Net interest rate spread ....................... 2.27 2.24
Net yield on average interest-
earnings assets .............................. 2.68 2.66
Non-performing loans to total assets ........... .16 .13
Allowance for loan loss to total loans ......... .41 .38
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward-looking statements. When used in this
discussion, the words "believes", "anticipates", "contemplates", "expects", and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Those risks and
uncertainties include changes in interest rates, the ability to control costs
and expenses, year 2000 issues and general economic conditions. WHG Bancshares
Corporation undertakes no obligation to publicly release the results of any
revisions to those forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Since we conduct no significant business other than owning all of the
common stock of Heritage Savings Bank, F.S.B. ("Heritage Savings"), references
in this discussion to "we," "us," and "our," refer collectively to WHG
Bancshares Corporation and Heritage Savings.
Overview
We are a unitary savings and loan holding company and own all of the
stock of Heritage Savings Bank, F.S.B. ("Heritage Savings"). We principally
operate through five branch offices located throughout Baltimore County,
Baltimore City and Howard County, Maryland.
Despite the rise in interest rates by the Federal Reserve in fiscal
2000, we were able to increase net income by 9.3%. For the fiscal year ended
September 30, 2000, we earned $800,000 or $.68 per diluted share as compared to
$732,000, or $.60 per diluted share for the fiscal year ended September 30,
1999. Additionally, assets increased $5.0 million to $159.9 million over last
year. Our net loans outstanding grew by 7.8% reflecting strong performance by
our loan production staff. Asset quality continues to remain excellent. During
the year, in order to accommodate the growing demands of customers, we relocated
the Ellicott City branch to a larger building with a drive-through facility and
installed an ATM machine at our Woodlawn branch. Additionally, we hired two new
business development officers with commercial lending backgrounds. Beginning in
January 2001, our Lutherville branch will also have an ATM machine and a
drive-through facility. We currently estimate that we will spend approximately
$120,000 on these capital improvements.
Management of Interest Rate Risk and Market Risk
Because the majority of our assets and liabilities are sensitive to
changes in interest rates, our most significant form of market risk is interest
rate risk, or changes in interest rates. We are vulnerable to an increase in
interest rates to the extent that our interest-bearing liabilities mature or
reprice more rapidly than our interest-earning assets. Our lending activities
have historically emphasized the origination of long-term, adjustable rate and
fixed rate loans secured by single-family residences. The primary source of
funds has been
4
<PAGE>
deposits with substantially shorter maturities. While having interest-bearing
liabilities that reprice more frequently than interest-earning assets is
generally beneficial to net interest income during a period of declining
interest rates, this type of an asset/liability mismatch is generally
detrimental during periods of rising interest rates.
We have established an asset/liability committee which consists of our
department supervisors, our President and the Chairman of our Board of Directors
and one outside Director. The committee meets on a monthly basis to review loan
and deposit pricing and production volumes, interest rate risk analysis,
liquidity and borrowing needs, and a variety of other assets and liability
management topics. On behalf of the committee, the Chairman reports to our Board
of Directors.
To reduce the effect of interest rate changes on net interest income,
we have adopted various strategies to enable us to improve the matching of
interest-earning asset maturities to interest-bearing liability maturities. The
principal elements of these strategies include seeking to:
o originate one-to four residential mortgage loans with adjustable rate
features or fixed rate loans with short maturities;
o lengthen the maturities of our liabilities when it would be cost effective
through the pricing and promotion of longer term certificates of deposit
and utilization of FHLB advances;
o attract low cost checking and transaction accounts which tend to be less
interest rate sensitive when interest rates rise;
o maintain interest- bearing deposits, federal funds and U.S. government
securities with short to intermediate terms to maturities; and
o maintain an investment portfolio that provides a stable cash flow, thereby
providing investable funds in varying interest rate cycles.
We have made a significant effort to maintain our level of lower cost
deposits as a method of enhancing profitability. In the past year, our level of
demand deposits has increased significantly. At September 30, 2000, we had
approximately $26.8 million, or 22%, of our deposits in low-cost savings,
checking and money market accounts. These deposits have traditionally remained
relatively stable and are expected to be only moderately affected in a period of
rising interest rates. This stability has enabled us to offset the impact of
rising rates in other deposit accounts.
Net Portfolio Value
Exposure to interest rate risk is actively monitored by our
management. Our objective is to maintain a consistent level of profitability
within acceptable risk tolerances across a broad range of potential interest
rate environments. We use the OTS Net Portfolio Value ("NPV") Model to monitor
our exposure to interest rate risk, which calculates changes in net portfolio
value. Reports generated from assumptions provided and modified by management
are reviewed by the Asset/Liability Management Committee and reported to the
Board of Directors monthly. The Interest Rate Sensitivity of Net Portfolio Value
Report shows the
5
<PAGE>
degree to which balance sheet line items and net portfolio value are potentially
affected by a 100 to 300 basis point (1/100th of a percentage point) upward and
downward parallel shift (shock) in the Treasury yield curve.
The following table represents our NPV at September 30, 2000. The NPV
was calculated by the OTS, based upon information we provided to the OTS.
Changes NPV
in Rate Ratio(1) Change(2)
--------- -------- ---------
+300 bp .72% -771
+200 bp 3.14% -528
+100 bp 5.74% -269
0 bp 8.42% 0 bp
-100 bp 11.00% 258
-200 bp 13.21% 479
-300 bp 15.17% 675
(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.
These calculations indicate that our NPV could be adversely affected by
increases in interest rates but could be favorably affected by decreases in
interest rates. In addition, we may be deemed to have more than a normal level
of interest rate risk under applicable regulatory capital requirements.
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, prepayments and deposit run-offs and should not be relied upon
as indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgages, generally have features which restrict changes in interest rates on a
short term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
6
<PAGE>
Analysis of Net Interest Income
Our results of operations are primarily dependent on our net interest
income, which is the difference between the interest income earned on our
assets, primarily loans and investments, and the interest expense on our
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 our 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.
Average Balance Sheet
The following table sets forth information relating to our consolidated
average balance sheet and reflects the average yield on assets and average costs
of liabilities at and for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances. Management does not believe that the use of
month-end balances instead of daily average balances has caused any material
differences in the information presented.
