<PAGE>
As filed with the Securities and Exchange Commission on August 1, 1996
Registration No. 333-2298
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
PRE-EFFECTIVE AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 6035 31-1463057
(State or other jurisdiction (Primary standard (I.R.S. employer
of incorporation or industrial classification identification number)
organization) code number)
3002 HARRISON AVENUE
CINCINNATI, OHIO 45211-5789
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
MICHAEL P. BRENNAN
PRESIDENT
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
3002 HARRISON AVENUE
CINCINNATI, OHIO 45211-5789
(513) 661-5735
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
Gary R. Bronstein, Esquire
Cynthia R. Cross, Esquire
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, check the following box: / /
<PAGE>
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item and Caption Prospectus Heading
---------------- ------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus. . . . . . Forepart of Registration Statement; Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus . . . . . . . . . . . . . . . . . . Front Cover Page, Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges. . . . . . . . . . . Prospectus Summary; Investment Considerations
4. Use of Proceeds . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . . . . . . . . . Cover Page; The Conversion -- Stock Pricing and
Number of Shares to be Issued
6. Dilution. . . . . . . . . . . . . . . . . . . . . [not applicable]
7. Selling Security Holders. . . . . . . . . . . . . [not applicable]
8. Plan of Distribution. . . . . . . . . . . . . . . Front Cover Page; The Conversion -- General;
-- Offering of Common Stock; -- Subscription, Community and Syndicated
Community Offerings; -- Financial Advisory and Sales Assistance
Arrangements
9. Description of Securities to be
Registered. . . . . . . . . . . . . . . . . . . . Description of Capital Stock
10. Interests on Named Experts and Counsel. . . . . . Legal Matters; Experts
11. Information with Respect to the Registrant
(a) Description of Business. . . . . . . . . . . Westwood Homestead Financial Corporation; The Westwood Homestead Savings
Bank; Business of the Company; Business of the Bank
(b) Description of Property . . . . . . . . . . Business of the Bank -- Properties
(c) Legal Proceedings. . . . . . . . . . . . . . Business of the Bank -- Legal Proceedings
(d) Market Price and Dividends . . . . . . . . . Front Cover Page; Dividends; Market for the Common Stock
(e) Financial Statements . . . . . . . . . . . . Index to Financial Statements
(f) Selected Financial Data. . . . . . . . . . . Selected Financial Information and Other Data
(g) Supplementary Information. . . . . . . . . . [not applicable]
(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . Management's Discussion and Analysis of Financial Condition and Results
of Operations
(i) Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . [not applicable]
(j) Directors and Executive Officers . . . . . . Management of the Bank
(k) Executive Compensation . . . . . . . . . . . Management of the Bank -- Executive Compensation; -- Selected Benefits
Plans and Arrangements
(l) Security Ownership of Certain Beneficial . . Owners and Management Proposed Management Purchases
(m) Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . Management of the Bank -- Transactions with Management
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . . . . . [not applicable]
</TABLE>
<PAGE>
PROSPECTUS
[ L O G O ]
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
(HOLDING COMPANY FOR THE WESTWOOD HOMESTEAD SAVINGS BANK)
UP TO 2,472,500 SHARES OF COMMON STOCK
------------------------
Westwood Homestead Financial Corporation (the "Company"), an Indiana
corporation, is offering up to 2,472,500 shares of common stock, par value $.01
per share (the "Common Stock"), in connection with the conversion of The
Westwood Homestead Savings Bank ("Westwood Homestead" or the "Bank") from an
Ohio mutual savings bank to an Ohio
(CONTINUED ON FOLLOWING PAGE)
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK INFORMATION CENTER AT ( )
- .
------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW AND CONSIDER THE DISCUSSION UNDER
"RISK FACTORS" ON PAGES .
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE FEDERAL DEPOSIT INSURANCE CORPORATION THE
SUPERINTENDENT OF THE OHIO DIVISION OF FINANCIAL INSTITUTIONS (THE
"SUPERINTENDENT"), OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC,
THE FDIC THE SUPERINTENDENT OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT
INSURED OR GUARANTEED BY THE FDIC, THE SAVINGS ASSOCIATION INSURANCE
FUND (THE "SAIF"), OR ANY OTHER GOVERNMENTAL AGENCY, AND INVOLVE
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
<TABLE>
<CAPTION>
ESTIMATED
UNDERWRITING AND ESTIMATED
PURCHASE OTHER FEES AND NET CONVERSION
PRICE (1) EXPENSES (2) PROCEEDS (2)
<S> <C> <C> <C>
Minimum per share.............................................. $10.00 $.39 $9.61
Midpoint Per Share............................................. $10.00 $.33 $9.67
Maximum Per Share.............................................. $10.00 $.29 $9.71
Maximum Per Share, as adjusted (3)............................. $10.00 $.25 $9.75
Total Minimum (1).............................................. $18,275,000 $700,000 $17,575,000
Total Midpoint (1)............................................. $21,500,000 $700,000 $20,800,000
Total Maximum (1).............................................. $24,725,000 $700,000 $24,025,000
Total Maximum, as adjusted (3)................................. $28,433,750 $700,000 $27,733,750
</TABLE>
(1) Determined in accordance with an independent appraisal conducted by RP
Financial, LC. ("RP Financial") as of March 1, 1996, and updated as of June
14, 1996 that the estimated pro forma market value of the Common Stock
ranged from $18,275,000 to $24,725,000. The purchase price per share will be
fixed at $10.00. See "The Conversion -- Stock Pricing and Number of Shares
to be Issued."
(2) Consists of estimated costs to the Bank and the Company in the Conversion,
including $250,000 in financial advisory fees payable to Charles Webb &
Company and Friedman, Billings, Ramsey & Co., Inc. (collectively, the
"Agents") for assisting in the distribution of shares of Common Stock in the
Subscription and Community Offerings (as defined herein) on a best efforts
basis. The Agents may be deemed to be underwriters, and such fees may be
deemed to be underwriting fees, for purposes of the Securities Act of 1933,
as amended. The Company and the Bank have agreed to indemnify the Agents for
reasonable costs and expenses in connection with certain claims or
liabilities, including certain liabilities under the Securities Act of 1933,
as amended. Actual net proceeds may vary from estimated amounts. See "Use of
Proceeds" and "The Conversion -- Plan of Distribution and Marketing Agent."
(3) As adjusted to give effect to an increase in the number of shares that could
be sold in the Conversion due to an increase of up to 15% above the maximum
of the Current Valuation Range (as defined herein) and the related increase
of up to 15% above the maximum number of shares which may be offered in the
Conversion, without the resolicitation of subscribers or any right of
cancellation, to reflect changes in market and financial conditions
following commencement of the Subscription and Community Offerings or to
fill in part or in whole the order of the Company's Employee Stock Ownership
Plan ("ESOP"). In the event of an oversubscription by Eligible Account
Holders above the maximum of the Current Valuation Range, up to an
additional 8% or 197,800 shares of the Company's authorized shares may be
issued to fill the order of the ESOP. The ESOP may also purchase part or all
of its shares in the open market subsequent to the completion of the
Conversion. Does not reflect shares that could be issued pursuant to the
Company's Management
<PAGE>
Recognition Plan ("MRP"). The MRP is subject to stockholder and FDIC
approval. Assuming implementation, the MRP may purchase shares of Common
Stock after the Conversion from authorized but unissued shares of Common
Stock at the then-current market value or from the open market in an amount
up to 4% of the shares issued in the Conversion (98,900 shares at the
midpoint of the Current Valuation Range). See "Management of the Bank --
Certain Benefit Plans and Agreements -- Management Recognition Plan."
------------------------
CHARLES WEBB & COMPANY FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
(CONTINUED FROM PRECEDING PAGE)
capital stock savings bank, and the issuance of all of the Bank's outstanding
capital stock to the Company pursuant to the Bank's Plan of Conversion (the
"Plan"). The simultaneous conversion of the Bank to stock form, the issuance of
the Bank's capital stock to the Company, and the offer and sale of the Common
Stock by the Company are referred to herein collectively as the "Conversion."