7
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------
2000 1999
--------------------------------------- ----------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable(1).................... $94,549 $ 7,242 7.66% $83,094 $6,272 7.55%
Investment securities(2)............... 38,025 2,568 6.75% 34,956 2,369 6.78%
Mortgage-backed securities............. 17,198 1,110 6.45% 16,693 1,036 6.21%
Other interest-earning assets(3)....... 4,020 270 6.71% 8,620 495 5.74%
-------- ------- -------- -------
Total interest-earning assets......$153,792 $11,190 7.28% $143,363 $10,172 7.10%
======= =======
Non-interest-earning assets.............. 3,208 3,560
-------- --------
Total assets.......................$157,000 $146,923
======= =======
Interest-bearing liabilities:
Demand deposits........................$ 27,113 $ 739 2.73% $ 27,121 $ 732 2.70%
Time deposits.......................... 90,955 5,035 5.54% 80,886 4,428 5.47%
Other liabilities(4)................... 23,166 1,296 5.59% 22,687 1,193 5.26%
-------- ------- -------- -------
Total interest-bearing
liabilities...................... 141,234 $ 7,070 5.01% 130,694 $ 6,353 4.86%
====== =====
Non-interest bearing liabilities......... 685 528
-------- --------
Total liabilities.................. 141,919 131,222
Stockholders' equity..................... 15,081 15,701
------ -------
Total liabilities and
stockholders' equity.............$157,000 $146,923
======= =======
Net interest income...................... $4,120 $3,819
===== =====
Interest rate spread(5).................. 2.27% 2.24%
==== ====
Net yield on interest-earning assets(6).. 2.68% 2.66%
==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................ 108.89% 109.69%
======= ======
</TABLE>
(1) Average balances include non-accrual loans.
(2) Includes available for sale securities, other investments held to maturity,
ground rents and FHLB stock.
(3) Includes Federal Funds, interest-bearing deposits in other financial
institutions and interest-earning 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.
8
<PAGE>
Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest
income and interest expense for major components of our interest-earning assets
and interest-bearing liabilities. The table distinguishes between (i) changes in
net income attributable to volume (changes in volume multiplied by the prior
period's interest rate), (ii) changes in net interest income attributable to
rate (changes in interest rates multiplied by the prior period's volume), and
(iii) changes in volume multiplied by changes in rates.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
2000 vs. 1999
Increase (Decrease)
Due to
------------------------------------------
Rate/
Volume Rate Volume Net
------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable ..................... $ 866 $ 91 $ 13 $ 970
Investment securities ................ 209 (9) (1) 199
Mortgage-backed securities ........... 32 40 2 74
Other interest-earning assets ........ (264) 84 (45) (225)
------- ------- ------- -------
Total interest-earning assets .... 843 206 (31) 1,018
Interest expense:
Deposits ............................. 546 62 6 614
Other liabilities(1) ................. 25 76 2 103
------- ------- ------- -------
Total interest-bearing liabilities 571 138 8 717
------- ------- ------- -------
Net change in net interest income ...... $ 272 $ 68 $ (39) $ 301
======= ======= ======= =======
</TABLE>
(1) Includes interest on advances from the FHLB of Atlanta and advance payments
by borrowers for taxes and insurance.
9
<PAGE>
Financial Condition
At September 30, 2000, our assets increased $5.0 million, or 3.2%, to
$159.9 million from $154.9 million at September 30, 1999. This increase was
primarily due to an increase in loans receivable of $7.0 million, partially
off-set by a decrease in interest-bearing deposits in other banks of $3.2
million.
New loan originations outpaced loan repayments by $7.0 million due to
rising mortgage interest rates during the 2000 fiscal year which reduced
refinance-related loan repayments experienced in prior years.
At September 30, 2000, our deposits increased by $4.7 million, or 4.1%
to $120.0 million from $115.3 million at September 30, 1999. The increase was a
result of a $5.3 million increase in certificates of deposit, due to the
continued promotion of our certificates of deposit products. This was partially
offset by a $400,000 decrease in passbook accounts.
Our net worth increased by approximately $600,000 to $15.5 million at
September 30, 2000 from $14.9 million at September 30, 1999. The increase
reflects fiscal 2000's net income and non-cash compensation from stock-based
bonus and benefit plans, partially offset by common stock dividends and a
$160,000 increase in accumulated other comprehensive loss. The increase in
accumulated loss resulted from the fluctuation in market value of our investment
in available for sale securities. Because of interest rate volatility,
accumulated other comprehensive loss and stockholders' equity could materially
fluctuate for each interim period and year-end period. The decrease in market
value of the investment securities available for sale is considered temporary in
nature and will not affect our net income until the securities are sold. We plan
to hold these securities until maturity or until the market values of these
securities increase. Accordingly, we do not expect, though there is no
assurance, that our investment in these securities will affect net income in
future periods.
Results of Operations
Net Income
For September 30, 2000, net income increased $68,000, to $800,000 from
$732,000 for the 1999 fiscal year. The increase was the result of an increase in
net interest income of $301,000. This was off-set by a $50,000 increase in the
provision for loan loss, a $117,000 decrease in non-interest income, a $35,000
increase in non-interest expenses, and a $31,000 increase in the provision for
income taxes.
Net Interest Income
Net interest income increased by approximately $301,000 to $4.1 million
for fiscal 2000 from $3.8 for fiscal 1999. 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, rose slightly in fiscal
2000 to 2.27% from 2.24% for fiscal 1999. The increase in interest rate spread
is primarily the result of the utilization of lower-yielding interest bearing
deposits to fund higher- yielding loans and federal funds investments. This
increase was partially offset by increases in the average cost of funds paid on
certificates of deposit and FHLB advances.
9
<PAGE>
Interest Income
Total interest income increased $1.0 million, or 9.8%, to $11.2 million
in fiscal 2000 from $10.2 million in fiscal 1999. Interest income on loans
increased by approximately $970,000 to $7.2 million for fiscal 2000 from $6.3
million for fiscal 1999. The increase was due to an increase in the average
dollar amount of loans outstanding in fiscal 2000 over fiscal 1999 of
approximately $11.4 million coupled with an increase in the average yield on
loans of 11 basis points to 7.66% for fiscal 2000 compared to 7.55% for fiscal
1999. The yield increase can be attributed to two factors. First, our loan
portfolio mix shifted modestly to higher yielding multifamily residential and
commercial mortgage loans. As of September 30, 2000, those two loan categories
comprised 14.2% of the net loan balance as compared to 10.1% as of September 30,
1999. Secondly, during fiscal 2000, market interest rates rose on all loan
products offered.
Interest and dividend income on investment securities increased by
$199,000 to $2,568,000 in fiscal 2000 from $2,369,000 in fiscal 1999. The
increase was the result of an increase in the average dollar amount of
investment securities outstanding of $3.1 million.
Interest income on mortgage backed securities increased by $74,000 to
$1,110,000 for fiscal 2000 from $1,036,000 for fiscal 1999. The increase
resulted from an increase of 24 basis points in the average yield to 6.45% in
fiscal 2000 from 6.21% in fiscal 1999, augmented by an increase of $500,000 in
the average dollar amount invested.
Other interest income decreased by $225,000 to $270,000 for fiscal 2000
from $495,000 for fiscal 1999. The decrease was due to a decrease in the average
dollar amount of other interest- earning assets, predominantly interest-bearing
deposits in other banks and federal funds sold, of $4.6 million. We reduced the
average daily balance of our interest -bearing deposits to fund higher yielding
loans and federal funds investments. As a result the yield on our other
interest-earning assets increased 97 basis points to 6.71% in fiscal 2000 from
5.74% in fiscal 1999. This partially offset the decreased income from lower
total average other interest-earning balances.
Interest Expense
Total interest expense increased approximately $700,000 or 10.9% to
$7.1 million in fiscal 2000 from $6.4 million in fiscal 1999. Interest on
deposits increased by $614,000 to $5,774,000 in fiscal 2000 from $5,160,000 in
fiscal 1999. The increase was primarily due to an increase of $10.1 million in
the average dollar amount outstanding of time deposits combined with an increase
in the average cost of time deposits. The rate paid on time deposits increased 7
basis points to 5.54% in fiscal 2000 from 5.47% in fiscal 1999.
Interest on short-term borrowings decreased $335,000 or 89.8%, to
$38,000 in fiscal 2000 from $373,000 in fiscal 1999. During fiscal 2000, a
period of rising interest rates, we converted our short-term borrowings into
long-term borrowings to manage our interest rate risk. This increased the rates
paid on total borrowings by 33 basis points to 5.59% in fiscal 2000 from 5.26%
in fiscal 1999. This was supplemented by a $479,000 increase in total average
borrowings outstanding. As a result, interest on long-term borrowings increased
$438,000 to $1,258,000 in fiscal 2000 from $820,000 in fiscal 1999.
10
<PAGE>
Provision for Loan Losses
The provision for loan losses for fiscal 2000 increased $50,000 to
$120,000 from $70,000 for fiscal 1999. The increase was primarily due to the
overall change in the loan portfolio mix resulting in an increase in high risk
loans. We continually evaluate the adequacy of the allowance for loan losses,
which encompasses the overall risk characteristics of the various portfolio
segments, past experience with losses, the impact of economic conditions on
borrowers and other relevant conditions. Management continues to offer a wider
variety of loan products coupled with the continued success of changing the mix
of the products offered in the loan portfolio - from lower yielding loans (i.e.,
one- to four family loans) to higher yielding loans (i.e., multifamily,
non-residential commercial, construction, and consumer loans). Based upon the
additions to the allowance for loan losses, management believes the allowance
for loan losses is adequate. However, there can be no assurance that the
allowance for loan losses will be adequate to cover significant losses, if any,
that we might incur in the future due to the higher degree of risk which might
result from the change in the mix of the loan portfolio.
Non-Interest Income
Total non-interest income for fiscal 2000 decreased $117,000, or 44.7%,
to $145,000 from $262,000 for fiscal 1999. Excluding other commissions and fees
of $127,000 from Mapleleaf Mortgage Corporation, which closed in March 1999,
total non-interest income for fiscal 1999 totaled $135,000. Such exclusion of
other commissions and fees reflects an increase of $10,000 in non-interest
income in fiscal 2000 compared to fiscal 1999. The increase primarily reflects
an increase in other income offset by a decrease in fees and charges on loans
and gain on sale of investments. Other income in fiscal 2000 increased $18,000
primarily due to an increase in ATM fee income and proceeds of $5,000 from the
mutual to stock conversion of the Company's life insurance provider.
Non-Interest Expense
Total non-interest expense for fiscal 2000 totaled $2,825,000 compared
to $2,790,000. While total non-interest expense in fiscal 2000 remained
relatively unchanged from fiscal 1999, the components of non-interest expense
changed. Beginning in January 2000, the FDIC reduced deposit insurance premium
assessments for all SAIF insured banks. Additionally, the most significant
increases in non-interest expense in fiscal 2000 were occupancy expense,
professional services, and other expense. Occupancy expense increased $30,000
due to the lease commencement in January 2000 of the new Ellicott City branch
location. Professional services increased $8,000 primarily due to the business
development planning in the second quarter of fiscal 2000. Other expenses in
fiscal 2000 increased $37,000 primarily due to the relocation of the Ellicott
City branch, increased ATM fees and software costs in regard to the Year 2000.
11
<PAGE>
Provision for Income Taxes
Provision for income taxes increased by approximately $31,000 or 6.3%
to $520,000 for fiscal 2000 from $489,000 for fiscal 1999. The increase was
primarily the result of an increase in pretax income. The effective tax rate
fell slightly to 39.4% for fiscal 2000 from 40.0% for fiscal 1999. The decrease
was the result of the write-off of the deferred tax asset of MMC and the
non-recognition of income tax benefit from the net operation loss of MMC in
fiscal 1999.
Liquidity and Capital Resources
Management believes it has ample cash flows and liquidity to meet its
loan commitments of $230,000 and unused lines of credit of $2.2 million at
September 30, 2000. We have 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. As of September 30, 2000, such borrowed funds
totaled $24.0 million.
We are required under federal regulations to monitor certain levels of
liquid assets , which include certain United States government obligations and
other approved investments. Current regulatory regulations require that our
subsidiary, Heritage Savings maintain liquid assets of not less than 4%. As of
September 30, 2000, Heritage Savings' regulatory liquidity was 48.42%. Heritage
Savings is also subject to federal regulations that impose certain minimum
capital requirements. See Note 13 to our consolidated financial statements.
Net cash provided by operating activities was $822,000 and $1,160,000
for fiscal 2000 and 1999. Cash flows from operations in fiscal 2000 decreased
from fiscal 1999 primarily due to an increase in other assets and a
substantially lower increase in deferred loan fees.
Net cash used by investment activities for fiscal 2000 totaled $6.1
million, a decrease of $24.1 million from $30.2 million for fiscal 1999. During
fiscal 1999, we made net purchases of $21.5 million of investment and
mortgage-backed securities and loans. In addition, cash was used to fund the
$4.8 million purchase of the assets of Bankers Affiliate, Inc. We made no
similar purchases in fiscal 2000. The decrease in net cash used was partially
offset by continued strong loan origination activity that exceeded principal
repayments in fiscal 2000.
Net cash provided by financing activities for fiscal 2000 totaled $4.1
million compared to $21.8 million in fiscal 1999. Net cash provided during
fiscal 2000 resulted from an increase of net deposits of $4.5 million, partially
offset by dividends paid of $431,000. The net cash provided in fiscal 1999
resulted from an increase in deposits of $20.2 million and an increase in
borrowings of $3.1 million. This was partially offset by stock repurchases
totaling $1.0 million and dividends paid of $452,000.
We monitor projected liquidity needs and determine the levels desired
based upon our commitments to make loans and our ability to generate funds.
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.
12
<PAGE>
ANDERSON ASSOCIATES, LLP
CERTIFIED PUBLIC ACCOUNTANTS
7621 FITCH LANE
BALTIMORE, MARYLAND 21236
410-882-8050
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, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the two year period ended September 30,
2000. 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, 2000 and 1999, and the
consolidated results of its operations and cash flows for each of the two years
in the two year period ended September 30, 2000, in conformity with generally
accepted accounting principles.