The shares of the Common Stock are being offered pursuant to nontransferable
subscription rights in a subscription offering (the "Subscription Offering"). In
connection with the Conversion, an independent appraisal of the estimated pro
forma market value of the Common Stock was conducted by RP Financial, LC. ("RP
Financial") which determined that such value ranged from $18,275,000 to
$24,725,000 (the "Current Valuation Range"). SUBSCRIPTION RIGHTS ARE NOT
TRANSFERABLE; PERSONS WHO ATTEMPT TO TRANSFER THEIR SUBSCRIPTION RIGHTS MAY LOSE
THE RIGHT TO PURCHASE COMMON STOCK IN THE CONVERSION AND MAY BE SUBJECT TO OTHER
SANCTIONS AND PENALTIES IMPOSED BY THE SUPERINTENDENT AND THE FDIC. Concurrently
with the Subscription Offering, shares of the Common Stock not sold in the
Subscription Offering are being offered to the general public in a community
offering (the "Community Offering") with preference being given to natural
persons and trusts of natural persons permanently residing in Hamilton, Butler,
Warren and Clermont counties in Ohio, Dearborn county in Indiana and Boone,
Kenton and Campbell counties in Kentucky (the "Local Community"), subject to the
right of the Bank and the Company, in their absolute discretion, to reject these
orders in whole or in part. It is anticipated that shares of Common Stock not
subscribed for in the Subscription and Community Offerings may be offered at the
discretion of the Company to certain members of the general public as part of a
community offering on a best efforts basis by a selling group of broker-dealers
managed by Charles Webb & Company ("Charles Webb"), with the participation and
assistance of Friedman, Billings, Ramsey & Co., Inc. ("FBR," and when referred
to together with Charles Webb, the "Agents") (the "Syndicated Community
Offering"). The Subscription, Community and Syndicated Community Offerings are
referred to collectively as the "Offerings." See "The Conversion -- Subscription
Offering," "-- Community Offering" and "-- Syndicated Community Offering."
The aggregate purchase price of all shares of the Common Stock will be based
on the estimated pro forma market value of the Common Stock as determined by an
independent appraisal. All shares of the Common Stock will be sold for $10.00
per share. EXCEPT FOR THE ESOP, WHICH INTENDS TO PURCHASE 8% OF THE TOTAL NUMBER
OF SHARES OF COMMON STOCK ISSUED IN THE CONVERSION (SUBJECT TO THE APPROVAL OF
THE SUPERINTENDENT AND THE FDIC), NO PERSON OR ENTITY, TOGETHER WITH ASSOCIATES
OR PERSONS ACTING IN CONCERT, MAY PURCHASE MORE THAN $250,000 OF THE COMMON
STOCK IN THE CONVERSION. NO PERSON MAY PURCHASE FEWER THAN 25 SHARES. Subject to
any required regulatory approval and the requirements of applicable laws and
regulations, but without further approval of the members of the Bank, purchase
limitations may be increased or decreased at the sole discretion of the Company
and the Bank at any time. See "The Conversion -- Limitations on Purchase of
Shares."
The Bank has engaged the Agents as its financial advisors and to assist the
Company in the sale of the Common Stock in the Offerings. The Company and the
Bank reserve the right, in their absolute discretion, to accept or reject, in
whole or in part, any or all orders in the Community Offering or the Syndicated
Community Offering either at the time of receipt of an order or as soon as
practicable following the termination of such Offerings. See "The Conversion."
The Agents are registered broker-dealers and members of the National Association
of Securities Dealers, Inc. ("NASD").
THE SUBSCRIPTION OFFERING WILL TERMINATE AT : .M., EASTERN TIME, ON
, 1996, UNLESS EXTENDED BY THE BANK AND THE COMPANY FOR UP TO AN
ADDITIONAL DAYS TO NO LATER THAN , 1996. Any shares not sold in
the Subscription Offering will be sold in the concurrent Community Offering,
which is expected to terminate on , 1996 but may terminate any day
thereafter, but in no event later than , 1996. Subscriptions paid by
check, bank draft or money order will be placed in a segregated account at the
Bank and will earn interest at the Bank's passbook annual yield (currently 2%)
from the date of receipt until consummation or termination of the Conversion.
Orders submitted are irrevocable until the completion or termination of the
Conversion; provided that, if the Conversion is not completed within 45 days
after the expiration of the Subscription and Community Offerings, unless such
period has been extended with the consent of the Superintendent and the FDIC,
all subscribers will have their funds returned promptly, with interest on
payments made by check, bank draft or money order or, if applicable, the
subscriber's withdrawal authorization will be terminated. In the event of an
extension of the offering period, all subscribers will be notified of such
extension, and of any right or need to confirm their subscriptions, or to modify
or rescind their subscriptions and have their funds returned promptly with
interest, and of the period within which the subscribers must notify the Bank of
their intention to confirm, modify or rescind their subscriptions. If an
affirmative response to any resolicitation is not received from subscribers,
such orders will be rescinded and such funds will be returned promptly with
interest or, if applicable, the subscriber's withdrawal authorization will be
terminated. See "The Conversion -- Subscription Offering -- Use of Order Forms
and Certification Forms," "-- Payment for Shares," and "-- Community Offering."
The Conversion is contingent upon approval of the Plan by the Bank's members
and the sale of at least the minimum number of shares offered pursuant to the
Plan.
<PAGE>
[MAP]
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.
WESTWOOD HOMESTEAD The Company is an Indiana corporation formed in March
FINANCIAL CORPORATION 1996 at the direction of Westwood Homestead for the
purpose of becoming a holding company for the Bank as
part of the Conversion. The Company is headquartered
in Cincinnati, Ohio, and its business activities will
initially be limited to the State of Ohio. Prior to
the Conversion, the Company will not engage in any
material operations. After the Conversion, the
Company's primary assets will be the outstanding
capital stock of the Bank, a portion of the net
proceeds of the Conversion, and a note receivable from
the ESOP.
THE WESTWOOD HOMESTEAD Westwood Homestead is an Ohio mutual savings bank
SAVINGS BANK headquartered in Cincinnati, Ohio that traces its
origin back to 1883. The Bank has occupied its main
office since 1922 and opened a branch office in the
Mount Adams section of Cincinnati, Ohio in June 1996.
In 1993, the Bank converted from an Ohio mutual savings
and loan association to an Ohio mutual savings bank,
and in connection with such conversion, adopted its
current name. The Bank is a member of the Federal Home
Loan Bank ("FHLB") System and its deposits are insured
up to applicable limits by the SAIF, administered by
the FDIC. At March 31, 1996, the Bank had total assets
of $97.9 million, deposits of $83.0 million, net loans
receivable of $75.3 million and retained income of
$14.4 million. See "Management's Discussion and
Analysis of Financial Condition and Results of
Operations" and "Business of the Bank."
The Bank is principally engaged in the business of
accepting deposits from the general public and
originating mortgage loans that are secured by one- to
four-family residential properties located in its
market area. The Bank also originates multi-family
residential loans and non-residential real estate
loans, although such lending has decreased in recent
years and these loans do not currently represent a
significant portion of the Bank's loan originations.
To a lesser extent, the Bank originates residential
construction and consumer loans. The Bank plans to
expand its consumer lending activities within the year
following the Conversion. See "Use of Proceeds" and
"Business of the Bank -- Consumer Loans."
Financial highlights of Westwood Homestead include the
following:
BUSINESS STRATEGY -- Westwood Homestead's business
strategy is to operate a well capitalized, profitable
community savings bank dedicated to financing home
ownership in its general and surrounding market areas
and providing quality service to its customers. The
Bank has implemented this strategy by: (i) closely
monitoring the needs of customers and providing quality
service; (ii) maintaining high asset quality; and (iii)
maintaining capital safely in excess of regulatory
requirements.
COMMUNITY ORIENTATION -- The Bank is committed to
meeting the financial needs of the community in which
it operates. Management believes that the Bank is of
sufficient size to be able to provide a relatively full
range of financial services on a personalized and
efficient basis. Management believes that Westwood
Homestead can be more effective in servicing its
customers than many of its nonlocal competitors because
of the Bank's ability to quickly and effectively
provide responses to customer needs and inquiries.