/s/Anderson Associates LLP
-----------------------------------
Anderson Associates LLP
November 14, 2000
Baltimore, Maryland
13
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30,
-------------
2000 1999
---- ----
<S> <C> <C>
Assets
------
Cash $ 1,720,707 $ 1,312,324
Interest bearing deposits in other banks 509,570 3,689,305
Federal funds sold 3,764,000 2,290,000
Investments available for sale (Note 2) 19,439,212 19,700,713
Other investments held to maturity (Note 3) 15,650,000 15,650,000
Mortgage backed securities (Note 4) 16,451,148 17,983,370
Loans receivable - net (Note 5) 96,909,448 89,931,326
Foreclosed real estate - 13,103
Accrued interest receivable - loans 446,343 389,587
- investments 773,864 647,790
- mortgage backed securities 88,548 96,914
Premises and equipment - net (Note 8) 1,253,765 838,527
Federal Home Loan Bank of Atlanta stock, at cost (Note 6) 1,450,000 1,200,000
Deferred income taxes (Note 14) 936,589 852,384
Prepaid and refundable income taxes 107,471 68,590
Other assets 415,037 258,632
------------ ------------
Total assets $159,915,702 $154,922,565
============ ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
-----------
Deposits (Note 9) $120,044,864 $115,302,487
Borrowings (Note 10) 24,000,000 24,000,000
Advance payments by borrowers for taxes and insurance 70,711 315,463
Income taxes payable (Note 14) 31,874 49,289
Other liabilities 317,623 338,661
------------ ------------
Total liabilities 144,465,072 140,005,900
Commitments and contingencies (Notes 5, 8, 10 and 11)
Stockholders' Equity (Notes 12 and 13)
--------------------
Common stock .10 par value; authorized 1,620,062
shares; issued and outstanding 1,285,609 shares in
2000 and in 1999 128,561 128,561
Additional paid-in capital 6,701,437 6,561,355
Retained earnings (substantially restricted) 10,301,365 9,932,078
Accumulated other comprehensive income (1,134,125) (973,504)
Employee Stock Ownership Plan (546,608) (731,825)
------------ ------------
Total stockholders' equity 15,450,630 14,916,665
------------ ------------
Total liabilities and stockholders' equity $159,915,702 $154,922,565
============ ============
</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 OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Interest and fees on loans (Note 5) $ 7,241,831 $ 6,271,546
Interest and dividends on investment securities 2,568,055 2,369,493
Interest on mortgage backed securities 1,110,107 1,036,267
Other interest income 269,772 495,105
----------- -----------
Total interest income 11,189,765 10,172,411
Interest on deposits (Note 9) 5,774,005 5,159,849
Interest on short-term borrowings 37,731 373,213
Interest on long-term borrowings 1,258,205 820,123
----------- -----------
Total interest expense 7,069,941 6,353,185
----------- -----------
Net interest income 4,119,824 3,819,226
Provision for loan losses (Note 5) 120,000 70,000
----------- -----------
Net interest income after provision for loan losses 3,999,824 3,749,226
Non-Interest Income
-------------------
Gain on sale of investments - 4,372
Other commissions and fees - 126,712
Fees and charges on loans 31,853 36,319
Fees on transaction accounts 55,455 54,977
Other income 57,998 39,711
----------- -----------
Total non-interest income 145,306 262,091
Non-Interest Expenses
---------------------
Salaries and related expenses 1,724,099 1,782,354
Occupancy 166,762 136,662
SAIF deposit insurance premium 34,952 58,473
Depreciation of equipment 99,553 86,908
Advertising 79,629 72,827
Data processing costs 112,226 104,454
Professional services 202,171 177,625
Loss on sale of repossessed assets 786 2,612
Other expenses 404,518 367,821
----------- -----------
Total non-interest expenses 2,824,696 2,789,736
----------- -----------
Income before tax provision 1,320,434 1,221,581
Provision for income taxes (Note 14) 520,110 489,462
----------- -----------
Net income $ 800,324 $ 732,119
=========== ===========
Basic earnings per share $ .68 $ .60
=========== ===========
Diluted earnings per share $ .68 $ .60
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
16
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR YEARS ENDED SEPTEMBER 30, 2000 AND 1999
-------------------------------------------
<TABLE>
<CAPTION>
Employee
Additional Accumulated Stock Total
Common Paid-In Retained Comprehensive Ownership Stockholders'
Stock Capital Earnings Income Plan Equity
----- ------- -------- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Balance - September 30, 1998 $ 138,900 $ 7,392,663 $ 9,651,860 $ (25,140) $(915,567) $ 16,242,716
Comprehensive Income
Net Income - - 732,119 - -
Unrealized holding losses
on available for sale
securities net of taxes
of $596,706 - - - (948,364) -
Total comprehensive income (216,245)
Purchase of 103,393 shares of
common stock (10,339) (1,006,667) - - - (1,017,006)
Compensation under Stock
Bonus Plan - 140,036 - - - 140,036
Compensation under Stock-Based
Benefit Plan - 35,323 - - 183,742 219,065
Dividends paid ($.36 per share) - - (451,901) - - (451,901)
------------ ------------ ------------ ------------ --------- ------------
Balance - September 30, 1999 128,561 6,561,355 9,932,078 (973,504) (731,825) 14,916,665
Comprehensive Income
Net Income - - 800,324 - -
Unrealized holding losses
on available for sale
securities net of taxes
of $101,062 - - - (160,621) -
Total comprehensive income 639,703
Compensation under Stock
Bonus Plan - 136,072 - - - 136,072
Compensation under Stock-Based
Benefit Plan - 4,010 - - 185,217 189,227
Dividends paid ($.36 per share) - - (431,037) - - (431,037)
------------ ------------ ------------ ------------ --------- ------------
Balance - September 30, 2000 $ 128,561 $ 6,701,437 $ 10,301,365 $ (1,134,125) $(546,608) $ 15,450,630
============ ============ ============ ============ ========= ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
17
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Operating Activities
--------------------
Net income before other comprehensive income $ 800,324 $ 732,119
Gain on sale of investment available for sale - (4,372)
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
-------------------------------------
Net accretion/amortization of premiums and discounts
of mortgage backed securities 1,321 5,629
Amortization of deferred loan fees (109,467) (159,153)
Loan fees deferred 62,447 158,084
Decrease in discount on loans purchased (125,305) (60,164)
Amortization of discounts on investments available for sale (183) -
Provision for loan losses 120,000 70,000
Loss on sale of foreclosed real estate 786 -
Non-cash compensation under stock-based
benefit plans 325,299 359,101
Increase in accrued interest receivable (174,464) (146,425)
Provision for depreciation 138,291 115,158
Decrease (increase) in deferred income taxes 16,856 (84,983)
(Increase) decrease in prepaid and refundable income taxes (38,881) 62,763
(Increase) decrease in other assets (156,405) 32,812
Increase (decrease) in accrued interest payable 246 (5)
(Decrease) increase in income taxes payable (17,415) 32,509
(Decrease) increase in other liabilities (21,038) 47,141
------------ ------------
Net cash provided by operating activities 822,412 1,160,214
Cash Flows from Investment Activities
-------------------------------------
Proceeds from maturing interest-bearing deposits 95,000 -
Purchases of interest-bearing deposits - (95,000)
Proceeds from sales and maturities of investments
available for sale - 3,437,496
Purchase of investments available for sale - (9,487,272)