Management plans to continue to emphasize the community
orientation of the Bank.
(i)
<PAGE>
ASSET QUALITY -- The Bank has been successful in
maintaining a high level of asset quality through
relatively conservative underwriting criteria in
originating mortgage and other loans. At March 31,
1996, the Bank had $14,000 in non-performing assets,
consisting of one loan which was contractually past due
90 days or more. The Bank's allowance for loan losses
as a percentage of total loans at March 31, 1996 was
.16%. In addition, at March 31, 1996, the Bank had no
real estate owned and only eight loans greater than 30
days delinquent. See "Business of the Bank -- Lending
Activities." The Bank expects to incur greater credit
risk in the future as it expands its consumer lending
and broadens its range of mortgage loan products. As a
result, future loan loss reserves are likely to be
higher. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and
"Risk Factors -- Risks Posed by Certain Lending
Activities."
CAPITAL POSITION -- The Bank's capital position has
been built to a level that considerably exceeds the
minimum required levels under current capital
requirements. At March 31, 1996, the Bank had $14.4
million of retained income which represented 14.7% of
total assets. Tangible capital and core capital were
$14.6 million, which represented 15.05% of average
adjusted total assets and risk-based capital was $14.7
million, which represented 29.5% of total risk-weighted
assets at March 31, 1996. Such amounts exceeded the
minimum required ratios of 1.5%, 3.0% and 8.0%,
respectively, and therefore the Bank was classified as
"well capitalized" under applicable regulatory
requirements at March 31, 1996. Assuming the sale of
Common Stock at the midpoint of the Current Valuation
Range and the contribution of 50% of the net proceeds
to the Bank, the Bank's regulatory capital ratios will
increase to 20.9%, 20.9% and 43.5%, respectively. See
"Historical and Pro Forma Regulatory Capital
Compliance."
INTEREST RATE SENSITIVITY - The Bank seeks to manage
interest rate-risk by pursuing certain strategies
designed to decrease the vulnerability of its earnings
to material and prolonged changes in interest rates.
Management's principal strategy in managing the Bank's
interest rate risk has been to emphasize the
origination of one- to four-family adjustable rate
mortgages and shorter term fixed rate mortgages for its
loan portfolio. The Bank has also recently started to
sell long term fixed rate mortgages in the secondary
market. In addition, in managing its portfolio of
investment securities and mortgage-backed securities,
the Bank in recent periods has emphasized the sale of
long-term and fixed-rate investment securities and
mortgage-backed securities so as to reduce the Bank's
exposure to increases in interest rates. At March 31,
1996, the Bank had a negative one-year interest rate
sensitivity gap of (15.2%). See "Management's
Discussion and Analysis of Financial Condition and
Results of Operations -- Interest Rate Sensitivity
Analysis."
THE CONVERSION GENERAL -- On January 11, 1996, the Board of Directors
of the Bank adopted the Plan pursuant to which Westwood
Homestead is converting from an Ohio chartered mutual
savings bank to an Ohio chartered stock savings bank
and is simultaneously forming a holding company. See
"The Conversion -- General." Upon Conversion, the Bank
will issue all of its capital stock to the Company in
exchange for at least 50% of the net Conversion
proceeds.
REASONS FOR CONVERSION -- Westwood Homestead's Board of
Directors believes that the stock form of ownership as
opposed to the mutual form is the preferred structure
for financial institutions, as evidenced in part by the
decline in the number of mutual thrifts in existence.
Mutual institutions generally are limited to retained
income as the principal means of raising capital. The
net proceeds from the sale of the
(ii)
<PAGE>
Common Stock in the Conversion will substantially
increase the Bank's capital position, which will in
turn increase the amount of funds available for lending
and investment and provide greater resources to support
both current operations and future expansion by the
Bank. Currently, management of the Bank is analyzing
plans to open or acquire another branch facility during
calendar year 1996, and other branching possibilities
will be studied, although there can be no assurance
that such expansion will be accomplished. See "Use of
Proceeds." Except for its plans to expand consumer
lending with a portion of the net Conversion proceeds
(see "Use of Proceeds") the Bank does not anticipate
any significant change in its current lending
activities as a result of the Conversion and
anticipates primarily investing its portion of the net
proceeds of the Conversion in the origination of one-
to four-family residential loans (though management
expects to expand the Bank's current lending activities
by, among other things, offering additional loan
products). The holding company structure will provide
greater flexibility than the Bank alone would have for
diversification of business activities and geographic
operations. Management believes that this increased
capital and operating flexibility will enable the Bank
to compete more effectively with other types of
financial services organizations. In addition, the
Conversion will also enhance the future access of the
Company and the Bank to the capital markets.
Furthermore, the Bank believes that if its customers,
most of whom reside in the Bank's Local Community,
become stockholders of the Company, they will have a
direct interest as owners in the financial success of
Westwood Homestead. Westwood Homestead believes that
this local ownership, combined with quality service and
products, will promote loyalty to Westwood Homestead
and encourage local stockholders to conduct more
business with the Bank and promote the Bank to other
persons, thereby further contributing to the Bank's
growth and earnings. Additionally, the Bank's Board of
Directors believes that the Conversion will be
beneficial to the communities within the Bank's Local
Community and persons residing within those
communities. The Conversion will provide those persons
with an opportunity to be an equity owner of the Bank.
This is consistent with the Bank's objective of being a
locally owned financial institution and servicing local
needs. Equity ownership will enable local stockholders
to participate in the Bank's success and profitability
through possible capital appreciation and dividends.
There can be no assurance, however, that the Company's
stockholders will be members of the Local Community or
have any interest in its well being.
USE OF PROCEEDS Although the Company cannot determine the actual level
of net proceeds from the sale of the Common Stock until
the Conversion is completed, it anticipates that the
net proceeds will be between approximately $17,575,000
and $24,025,000 (or $27,733,750 if the Current
Valuation Range is increased by 15%). The Company
expects to purchase all of the capital stock of the
Bank to be issued in the Conversion in exchange for
up to 50% of the net proceeds of the Conversion.
THE BANK. The Bank intends to add its portion of the
net proceeds to the Bank's general funds to be used for
general purposes, including the origination of one- to
four-family loans and the expansion of its consumer
lending activities. The Bank may also use a portion of
the net proceeds for the payment of outstanding FHLB
advances. The Bank may also utilize proceeds from the
Conversion to open or acquire additional branches and
to acquire other financial institutions, although there
can be no assurance that such expansion or acquisition
can or will be accomplished. In this regard, the Bank
opened a branch facility in the Mount Adams section of
the city of Cincinnati, Ohio in June 1996 and other
branching possibilities are being
(iii)
<PAGE>
studied. Management expects to spend between $25,000
and $50,000 over the next two years to upgrade and
modernize its computer system, including the placement
of a home page on the Internet. A portion of the net
proceeds may be used to build a drive-up service window
at the Bank's main office. See "Use of Proceeds". A
portion of the net proceeds will also be used to
rebuild the Bank's liquidity portfolio, in order to
meet potential withdrawal of high rate CDs maturing in
late 1997 through 1999. See "Management's Discussion
and Analysis of Financial Condition and Results of
Operations."
THE COMPANY. The net proceeds retained by the Company
will also be available for a variety of corporate
purposes, including the possible payment of regular
cash dividends and/or special cash dividends,
repurchases of the Common Stock and additional capital
contributions. Management also expects to explore
opportunities for acquiring other financial
institutions in the Bank's market area, and intends to
pursue such acquisitions as an integral part of the
Bank's strategic growth plans, although there can be no
assurance that such acquisitions can or will be
consummated. In addition, the Company intends to lend
funds to the ESOP sufficient to enable the ESOP to
purchase up to 8% of the Common Stock. Based upon the
issuance of 2,150,000 shares (the midpoint of the
Current Valuation Range), the loan to the ESOP to
purchase 8% of the Common Stock would be $1,720,000.