Proceeds from maturing other investments - held
to maturity - 7,250,000
Purchase of other investments - held to maturity - (8,300,000)
Purchase of mortgage backed securities - (12,474,599)
Principal collected on mortgage backed securities 1,530,903 1,761,259
Proceeds from sale of foreclosed real estate 12,317 -
Net increase in shorter term loans (7,324) (129,098)
Loans purchased - (1,920,000)
Longer term loans originated or acquired (22,459,738) (24,558,609)
Principal collected on longer term loans 15,541,265 19,345,632
Purchase of Bankers Affiliate, Inc.'s net assets - (4,811,311)
Investment in premises and equipment (553,529) (75,619)
Purchase of stock in Federal Home Loan Bank of Atlanta (250,000) (200,000)
Decrease in investment in and loans to joint ventures - 50,000
------------ ------------
Net cash used by investment activities (6,091,106) (30,207,121)
</TABLE>
18
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Financing Activities
------------------------------------
Net (decrease) increase in demand deposits, money
market, passbook accounts and advances by
borrowers for taxes and insurance $ (822,461) $ 1,028,806
Net increase in certificates of deposit 5,319,840 19,209,102
Decrease in checks outstanding in excess
of bank balance - (11,077)
Increase in borrowings - 3,062,832
Stock repurchase - (1,017,006)
Dividends (431,037) (451,901)
------------ ------------
Net cash provided by financing activities 4,066,342 21,820,756
------------ ------------
Decrease in cash and cash equivalents (1,202,352) (7,226,151)
Cash and cash equivalents at beginning of year 7,196,629 14,422,780
------------ ------------
Cash and cash equivalents at end of year $ 5,994,277 $ 7,196,629
============ ============
The following is a Summary of Cash and Cash Equivalents:
--------------------------------------------------------
Cash $ 1,720,707 $ 1,312,324
Interest bearing deposits in other banks 509,570 3,689,305
Federal funds sold 3,764,000 2,290,000
------------ ------------
Balance of cash items reflected on
Statement of Financial condition 5,994,277 7,291,629
Less - certificates of deposit with original
maturities of more than three months that
are included in interest bearing deposits
in other banks - (95,000)
------------ ------------
Cash and cash equivalents reflected on the
Statement of Cash Flows $ 5,994,277 $ 7,196,629
============ ============
Supplemental Disclosure of Cash Flow Information:
-------------------------------------------------
Cash paid during the year for:
Interest $ 7,096,982 $ 6,325,998
============ ============
Taxes $ 561,250 $ 654,300
============ ============
Purchase of Bankers Affiliate, Inc.'s net assets funded
by retirement of note payable and capital stock $ - $ 2,525,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
19
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
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 for the year ended September
30, 1999 the Bank's subsidiary, Mapleleaf Mortgage Corporation
("MMC"). All intercompany accounts and transactions have been
eliminated in the accompanying consolidated financial
statements. During the year ended September 30, 1999 the Bank's
subsidiary discontinued its operations. MMC's operations were
not material to the Company and no separate disclosure has been
made.
B. Business - The Bank's primary business activity, centered in the
Baltimore metropolitan area, 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 H & I 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 - Investments classified as available for sale are
carried at fair value. Investments classified as held to
maturity are carried at amortized cost since management has the
ability and intent to hold them to maturity. Amortization of
premiums and accretion of discounts on all investment purchases
are computed using the straight-line method over the life of
debt instrument.
Gains and losses on available for sale securities are determined
using the specific identification method.
20
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
F. Mortgage Backed Securities - Mortgage backed securities 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.
G. 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.
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, 2000 and 1999.
The Bank services loans for others and pays the participant its
share of the 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.
H. 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.
21
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
H. Statement of Financial Accounting Standards ("SFAS") No. 114, as
amended by SFAS No. 118, 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.
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.
I. 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. 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.
22
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
J. 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.
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 - SFAS No. 123, "Accounting for
Stock-Based Compensation" 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.
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.
23
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
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 an original maturity date less than ninety days.
P. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the appropriate
period. Unearned ESOP shares are not included in outstanding
shares. Diluted EPS is computed by dividing net income by the
weighted average shares outstanding as adjusted for the dilutive
effect of stock options and unvested stock awards based on the
"treasury stock" method. Information relating to the calculation
of net income per share of common stock is summarized for the
years ended September 30, as follows:
2000 1999
---- ----
Net income $ 800,324 $ 732,119
======== ========
Weighted Average Shares
Outstanding basic EPS 1,169,120 1,210,570
Dilutive Items
Stock options - -
Unvested stock awards - 4,508
----------- -----------
Adjusted weighted average shares
used for dilutive EPS 1,169,120 1,215,078
=========== ===========
24
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 2 - Investments Available for Sale
------------------------------
The amortized cost and fair values of investments available for sale at are
as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
September 30, 2000
Equity investments $ 544,324 $ - $ 190,690 $ 353,634
Federal Home Loan
Bank Bonds 17,493,485 - 1,400,174 16,093,311
Federal Home Loan
Mortgage Corporation
Bonds 3,249,114 - 256,847 2,992,267
----------- ------- ----------- -----------
$21,286,923 $ - $ 1,847,711 $19,439,212
=========== ======= =========== ===========
September 30, 1999
Equity investments $ 544,324 $ - $ 192,136 $ 352,188
Federal Home Loan
Bank Bonds 17,493,370 - 1,171,721 16,321,649
Federal Home Loan
Mortgage Corporation
Bonds 3,249,047 - 222,171 3,026,876
----------- ------- ----------- -----------
$21,286,741 $ - $ 1,586,028 $19,700,713
=========== ======= =========== ===========
During the year ended September 30, 2000, the Company did not sell any
investments. During the year ended September 30, 1999, the Company received
proceeds of $127,495 from the sale of investments that resulted in gross gains
of $4,372.
The equity investments have no stated maturity and all of the Federal Home
Loan Bank and Federal Home Loan Mortgage Corporation Bonds have a stated
maturity date of ten years or more.