The loan is currently expected to be amortized over 12
years. Proceeds from the Conversion may also be used
for the establishment of a financial services
subsidiary that can offer a variety of financial
products to the Bank's customers, such as investment
product sales. See "Use of Proceeds" and "Business of
the Bank -- General." It is expected that, in the
interim, all or part of the net proceeds may be
invested in short-term and intermediate-term government
securities, insured jumbo certificates of deposit and
FHLB time deposits. See "Use of Proceeds."
THE SUBSCRIPTION AND The shares of the Common Stock are being offered at a
COMMUNITY OFFERINGS price of $10.00 per share. The total number of shares
to be issued in the Conversion will be between
1,827,500 and 2,472,500 shares based on market and
financial conditions at the time of the closing of the
Conversion, and may be increased to 2,843,375 shares.
Shares of Common Stock issued in the Conversion will
not be federally insured. The shares of Common Stock
are being offered in the Subscription Offering in the
following order of priority: (1) Eligible Account
Holders; (2) the ESOP; (3) Supplemental
Eligible Account Holders; and (4) Other Members.
Subscription rights received in any of the foregoing
categories will be subordinated to the subscription
rights received by those in a prior category.
Concurrently, and subject to the prior rights of
holders of subscription rights, shares not sold in the
Subscription Offering are being offered in the Community
Offering to the general public, with preference given
to natural persons and trusts of natural persons
permanently residing in the Local Community.
Based on the sale of 2,150,000 shares in the Conversion
(the midpoint of the Current Valuation Range), the ESOP
is expected to purchase 172,000 shares, or 8% of the
shares to be issued. The ESOP is currently expected to
purchase shares of Common Stock as part of the
Conversion with funds borrowed from the Company.
Assuming receipt of regulatory approval and approval by
the Company's stockholders, the Company will implement
the MRP, which will purchase shares of Common Stock in
an amount equal to 4% of the number of shares sold in
the
(iv)
<PAGE>
Conversion (86,000 shares at the midpoint of the
Current Valuation Range). Such purchase by the MRP may
be from authorized but unissued shares of Common Stock
at a purchase price equal to the then current market
value of such shares or from the open market.
The Subscription Offering will terminate on ________
___, 1996, unless extended by the Company and the Bank
for an additional ___ days. The Community Offering is
expected to terminate on the same date but may
terminate any day thereafter, but no later than
________ ___, 1996. See "The Conversion."
PURCHASE LIMITATIONS Except for the ESOP, which intends to purchase 8% of
the total number of shares of Common Stock issued in
the Conversion (subject to the approval of the
Superintendent and the FDIC), no person or entity,
together with associates or persons acting in concert,
may purchase more than $250,000 of the Common Stock in
the Conversion. No person may purchase fewer than 25
shares. In the event of an oversubscription, shares
will be allocated in accordance with the Plan. In the
event of an increase in the total number of shares up
to the number issuable at 15% above the Current
Valuation Range, the additional shares may be
distributed and allocated without the resolicitation of
subscribers. Subject to any required regulatory
approval and the requirements of applicable laws and
regulations, but without further approval of the
members of the Bank, purchase limitations may be
increased or decreased at the sole discretion of the
Company and the Bank at any time. If such amount is
increased, subscribers for the maximum amount will be
given the opportunity to increase their subscriptions
up to the then applicable limit, subject to the rights
and preferences of any person who has priority
subscription rights. In the event that the purchase
limitation is decreased after commencement of the
Subscription and Community Offerings, the orders of any
person who subscribed for more than the new maximum
purchase limitation shall be decreased by the minimum
amount necessary so that such person shall be in
compliance with the then maximum limit.
INDEPENDENT APPRAISAL RP Financial, a firm experienced in valuing savings
institutions, has made an independent appraisal of the
estimated aggregate pro forma market value of the
Common Stock to be issued in connection with the
Conversion. The Current Valuation Range in RP
Financial's appraisal as of March 1, 1996 and updated
as of June 14, 1996, is from $18,275,000 to
$24,725,000. SUCH APPRAISAL IS NOT INTENDED AND MUST
NOT BE CONSTRUED AS A RECOMMENDATION OF ANY KIND AS TO
THE ADVISABILITY OF PURCHASING SUCH SHARES. The
appraisal considered a number of factors and was based
upon estimates derived from those factors, all of which
are subject to change from time to time. In preparing
the valuation, RP Financial relied upon and assumed the
accuracy and completeness of financial and statistical
information provided by the Company and the Bank. RP
Financial did not verify the financial statements
provided or independently value the assets of the Bank.
RP Financial will either confirm the continuing
validity of its appraisal immediately prior to
consummation of the Conversion or otherwise provide an
updated appraisal. For further information, see "The
Conversion -- Stock Pricing and Number of Shares to be
Issued."
(v)
<PAGE>
PROSPECTUS DELIVERY AND To ensure that each subscriber receives a Prospectus at
PROCEDURE FOR least 48 hours prior to the termination of the offering
PURCHASING SHARES in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"),
no Prospectus will be mailed any later than five days
prior to the expiration date of the offering or hand
delivered any later than two days prior to such date.
Execution of an original stock order form and
certification form (together, the "Order Form") will
confirm receipt or delivery in accordance with Rule
15c2-8. Order Forms will be distributed only with a
Prospectus. An acknowledgement is required to be
signed and returned with an Order Form. The Bank will
accept for processing only orders submitted on original
Order Forms. Payment by check, money order, bank draft
or debit authorization to an existing account at the
Bank must accompany the Order Form.
To ensure that Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are properly
identified as to their stock purchase priorities, such
persons must list all of their deposit accounts at the
Bank on the Order Form.
DIVIDENDS Payment of cash dividends on the Company's common stock
will be subject to the requirements of applicable law
and the determination by the Board of Directors that
the Company's net income, financial condition and need
for capital in connection with possible acquisitions
and general business growth, regulatory and tax
considerations, and economic and thrift industry
conditions justify the payment of dividends. While the
Board of Directors has not determined whether to pay
dividends on the Common Stock, the Board will consider
paying dividends after the Conversion in light of all
these factors. There can be no assurance that
dividends will in fact be paid. See "Dividends."
MARKET FOR THE The Company, as a newly organized company, has never
COMMON STOCK issued capital stock, and consequently there is no
current established market for its Common Stock. The
Company has received approval to have the Common Stock
listed on the Nasdaq National Market under the symbol
"WEHO," conditioned upon completion of the Conversion
and satisfaction of Nasdaq National Market entry
requirements. FBR has advised the Company that it
intends to act as a market maker for the Common Stock,
but is not obligated to do so. No assurance can be
given, however, that an active and liquid market for
the Common Stock will develop. Further, no assurance
can be given that an investor will be able to sell the
Common Stock at or above the purchase price after the
Conversion. See "Market for Common Stock."
RISK FACTORS Special attention should be given to the matters
discussed under "Risk Factors," which include
discussions of (i) the risks associated with aggressive
growth of the Company and the Bank; (ii) the
potentially adverse impact of interest rates and
economic and industry conditions; (iii) the liquidity
level of the Bank; (iv) large loans to one borrower or
groups of borrowers; (v) the risks posed by certain
lending activities; (vi) the risk of low return on
equity and increased operating expenses post-Conversion
and loss in 1995; (vii) the disparity between SAIF and
BIF insurance premiums and a possible special
assessment on SAIF insured institutions; (viii) the
dilutive effect of the MRP and stock options; (ix) the
potential impact on voting control of purchases by
management; (x) the potential benefits to management
upon and subsequent to Conversion; (xi) the absence of
a prior market for the Common Stock; (xii) the articles
of incorporation, bylaw and statutory provisions that
could discourage hostile acquisitions of control;
(xiii) the potentially adverse income tax consequences
of the distribution of subscription rights; (xiv) the
dependence on key personnel; (xv) the role of the
marketing advisor/best efforts offering; and (xvi) the
risk of loss of principal.
(vi)
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following tables set forth selected financial, operating and other data
of the Bank at the dates indicated. This information is derived in part from
and should be read in conjunction with the Financial Statements and Notes
thereto appearing elsewhere in this Prospectus.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At December 31,
March 31, ---------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- --------- ---------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total amount of:
Assets. . . . . . . . . . . $ 97,892 $ 96,638 $ 112,978 $ 114,344 $ 102,569 $ 97,228
Loans held for sale . . . . 936 1,697 -- -- -- --
Loans receivable, net . . . 74,398 73,245 70,185 63,205 58,684 58,977
Cash and cash equivalents . 2,491 869 748 2,608 1,886 2,377
Investment securities (1):
Available for sale . . . 988 993 1,886 -- -- --
Held to maturity . . . . -- -- -- 2,003 2,017 2,035
Mortgage-backed securities (1):
Available for sale . . . 16,358 17,380 32,560 -- -- --
Held to maturity . . . . -- -- 4,375 44,600 38,080 32,297
Deposits. . . . . . . . . . 83,004 81,748 92,526 99,895 88,771 84,899
FHLB advances . . . . . . . 136 139 5,349 -- -- --
Federal funds purchased . . -- -- 2,200 -- -- --
Retained income (1) . . . . 14,417 14,190 12,279 13,980 13,007 11,976
Number of:
Real estate loans outstanding 1,178 1,140 1,070 1,045 1,054 1,098
Deposit accounts . . . . . 8,328 7,841 7,655 7,554 7,265 6,034
Offices open . . . . . . . 1 1 1 1 1 1
</TABLE>
_______________________
(1) The Bank adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," on January 1, 1994.
The adoption of SFAS No. 115 resulted in an after tax decrease to
retained income of $204,000, $327,000 and $2.5 million as of
March 31, 1996, December 31, 1995 and 1994, respectively. For
additional information, see Notes 2 and 3 to the Bank's Financial
Statements contained herein.
(vii)
<PAGE>
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income . . . . . . . $ 1,815 $ 2,009 $ 7,756 $ 7,653 $ 7,749 $ 7,965 $ 8,446
Interest expense. . . . . . . 1,210 1,373 5,262 5,047 5,010 5,216 5,850
------- -------- -------- -------- -------- -------- --------
Net interest income before provision
for loan losses. . . . . . 605 636 2,494 2,606 2,739 2,749 2,596
Provision for loan losses . . 15 -- 38 30 12 12 --
------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for loan losses. . . . . . 590 636 2,456 2,576 2,727 2,737 2,596
Noninterest income (loss) . . 45 29 (737) 79 72 61 48
Noninterest expense . . . . . 478 397 2,056 1,494 1,326 1,196 1,116
------- -------- -------- -------- -------- -------- --------
Income (loss) before federal income
tax expense . . . . . . . . 157 268 (337) 1,161 1,473 1,602 1,528
Federal income tax expense (benefit) 53 92 (114) 400 500 571 503
------- -------- -------- -------- -------- -------- --------
Net income (loss) . . . . . . $ 104 $ 176 $ (223) $ 761 $ 973 $ 1,031 $ 1,025
------- -------- -------- -------- -------- -------- --------
------- -------- -------- -------- -------- -------- --------
</TABLE>
(viii)
<PAGE>
KEY OPERATING RATIOS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on assets (net income
(loss) divided by average
total assets). . . . . . .43% .62% (.21)% .66% .88% 1.05% 1.12%
Return on average retained
income (net income (loss)
divided by average retained
income). . . . . . . . . 2.89 4.96 (1.59) 5.39 7.19 8.22 8.94
Interest rate spread (combined
weighted average interest
rate earned less combined
weighted average interest
rate cost) . . . . . . . 1.77 1.66 1.74 1.75 1.97 2.12 2.30
Ratio of average interest-
earning assets to average
interest-bearing liabilities 115.20 112.36 113.76 112.75 112.10 113.40 112.41
Ratio of noninterest expense
to average total assets. 1.97 1.39 1.97 1.31 1.20 1.22 1.23
ASSET QUALITY RATIOS:
Nonperforming assets to total
assets at end of period. .01 -- -- .02 .10 .04 .18
Nonperforming loans to total
loans at end of period . .02 -- -- .03 .17 .07 .30
Allowance for loan losses to
total loans at end of period .16 .09 .14 .09 .05 .03 .02
Allowance for loan losses to
nonperforming loans at end
of period (1) . . . . . 834.26 -- -- 265.97 29.83 44.14 6.15
Provision for loan losses to
total loans receivable, net .02 -- .05 .04 .02 .02 --
Net charge-offs to average
loans outstanding. . . . -- -- -- -- -- -- --
CAPITAL RATIOS:
Retained income to total assets
at end of year . . . . . 14.73 11.80 14.68 10.87 12.23 12.68 12.32
Average retained income to
average assets . . . . . 14.78 12.42 13.50 12.33 12.24 12.75 12.57
</TABLE>
_______________
(1) No calculation at December 31, 1995 and March 31, 1995 due to the fact
that the Bank had no non-performing loans during those periods.
(ix)
e<PAGE>
RECENT DEVELOPMENTS
(UNAUDITED)
Set forth below are selected financial and other data of the Bank at and
for the three and six months ended June 30, 1996 and 1995. The data at
June 30, 1996 and March 31, 1996 and for the three and six months ended
June 30, 1996 and 1995 is unaudited, but in the opinion of management reflects
all adjustments, consisting of normal recurring accruals, considered necessary
for a fair presentation. The results of operations and ratios of other data
for the three and six months ended June 30, 1996, are not necessarily
indicative of the results of operations for the fiscal year ending
December 31, 1996.
SELECTED FINANCIAL AND OTHER DATA
At At
June 30, March 31,
1996 1996
-------- ---------
(Dollars in thousands)
Total amount of:
Assets.............................. $ 98,431 $ 97,892
Loans held for sale................. 693 936
Loans receivable, net............... 77,823 74,398
Cash and cash equivalents........... 649 2,491
Investment securities (1):
Available for sale............... 982 988
Mortgage-backed securities (1):
Available for sale............... 15,325 16,358
Deposits............................ 82,786 83,004
FHLB advances....................... 1,133 136
Retained income (1)................. 14,363 14,417
Number of:
Real estate loans outstanding....... 1,263 1,178
Deposit accounts.................... 7,051 6,773
Offices open........................ 2 1
______________
(1) The Bank adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," on January 1, 1994. The adoption of SFAS
No. 115 resulted in an after tax decrease to retained income of $371,000
and $204,000 as of June 30, 1996 and March 31, 1996, respectively.
SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Interest income....................................... $ 1,852 $ 1,982 $ 3,667 $ 3,990
Interest expense...................................... 1,212 1,368 2,422 2,741
------- ------- ------- -------
Net interest income before provision for loan losses.. 640 614 1,245 1,249
Provision for loan losses............................. 15 -- 30 --
------- ------- ------- -------
Net interest income after provision for loan losses... 625 614 1,215 1,249
Noninterest income (loss)............................. 24 (571) 69 (541)
Noninterest expense................................... 478 422 956 819
------- ------- ------- -------
Income (loss) before federal income tax expense....... 171 (379) 328 (111)
Federal income tax expense (benefit).................. 58 (92) 112 --
------- ------- ------- -------
Net income (loss)..................................... $ 113 $ (287) $ 216 $ (111)
======= ======= ======= =======
</TABLE>
(x)
<PAGE>
KEY OPERATING RATIOS
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Performance Ratios:
Return on assets (net income (loss) divided
by average total assets)............................. 0.46% (1.09)% .44% (.24)%
Return on average retained income (net income
(loss) divided by average retained income)........... 3.07 (8.48) 2.89 (1.76)%
Interest rate spread (combined weighted average
interest rate earned less combined weighted
average interest rate cost).......................... 1.82 1.74 1.80 1.70
Ratio of average interest-earning assets
to average interest-bearing liabilities.............. 116.43 112.18 115.82 112.27
Ratio of noninterest expense to average
total assets......................................... 1.95 1.60 1.96 1.50
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end of period.... -- --
Nonperforming loans to total loans at end of period...... -- --
Allowance for loan losses to total loans
at end of period..................................... 0.17 0.09
Allowance for loan losses to nonperforming
loans at end of period............................... -- --
Provision for loan losses to total loans
receivable, net...................................... 0.02 --
Net charge-offs to average loans outstanding............ -- --
CAPITAL RATIOS:
Retained income to total assets at end of year.......... 14.59 14.10
Average retained income to average assets............... 14.96 12.85
</TABLE>
(xi)
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1996 AND MARCH 31, 1996
The most significant changes in the composition of the Bank's balance
sheet during the quarter ended June 30, 1996 relate to cash and cash
equivalents, which decreased by $1.9 million, or 73.9%, from $2.5 million at
March 31, 1996 to $649,000 at June 30, 1996, and FHLB advances, which
increased from $136,000 at March 31, 1996 to $1.1 million at June 30, 1996.