25
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 3 - Other Investments - Held to Maturity
------------------------------------
The amortized cost and fair values of other investments are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ----------- ---------- ------------
September 30, 2000
-------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage
Association Bonds $ 2,750,000 $ -- $ 199,337 $ 2,550,663
Federal Home Loan
Bank Bonds 11,300,000 -- 835,326 10,464,674
Federal Home Loan Mortgage
Corporation Bonds 1,600,000 -- 129,206 1,470,794
----------- ----------- ----------- -----------
$15,650,000 $ -- $ 1,163,869 $14,486,131
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage
Association Bonds $ 2,750,000 $ - $ 180,620 $ 2,569,380
Federal Home Loan
Bank Bonds 11,300,000 - 711,934 10,588,066
Federal Home Loan Mortgage
Corporation Bonds 1,600,000 - 106,968 _1,493,032
----------- ----------- ----------- -----------
$15,650,000 $ - $ 999,522 $14,650,478
=========== =========== =========== ===========
</TABLE>
No gains or losses were realized during the years ended September 30, 2000
or 1999.
The scheduled maturities of other investments at September 30, 2000:
Amortized Fair
Cost Value
---------- ----------
Due after five years through ten years $ 350,000 $ 340,719
Due after ten years 15,300,000 14,145,412
---------- ----------
$15,650,000 $14,486,131
=========== ===========
26
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 4 - Mortgage Backed Securities
--------------------------
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, 2000
-----------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC participating certificates $ 1,615,533 $ - $ 57,779 $ 1,557,754
GNMA participating certificates 14,087,170 2,868 555,278 13,534,760
FNMA participating certificates 748,445 - 26,550 721,895
----------- ----------- ----------- -----------
$16,451,148 $ 2,868 $ 639,607 $15,814,409
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC participating certificates $ 1,786,228 $ - $ 67,727 $ 1,718,501
GNMA participating certificates 15,402,200 4,982 698,741 14,708,441
FNMA participating certificates 794,942 - 30,345 764,597
----------- ----------- ----------- -----------
$17,983,370 $ 4,982 $ 796,813 $17,191,539
=========== =========== =========== ===========
</TABLE>
No gains or losses were realized during the years ended September 30, 2000
and 1999.
27
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 5 - Loans Receivable
----------------
Loans receivable at September 30, 2000 and 1999 consist of the following:
2000 1999
------------- -------------
One to four family residential mortgage loans $ 72,225,058 $ 71,041,820
Multifamily residential mortgage loans 3,832,379 2,352,325
Commercial mortgage loans 9,915,566 6,772,077
Construction loans 6,592,205 5,183,370
Lines of credit 1,596,872 1,174,432
Home equity lines of credit 2,868,228 3,500,846
Land/lot loans 210,302 832,531
Home improvement loans 3,443 4,608
Consumer loans 2,689,749 3,401,338
Share loans 399,212 390,723
Commercial loans secured by lease
finance receivables 171,059 438,089
------------- -------------
100,504,073 95,092,159
Less - undisbursed portion of loans
in process (2,124,623) (3,568,811)
- unamortized discount (601,230) (725,393)
- deferred loan origination fees (472,584) (519,604)
- unearned insurance commissions (976) (2,118)
- allowance for loan losses (395,212) (344,907)
------------- -------------
$ 96,909,448 $ 89,931,326
============= =============
The following is a summary of the allowance for loan losses:
September 30,
-----------------------------
2000 1999
--------- ---------
Beginning balance $ 344,907 $ 301,425
Provision for loan losses 120,000 70,000
Charge-offs (69,695) (26,518)
--------- ---------
Balance end $ 395,212 $ 344,907
========= =========
28
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 5 - Loans Receivable - Continued
----------------
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 95% 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.
There were no impaired loans as defined by SFAS No. 114 at September 30,
2000 and 1999. There was no interest income recognized on impaired loans during
those periods.
Non-accrual loans that are not subject to SFAS No. 114 for which interest
has been reduced totaled approximately $243,797 and $177,199 at September 30,
2000 and 1999.
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:
2000 1999
---- ----
Interest income that would have
been recognized $21,530 $24,119
Interest income recognized 13,477 8,621
------- -------
Interest income not recognized $ 8,053 $15,498
======= =======
29
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 5 - Loans Receivable - Continued
----------------
Loans outstanding to officers and directors and their affiliates of the
Bank at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Balance At Balance At Balance At
September Loans Principal September Loans Principal September
30, 2000 Made Repayment 30, 1999 Made Repayment 30, 1998
----------- ----- --------- ------------ ----- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$1,534,075 $138,089 $121,277 $1,517,263 $330,325 $355,278 $1,542,216
</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:
2000 1999
---- ----
Mortgage loan portfolios serviced for:
Other investors $5,238,440 $5,717,050
========== ==========
Custodial Escrow balances maintained in connection with the foregoing loan
servicings were approximately $17,544 and $40,466 at September 30, 2000 and
1999.
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,
---------------------------------------- ----------------------------------
2000 1999
---- ----
Loan commitments $ 230,000 $1,648,250
Unused lines of credit 2,225,534 2,792,468
Mortgage loan commitments not reflected in the accompanying financial
statements at September 30, 2000 are for a fixed rate mortgage totaling $50,000
at 9.0% and variable rate mortgages totaling $180,000 ranging from 9.5% to
10.5%.
Mortgage loan commitments not reflected in the accompanying financial
statements at September 30, 1999 are for fixed rate mortgages totaling
$1,648,250 ranging from 7.125% to 8.375%.
30
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 5 - Loans Receivable - Continued
----------------
Lines of credit are loan commitments to individuals and companies and have
fixed expiration dates as long as there is no violation of any condition
established in the contract. The Bank evaluates each customer's credit
worthiness on a case-by-case basis.
The credit risk involved in these financial instruments is essentially the
same as that involved in extending loan facilities to customers. No amount has
been recognized in the statement of financial condition at September 30, 2000 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
-------------------------------------------------
On April 1, 1999, the Bank purchased substantially all the assets and
liabilities of Bankers Affiliate, Inc. for $5 million in cash ($4,811,311 net of
cash received) and the retirement of a $2.5 million note and $25,000 of Bankers
Affiliate, Inc. stock. The purchase consisted primarily of automobile, boat and
home equity loans.
Bankers Affiliate, Inc. was equally owned by the Bank and two other thrift
institutions and made consumer loans to their customers. Loans to Bankers
Affiliate, Inc. were due on demand and bore an adjustable interest rate. The
Bank had a 33-1/3% interest in this company and its proportionate share of
income or losses was not recorded on the equity method, since such amounts were
not material to the accompanying consolidated financial statements. The Bank was
using the cost method of accounting to record this investment.
31
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 8 - Premises and Equipment
----------------------
Premises and equipment at September 30, 2000 and 1999 are summarized by
major classification as follows:
Useful Life
2000 1999 in Years
---- ---- -----------
Land $ 224,056 $ 224,056 -
Office buildings 602,549 602,549 5-50
Leasehold improvements 375,728 - 20
Furniture, fixtures and equipment 1,097,057 919,593 3-20
---------- -----------
2,299,390 1,746,198
Accumulated depreciation (1,045,625) (907,671)
---------- -----------
$1,253,765 $ 838,527
========== ===========
The provision for depreciation for the periods ended September 30, 2000 and
1999 was $138,291 and $115,158, respectively.
The Bank has entered into several operating leases for the premises of its
branch offices. Rental expense under these leases for the years ended September
30, 2000 and 1999 was $88,430 and $59,221, respectively. At September 30, 2000,
the minimum rental commitments under noncancellable leases are as follows:
Year Ended September 30, Total
------------------------ ----------
2001 $ 76,056
2002 54,200
2003 53,000
2004 55,400
2005 59,180
Thereafter 1,260,700
----------
$1,558,536
==========
32
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 9 - Deposits
--------
Deposits are summarized as follows at September 30:
<TABLE>
<CAPTION>
2000 1999
---------------------------------- -------------------------------
Weighted- Weighted-
Average Average
Type of Account Amount Rate Amount Rate _
--------------- ------ ------------- ------ ----------------
<S> <C> <C> <C> <C>
NOW and money market
accounts including
non-interest bearing deposits
of $570,669 in 2000 and
$981,921 in 1999 $ 11,333,337 2.85% $ 11,523,206 1.05%
Passbook savings 15,429,951 3.04% 15,817,791 3.05%
Certificates of deposit 93,281,151 6.00% 87,961,311 5.46%
------------ ------------
120,044,439 115,302,308
Accrued interest 425 179
------------ ------------
$120,044,864 $115,302,487
============ ============
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $10,139,329 and $7,384,506 at September 30, 2000
and 1999. Deposits in excess of $100,000 are not insured by the Savings
Association Insurance Fund.
2000 1999
------------ --------------
Amount Amount
------ ------
Certificates accounts mature as follows:
One year or less $43,312,986 $34,938,382
More than 1 year through 2 years 21,121,405 24,070,423
More than 2 years through 3 years 18,282,972 7,926,915
More than 3 years through 4 years 8,834,257 21,025,591
More than 4 years 1,729,531 -
----------- -----------
$93,281,151 $87,961,311
=========== ===========
33
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 9 - Deposits - Continued
--------
Interest expense on deposits is summarized as follows for the years ended
September 30:
2000 1999
---- ----
Certificates $ 5,035,598 $ 4,429,927
NOW and money market 270,743 268,188
Passbook 467,664 461,734
------------ ------------
$ 5,774,005 $ 5,159,849
============ ============
Note 10- Borrowings
----------
The Company's borrowings at September 30 are as follows:
2000 1999
---- ----
Short-term Federal Home Loan Bank advances $ - $ 4,000,000
Long-term Federal Home Loan Bank advances 24,000,000 20,000,000
---------- ----------
Total $24,000,000 $24,000,000
=========== ===========
Federal Home Loan Bank advances at September 30, 2000 consist of a long
term adjustable rate advance bearing interest at 6.78% per annum and long term
fixed rate advances bearing interest at 4.89% to 6.33% per annum.
Federal Home Loan Bank advances at September 30, 1999 consist of short term
fixed and adjustable rate advances bearing interest at 5.11% to 5.75% per annum
and long term fixed rate advances bearing interest at 4.89% to 5.52% per annum.
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.
34
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 10- Borrowings - Continued
----------
Aggregate maturities required on Federal Home Loan Bank advances at
September 30, 2000 are as follows:
September 30, 2003 $ 3,000,000
September 30, 2004 3,000,000
After September 30, 2004 18,000,000
----------
Total $24,000,000
===========
At September 30, 2000 and 1999, the Bank had a $5.0 million secured bank
line of credit that is subject to termination at either party's discretion.
There were no borrowings outstanding under this agreement at September 30, 2000
and 1999.
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, 2000 and 1999. The costs of funding this plan were $35,585 and $25,191 for
the years ended September 30, 2000 and 1999, respectively.
The following table sets forth the plan's related costs at September 30:
2000 1999
---- ----
Service cost $29,253 $24,512
Interest cost 66,023 53,123
Actual return on plan assets (67,994) (58,419)
Other components 8,303 5,975
------- -------
Net period pension costs $35,585 $25,191
======= =======
35
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 11- Pension Plan - Continued
------------
The following table sets forth the plan's funded status at September 30:
2000 1999
--------- ---------
Accumulated benefit obligation $ 644,250 $ 591,366
========= =========
Projected benefit obligation $ 901,668 $ 882,248
Fair value of plan assets as of September 30 863,662 819,527
--------- ---------
Plan assets in deficit of projected
benefit obligation (38,006) (62,721)
Unrecognized net loss 244,507 234,038
Unrecognized net transition obligation 1,621 1,823
--------- ---------
Prepaid pension cost $ 208,122 $ 173,140
========= =========
Reconciliation of Projected Benefit Obligation
Projected benefit obligation beginning of year $ 882,248 $ 762,500
Interest cost for the fiscal year 66,023 53,123
Service cost for the fiscal year 29,253 24,512
Benefit payments for the fiscal year (71,375) (6,817)
Actuarial (gain) loss for the fiscal year (4,481) 48,930
--------- ---------
Projected benefit obligation as of September 30
before settlement 901,668 882,248
Effect of settlement - -
--------- ---------
Projected benefit obligation as of September 30
after settlement $ 901,668 $ 882,248
========= =========
The following interest rate assumptions were used for September 30:
2000 1999
---- ----
Weighted-average discount rate 7.75% 7.50%
Long term rate of return 8.00% 8.00%
Rate of compensation increase 5.00% 5.00%
36
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 12- Common Stock and Stock Benefit Plans
------------------------------------
In 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.
The Bank has established an Employee Stock Ownership Plan ("ESOP"), and
acquired 129,604 shares of the Company's common stock. The Employee Stock
Ownership Plan purchased 30,616 additional shares with the proceeds from the
special distribution. Funds used to acquire the initial shares were borrowed
from the Company by the ESOP with a direct loan from the Company requiring
annual payments of $129,604. During the fiscal year ended September 30, 1998 the
Company assigned the loan to a third party. During February 1999, the Company
exercised its option to repurchase the loan.
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, 2000
and 1999 was $165,638 and $219,065, respectively.
37
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 12- Common Stock and Stock Benefit Plans - Continued
------------------------------------
The ESOP shares as of September 30 were as follows:
2000 1999
---- ----
Allocated shares 90,360 64,826
Shares earned, but unallocated 2,832 4,092
Unearned shares 69,969 94,243
Fair value of unearned shares at September 30 $572,906 $854,124
The Company has a Stock Option Plan (the "Plan") whereby 183,058 shares of
common stock have been 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. During the year ended September 30, 1997, the
Company granted options to purchase 162,006 shares at a weighted average price
of $13.30 per share. Such shares and fair value have been adjusted to 183,058
shares at a weighted average price of $11.77 for the effect of a special
distribution.