The Bank used cash and cash equivalents and FHLB advances to fund the
increase of $3.4 million in loans receivable.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 1996 AND 1995
The most significant changes in the Bank's components of net income for
the quarter ended June 30, 1996 compared to the same quarter in 1995 involve
noninterest income (loss), which increased from a $571,000 loss to $24,000
income, and the provision for loan losses, which was zero for the quarter
ended June 30, 1995 compared to $15,000 for the same quarter in 1996. The
increase in noninterest income between the periods was principally due to a
$392,000 loss on the sale of securities during the June 30, 1995 quarter.
Management increased the Bank's provision for loans losses during the
June 30, 1996 quarter as a result of increased risks associated with the
continued implementation of a program involving the origination of loans
with loan-to-value ratios of 100%. See "Business of the Bank -- Lending
Activities -- One- to Four-Family Real Estate Loans."
LIQUIDITY AND CAPITAL RESOURCES
The Bank's capital level remained relatively stable between March 31 and
June 30, 1996. Liquidity decreased principally as a result of the Bank's use
of cash and cash equivalents to fund loans. Management expects to use a
portion of the net Conversion proceeds to rebuild the Bank's liquidity
portfolio. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
(xii)
<PAGE>
RISK FACTORS
BEFORE INVESTING IN THE SHARES OF THE COMMON STOCK OFFERED BY THIS
PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE MATTERS
PRESENTED BELOW.
RISKS ASSOCIATED WITH PLANNED AGGRESSIVE GROWTH OF THE COMPANY AND THE BANK
In order for the Company to enhance shareholder returns and generate a
competitive return on equity after consummation of the Conversion, management
plans to engage in an aggressive strategy of growth, both externally through the
selective acquisition of other financial institutions and internally through
branch expansion and through an expansion of the Bank's lending activities.
Management expects that lending activities will expand through an extension of
current lending operations and the addition of new loan products, such as an
increase in amounts and types of consumer loans. (See "Use of Proceeds").
While it is the Company's and the Bank's objective to pursue prudent growth that
will not materially compromise credit quality or interest rate risk exposure, an
aggressive growth strategy could result in additional credit risk and in a
reduction in the level of control currently exerted by management over the
Bank's business and operations.
There can be no assurance that the Bank will be successful in implementing
its strategic growth plan. The Bank's ability to expand internally by
establishing new branch offices is dependent on its ability to identify
advantageous branch office locations and generate new deposits and loans from
those locations. At the same time, the Company's ability to grow through
acquisitions is dependent on successfully identifying, acquiring and integrating
such institutions. The Bank's market area is highly competitive for financial
institution acquisitions, and the Company will be competing with numerous larger
and far more experienced acquirors. (Neither current management nor the Board
of Directors of the Bank has ever pursued or completed an acquisition.)
Accordingly, there can be no assurance that the Bank will in fact be able to
generate internal growth as planned or that the Company will be able to identify
attractive acquisition candidates, to acquire such candidates on favorable terms
or to successfully integrate any acquired institutions into the Company's and
the Bank's business and operations.
POTENTIALLY ADVERSE IMPACT OF INTEREST RATES AND ECONOMIC, INDUSTRY AND
COMPETITIVE CONDITIONS
The savings institution industry is vulnerable to fluctuations in market
interest rates. Like most savings institutions, Westwood Homestead's net
interest income is affected by general economic conditions and other factors
that influence market interest rates and Westwood Homestead's ability to respond
to changes in such rates. At March 31, 1996 (the most recent date for which
data is available), an instantaneous increase in market interest rates of 1%,
2%, 3% and 4% would have resulted in a decrease in the Bank's net interest
income of approximately $149,000, $336,000, $551,000, and $775,000,
respectively, while an instantaneous decrease in market rates of 1%, 2%, 3% and
4% would have resulted in an increase in net interest income of approximately
$116,000, $224,000, $295,000 and $349,000, respectively. This measure indicates
that the Bank is particularly vulnerable to increases in market interest rates.
Conversely, the Bank could benefit from decreases in interest rates. This
calculation, however, is based on numerous assumptions, not all of which are
within the control of the Bank. Although the Bank believes that these
assumptions are reasonable, there can be no assurance that the Bank's net
interest income will react to changes in interest rates as indicated by this
analysis or that the Bank's net interest income would not be adversely affected
by increases or decreases in interest rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Interest Rate
Sensitivity Analysis and Net Portfolio Value."
The Bank encounters substantial competition in its lending and deposit
activities. See "Business of the Bank -- Competition." Numerous larger and
more diverse financial institutions are headquartered in Cincinnati and compete
directly with the Bank for customers. These larger institutions have resources
far greater than those of the Bank and are therefore able to offer a wider
variety of retail products and to take advantage of advances in technology to a
greater extent than the Bank. These competitive conditions will affect the
Bank's ability to pursue its strategic growth plans. See "Risks Associated With
Planned Aggressive Growth of the Company and the Bank."
1
<PAGE>
Significant and rapid changes have occurred in the savings institution
industry in recent years, and the future of the industry is subject to various
uncertainties. The traditional role of savings institutions as the nation's
primary housing lenders is diminishing and savings institutions are subject to
increasing competition from commercial banks and mortgage bankers. The ability
of savings institutions to diversify into lending activities other than real
estate lending has been limited by federal regulation. Savings institution
insolvencies have resulted in increased deposit insurance costs. The savings
institution industry also faces an uncertain regulatory environment in which
applicable laws, regulations, and enforcement policies may be subject to
significant change.
LIQUIDITY LEVELS
During the period of September 1997 to December 1999, $11.9 million in high
rate long-term certificates of deposit will mature. The Bank also has $1.0
million in low-rate out of state jumbo CDs maturing in 1996. Some of these
certificates of deposit may not be reinvested in products offered by the Bank,
thereby adversely affecting the Bank's liquidity in the short term. Management
believes, however, that the Conversion proceeds will provide a sufficient
liquidity portfolio to maintain liquidity at appropriate levels in the future.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business of the Bank --
Deposit Activity and Other Sources of Funds."
LARGE LOANS TO ONE BORROWER OR GROUPS OF BORROWERS
At March 31, 1996, the Bank had loans outstanding to 18 borrowers or groups
of affiliated borrowers with aggregate balances in excess of $500,000, or a
total aggregate amount of $17.1 million, or 22.7%, of the total loan portfolio.
While these loans complied with regulatory limitations on the Bank's aggregate
loans to one borrower or group of affiliated borrowers at origination, these
loans present more risk to the Bank than smaller loans because adverse
circumstances among a small number of borrowers could adversely affect the
Bank's credit quality. At March 31, 1996, none of these loans were non-
performing or a classified asset.
RISKS POSED BY CERTAIN LENDING ACTIVITIES
The Bank's loan portfolio at March 31, 1996 included approximately $19.6
million, or 25.6%, of loans secured by multi-family or non-residential real
estate. Such loans entail significantly greater risk than that posed by loans
secured by one-to four-family real estate.
Multi-family and non-residential real estate loans typically involve larger
loan balances upon origination. At March 31, 1996, the average balance of the
Bank's multi-family and non-residential real estate loans was $147,000 as
compared to an average balance of $55,000 for the Bank's one- to four-family
residential loans. Such loans also involve a greater repayment risk, as
repayment generally is dependent in large part on sufficient income from the
properties securing the loans to cover operating expenses and debt service.
This risk can be significantly affected by supply and demand conditions in the
market for multi-family residential units and commercial office, retail and
warehouse space. In addition, non-residential real estate is more likely than
other types of property to be subject to some form of environmental
contamination. However, the risks associated with the Bank's multi-family and
non-residential real estate loans are mitigated to some degree because the
majority of these loans in the Bank's portfolio are seasoned loans and the Bank
is not actively soliciting these types of loans.
The Bank will utilize a portion of the net proceeds from the Conversion to
expand consumer lending. These loans will include automobile loans, small
unsecured loans, home improvement loans and credit card loans (See "Use of
Proceeds"). Consumer loans generally involve more risk than one- to four-family
residential real estate loans. Repossessed collateral for a defaulted loan may
not provide an adequate source of repayment of the outstanding loan balance as a
result of damage, loss or depreciation, and the remaining deficiency often does
not warrant further substantial collection efforts against the borrower. In
addition, loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Further, the application of various
state and federal laws, including federal and state bankruptcy and insolvency
law, may limit the amount which may be recovered.
2
<PAGE>
The Bank has also recently begun offering, on a limited basis, one- to
four-family mortgage loans to qualified borrowers with loan-to-value ratios of
100%. The Bank will lend the borrower 80% of the lesser of the appraised value
or purchase price of the property as a first mortgage, and will lend the
borrower up to the additional 20% (up to $100,000) needed to purchase the
property as a second mortgage. At March 31, 1996, the Bank had eight of
these loans outstanding, with an aggregate balance of first mortgages of
$731,000 and an aggregate balance of second mortgages of $163,000. For
additional information, see "Business of the Bank -- Lending Activities."
These loans involve a greater degree of risk than conventional one- to
four-family mortgage loans because the borrower has little or no equity in
the property securing the loan.
POST CONVERSION RETURN ON EQUITY AND OPERATING EXPENSES; LOSS IN PRIOR FISCAL
YEAR
As a result of the Conversion, total equity will be substantially increased
($18.2 million, or 126% and $21.0 million, or 146% at the midpoint and maximum,
respectively, of the Current Valuation Range). The increase in equity is likely
to adversely affect the Company's ability to attain a favorable return on
average equity (net income divided by average equity), absent a corresponding
increase in net income. There can be no assurance that the Company will be able
to increase net income in future periods in amounts commensurate with the
increase in equity resulting from the Conversion. See "Capitalization."
In addition, the Bank's operating expenses may increase in future periods
as a result of (i) the expenses associated with the reporting obligations of a
public company; (ii) the compensation expenses resulting from the planned
implementation of certain stock related benefit plans in connection with the
Conversion (see "Pro Forma Data" and "Management of the Bank -- Certain Benefit
Plans and Agreements"); and (iii) an increase in expenses that may result from
implementation of the Bank's growth strategy through branch purchases,
acquisitions and increased personnel. However, to the extent the Bank's growth
strategy is successful in increasing the Bank's interest earning assets, certain
of these increased expenses should be offset by improved earnings, though there
can be no assurance that the Bank will successfully implement its strategic
growth plan. See " -- Risks Associated with Planned Aggressive Growth of the
Company and the Bank." Any increases in the Bank's operating expenses as a
result of these factors may be offset by earnings on the Conversion proceeds.
See " -- Potentially Adverse Impact of Interest Rates and Economic and Industry
Conditions."
The Bank operated at a loss during 1995. Net loss for the year ended
December 31, 1995 was $223,125. The loss for the period was primarily due to an
$814,000 loss on the sale of securities to fund liquidity requirements, a charge
of $375,000 taken in connection with the Directors' Plan, and an increase in
other operating expenses of $187,000. While neither the loss on the sale of
securities nor the high level of expenses referred to above is expected to
recur, there can be no assurance that the Bank will not experience net losses in
future periods. However, the Bank did have net income of $103,766 for the three
months ended March 31, 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Comparison of Financial Condition
at December 31, 1995 and December 31, 1994" and "--Comparison of Financial
Condition at March 31, 1996 and December 31, 1995."
DISPARITY BETWEEN SAIF AND BIF INSURANCE PREMIUMS; SAIF SPECIAL ASSESSMENT
The Bank's savings deposits are insured by the SAIF, which is administered
by the FDIC. The assessment rate currently ranges from 0.23% of deposits for
well capitalized institutions to 0.31% of deposits for undercapitalized
institutions. The FDIC also administers the Bank Insurance Fund ("BIF"), which
has the same designated reserve ratio as the SAIF. The deposit insurance
assessment rate for most commercial banks and other depository institutions with
deposits insured by the BIF ranges from .27% of insured deposits for
undercapitalized BIF-insured institutions to a statutory minimum of $2,000
annually for well-capitalized institutions, which constitute over 90% of the
BIF-insured institutions. The existing substantial disparity in the deposit
insurance premiums paid by BIF and SAIF members places SAIF-insured savings
institutions such as the Bank at a significant competitive disadvantage to BIF-
insured institutions.
In September 1995, Congress began consideration of a recapitalization plan
for the SAIF. The purpose of the plan is to eliminate the significant disparity
between deposit insurance rates paid by savings associations such as the Bank
and most commercial banks. This disparity has adversely affected the Bank's
competitive position vis-a-
3
<PAGE>
vis its commercial banking competitors which are insured by the BIF. In April
1996, there was an attempt to attach legislation that would have provided for a
special one-time assessment to recapitalize the SAIF and would have spread the
interest payments on obligations issued by the Financing Corporation on all
FDIC-insured institutions. Such attempt was unsuccessful. The Bank cannot
predict whether this proposed legislation will be enacted in the future or, if
enacted, what its final form will be.
The following summarizes the major provisions of the legislation as most
recently considered by Congress. As part of the continuing resolution, Congress
proposed to authorize the FDIC to assess a one-time fee on institutions, like
the Bank, with deposits insured by the SAIF in order to increase the SAIF's
reserves to the 1.25% of insured deposits required by the Federal Deposit
Insurance Act ("FDIA"). The amount of such assessment would be determined by
the FDIC based on the amount of reserves in the SAIF, the amount of insured
deposits and such other factors as the FDIC deemed appropriate. The amount of
such assessment for an individual institution would have been based on its SAIF-
assessable deposits as of March 31, 1995 and was expected to range between 0.85%
and 0.90% of such deposits. The special assessment would have been required to
be accrued in the quarter in which the legislation was passed by Congress and
would have been due on such date as the FDIC prescribed within 60 days of
enactment of the legislation. The proposed legislation provided for the merger
of the SAIF and the BIF into a single Deposit Insurance Fund effective January
1, 1998 if no insured depository institution was a savings association on the
date. Based on its deposits as of March 31, 1995, the Bank would have been
required to pay a special assessment of approximately $805,000 on a pre-tax
basis if it is assessed at the rate of 0.90% of SAIF-assessable deposits.