The following table summarizes the status of and changes in the Company's
stock option plan during the past two years, as retroactively adjusted for the
Company's special distribution.
Weighted
Average
Exercise
Shares Price
------ --------
Outstanding at September 30, 1998 183,058 11.77
Forfeited options (2,306) 11.89
-------
Outstanding at September 30, 1999 180,752 11.78
Forfeited options (4,282) 11.71
-------
Outstanding at September 30, 2000 176,470 11.78
=======
Exercisable at September 30, 2000 111,622
=======
38
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 12- Common Stock and Stock Benefit Plans - Continued
------------------------------------
The Company has 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 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 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.
Note 13- Retained Earnings
-----------------
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possible additional discretionary, actions
by the regulators that, if undertaken, could have a direct material effect on
the Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) and
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of September 30, 2000, that the
Bank meets all capital adequacy requirements to which it is subject.
39
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 13- Retained Earnings - Continued
-----------------
As of September 30, 2000, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Bank's
category. The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------- -------------------- --------------------
Amount % Amount % Amount %
----------- ------ ---------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
September 30, 2000
Tangible (1) $14,770,000 9.2% $2,410,410 1.5% $ N/A N/A%
Tier I capital (2) 14,770,000 20.3% N/A N/A% 4,374,300 6.0%
Core (1) 14,770,000 9.2% 6,427,760 4.0% 8,034,700 5.0%
Risk-weighted (2) 15,089,000 20.7% 5,832,400 8.0% 7,290,500 10.0%
September 30, 1999
Tangible (1) $15,572,000 9.9% $2,355,435 1.5% $ N/A N/A%
Tier I capital (2) 15,572,000 23.1% N/A N/A% 4,038,120 6.0%
Core (1) 15,572,000 9.9% 4,710,810 3.0% 7,851,450 5.0%
Risk-weighted (2) 15,793,000 23.5% 5,384,160 8.0% 6,730,200 10.0%
</TABLE>
(1) To adjusted total assets.
(2) To risk-weighted assets.
40
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 14- Income Taxes
------------
The income tax provision consists of the following:
For Years Ended
September 30,
------------------------------
2000 1999
-------- --------
Current
-------
Federal $400,469 $473,051
State 102,785 101,394
------- -------
503,254 574,445
Deferred
--------
Federal 13,802 (69,580)
State 3,054 (15,403)
-------- --------
16,856 (84,983)
-------- --------
$520,110 $489,462
======== ========
The amount computed by applying the statutory federal income tax rate to
income before taxes differs from the taxes provided for the following reasons:
Years Ended September 30,
-------------------------------------------------
2000 1999
-------------------------------------------------
Percent Percent
of Pretax of Pretax
Amount Income Amount Income
-------- -------- -------- -------
Tax at statutory rate $448,948 34.00 $415,338 34.00
Increases (Decreases)
Resulting From
---------------------------
State income tax net of
federal income tax benefit 69,854 5.29 56,754 4.65
Other 1,308 .10 17,370 1.42
-------- ----- -------- -----
$520,110 39.39 $489,462 40.07
======== ===== ======== =====
41
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
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, 2000 and 1999 are presented below:
2000 1999
---------- ----------
Deferred Tax Assets:
Deferred loan origination fees $ 182,512 $ 200,671
Allowance for loan losses 152,631 133,203
Reserve for uncollected interest 1,948 4,944
ESOP contribution 8,331 8,331
Net unrealized holding losses 713,586 612,524
Other 64,752 93,621
---------- ----------
Total gross deferred tax assets 1,123,760 1,053,294
Deferred Tax Liabilities:
Tax reserve for bad debts in excess of
base year amount $ 24,964 $ 56,169
Federal Home Loan Bank of Atlanta stock
dividends 56,965 56,965
Depreciation 24,865 20,909
Pension plan 80,377 66,867
---------- ----------
Total gross deferred tax liabilities 187,171 200,910
---------- ----------
Net deferred tax assets $ 936,589 $ 852,384
========== ==========
Qualified thrift lenders such as the Bank are not required to provide a
deferred tax liability for bad debt reserves for tax purposes that arose in
fiscal years beginning before December 31, 1987. Such bad debt reserve for the
Bank amounted to approximately $2,022,261 with an income tax effect of
approximately $780,997 at September 30, 2000. This bad debt reserve would become
taxable if certain conditions are met by the Bank.
As of September 30, 2000, the Company and its Subsidiary file their income
tax returns on a fiscal year basis.
42
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 15- Disclosure About Fair Value of Financial Instruments
----------------------------------------------------
The estimated fair values of the Bank's financial instruments are
summarized below. The fair values of a significant portion of these financial
instruments are estimates derived using present value techniques prescribed by
the FASB and may not be indicative of the net realizable or liquidation values.
Also, the calculation of estimated fair values is based on market conditions at
a specific point in time and may not reflect current or future fair values.
The carrying amount is a reasonable estimate of fair value for cash,
federal funds, interest-bearing deposits in other banks and securities purchased
under agreements to resell due to the short-term nature of these investments.
Fair value is based upon market prices quoted by dealers for investment
securities and 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 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.
43
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 2000
------------------
Note 15- Disclosure About Fair Value of Financial Instruments - Continued
----------------------------------------------------
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Value
Financial Assets
Cash, interest-bearing
deposits in other banks
and federal funds $ 5,994,277 $ 5,994,277 $ 7,291,629 $ 7,291,629
Investments available
for sale 19,439,212 19,439,212 19,700,713 19,700,713
Other investment
securities held to
maturity 15,650,000 14,486,131 15,650,000 14,650,478
Mortgage backed
securities 16,451,148 15,814,409 17,983,370 17,191,539
Loans receivable - net 96,909,448 91,809,000 89,931,326 86,230,000
Federal Home Loan
Bank of Atlanta stock 1,450,000 1,450,000 1,200,000 1,200,000
Financial Liabilities
Deposits $120,044,864 $120,114,000 $115,302,487 $115,492,000
Commitments - 230,000 - 1,648,250
Borrowings 24,000,000 22,994,000 24,000,000 22,942,000
</TABLE>
Note 16- Recent Accounting Pronouncements
--------------------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued in June 1998. This Statement standardizes the accounting
for derivative instruments including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize these items as assets or
liabilities in the statement of financial position and measure them at fair
value. This Statement generally provides for matching the timing of gain or loss
recognition on the hedging instrument with the recognition of the changes in the
fair value of the hedged asset or liability that are attributable to the hedged
risk or the earnings effect of the hedged forecasted transaction. The Statement,
which is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000, will not affect the Company's financial position or its results
of operations.
44