DILUTIVE EFFECT OF THE MRP AND STOCK OPTIONS
It is expected that following the consummation of the Conversion the
Company will adopt the Westwood Homestead Financial Corporation 1997 Stock
Option and Incentive Plan (the "Option Plan") and the MRP, both of which would
be subject to prior stockholder and regulatory approval, and that such plans
would be considered and voted upon at a meeting of the Company's stockholders to
be held no earlier than six months after the Conversion. Under the MRP,
directors, officers and employees of the Company and the Bank are expected to be
awarded an aggregate amount of Common Stock equal to 4% of the shares issued in
the Conversion. Under the Option Plan, an aggregate amount of Common Stock
equal to 10% of the shares issued in the Conversion will be reserved for future
issuance to officers, employees and directors of the Company and the Bank, and
options to purchase 66.8% of such shares are expected to be granted in the year
following the Conversion at exercise prices equal to the market price of the
Common Stock on the date of grant. It is not currently known whether the shares
issued to directors, officers and employees under the MRP would be from
authorized but unissued shares of Common Stock or, to the extent available,
Common Stock purchased in the open market. In the event the shares issued under
the MRP and the Option Plan consist of newly issued shares of Common Stock, the
interests of existing stockholders would be diluted. Assuming that 2,150,000
shares of the Common Stock are issued in the Conversion, it is expected that
215,000 shares of the Common Stock will be reserved for issuance under the
Option Plan to directors, officers and employees in the year following the
Conversion. The grant of options on the foregoing terms may also be considered
dilutive of the interests of stockholders. At the midpoint of the Current
Valuation Range, if all shares currently expected to be issued under the MRP and
all options currently expected to be granted under the Option Plan were newly
issued and the exercise price for the shares underlying options was equal to
$10.00, the number of outstanding shares of Common Stock would increase from
2,150,000 to 2,451,000 and the pro forma book value per share of the outstanding
Common Stock at March 31, 1996 would have been $14.19 compared with $15.18
without such plans. See "Pro Forma Data" and "Management of the Bank -- Certain
Benefit Plans and Agreements."
4
<PAGE>
POTENTIAL IMPACT ON VOTING CONTROL OF PURCHASES BY MANAGEMENT
As a result of the level of Common Stock expected to be owned by management
subsequent to the Conversion as a result of individual purchases, as well as
purchases by the MRP and the Option Plan and allocations under the ESOP,
management could benefit from certain statutory and regulatory provisions, as
well as certain provisions in the Company's Articles of Incorporation and Bylaws
that may tend to promote the continuity of existing management. Specifically,
it is currently expected that directors and executive officers will subscribe
for approximately 80,000 shares, or 3.7%, of the Common Stock (assuming the sale
of 2,150,000 shares at the midpoint of the Current Valuation Range). The ESOP's
purchase of 8% of the Common Stock and the MRP's expected issuance of 86,000
shares, or 4%, of the Common Stock could (assuming the shares purchased by the
MRP are from authorized but unissued shares) increase the estimated percentage
of the Common Stock management will initially control to 15.5% of all shares
outstanding (assuming the sale of 2,150,000 shares at the midpoint of the
Current Range). If all of the options currently expected to be granted under
the Option Plan (options for 215,000 shares at the midpoint of the Current
Valuation Range) were exercised (which is not anticipated), the percentage of
shares controlled by such persons would be 22.9% of the total number of shares
of Common Stock outstanding. Management will thus have a very substantial
interest in the Company and could, if each member of management were to act
consistently with each other, have significant influence over the outcome of any
stockholder vote requiring a majority vote and in the election of directors, and
could have veto power in matters requiring the approval of 80% of the Company's
outstanding Common Stock, such as certain business combinations. Management
might thus have the power to authorize actions that may be viewed as contrary to
the best interests of non-affiliated holders of the Common Stock and might have
veto power over actions that such holders may deem to be in their best
interests. See "Pro Forma Data," "Proposed Management Purchases," "Management
of the Bank -- Certain Benefit Plans and Agreements," "The Conversion --
Regulatory Restrictions on Acquisition of the Common Stock," "Certain
Restrictions on Acquisition of the Company and the Bank" and "Certain Anti-
Takeover Provisions in the Articles of Incorporation and Bylaws."
POTENTIAL BENEFITS TO MANAGEMENT UPON AND SUBSEQUENT TO CONVERSION
STOCK OPTIONS. The Board of Directors of the Company intends to implement
the Option Plan, at a meeting of its stockholders to be held no earlier than six
months following the Conversion, contingent upon receipt of stockholder, the
FDIC's and the Superintendent's approval. Assuming 2,150,000 shares are issued
in the Conversion and receipt of the required approvals, the Bank currently
plans to grant options to purchase 53,750 and 20,156 shares of the Common Stock
to Michael P. Brennan, President of the Bank, and to all other key employees as
a group (4 persons), respectively, under the Option Plan in the year following
the Conversion. Non-employee directors as a group (7 persons) are expected to
receive options to purchase 64,500 shares. The exercise price of the options,
which would be granted at no cost to the recipients thereof, would be the fair
market value of the Common Stock subject to the option on the date the option is
granted.
MRP. The Board of Directors of the Company intends to implement the MRP at
a meeting of the Company's stockholders to be held no earlier than six months
following the Conversion, contingent upon receipt of regulatory and stockholder
approval. Subject to such approval, the MRP will purchase an amount of shares
after the Conversion equal to 4% of the shares issued in the Conversion (86,000
shares at the midpoint of the Current Valuation Range). No shares will be
awarded under the MRP prior to receipt of regulatory and stockholder approval.
Awards under the MRP would be granted at no cost to the recipients thereof.
Assuming 2,150,000 shares are issued in the Conversion and receipt of the
required approvals, the Bank currently intends to grant 21,500 and 8,063 shares
to Michael P. Brennan and all other key employees as a group (4 persons),
respectively, under the MRP. Non-employee directors as a group (7 persons) are
expected to receive 25,800 shares under the MRP, assuming 2,150,000 shares are
issued in the Conversion.
5
<PAGE>
EMPLOYMENT AND SEVERANCE AGREEMENTS. The Company and the Bank have entered
into an employment agreement with Mr. Michael P. Brennan, President and Chief
Executive Officer, and will enter into severance agreements with Mr. John Essen,
Chief Financial Officer, and Mr. Gerald Mueller, Chief Lending Officer, to
become effective upon Conversion, subject to the approval of the FDIC and the
Superintendent. The employment and severance agreements will provide for the
payment of up to approximately three times the officer's salary in the event of,
among other things, involuntary termination of employment in connection with, or
within one year after, a change in control of the Company or the Bank. For
additional information, see "Management of the Bank -- Certain Benefit Plans and
Agreements -- Employment and Severance Agreements."
OTHER BENEFITS. Subject to approval by the Superintendent and the FDIC,
under the ESOP, which intends to borrow funds from the Company to purchase 8% of
the Common Stock issued in the Conversion, shares of Common Stock will be
allocated among the accounts of participating employees. In addition to the
possible financial benefits under the benefit plans, management could benefit
from certain statutory and regulatory provisions, as well as certain provisions
in the Company's Articles of Incorporation and Bylaws, all of which may tend to
promote the continuity of existing management. See "Management of the Bank --
Certain Benefit Plans and Agreements."
ABSENCE OF PRIOR MARKET FOR THE COMMON STOCK
Prior to the Offerings, no shares of the Common Stock have been
outstanding. Although the Company has received preliminary approval for
quotation of the Common Stock on the Nasdaq National Market, there can be no
assurance that an active and liquid trading market for the Common Stock will
develop or be maintained. In addition, approximately 553,000 shares, or 22.6%
of the Common Stock to be issued (assuming the issuance of 2,150,000 shares,
implementation of the MRP and the Option Plan and the use of newly issued shares
to fund such plans), are expected to be purchased by members of management and
stock benefit plans of the Company and the Bank and are not expected to be
traded actively. Accordingly, investors should consider the potentially
illiquid nature of the Common Stock and should only subscribe for the Common
Stock with a long-term investment intent. See "Market for the Common Stock."
ARTICLES OF INCORPORATION, BYLAW AND STATUTORY PROVISIONS THAT COULD DISCOURAGE
HOSTILE ACQUISITIONS OF CONTROL
The Company's Articles of Incorporation and Bylaws contain certain
provisions that could discourage non-negotiated takeover attempts that certain
stockholders might deem to be in their interests or through which stockholders
might otherwise receive a premium for their shares over the then-current market
price and that may tend to perpetuate existing management. These provisions
currently include: the classification of the terms of the members of the Board
of Directors; supermajority provisions for the approval of certain business
combinations; certain provisions relating to meetings of stockholders, including
the absence of cumulative voting; restrictions on the acquisition of the
Company's equity securities; and provisions allowing the Board to consider
nonmonetary factors in evaluating a business combination or a tender or exchange
offer. The Articles of Incorporation also authorize the issuance of 1,000,000
shares of preferred stock as well as additional shares of Common Stock. These
shares could be issued without stockholder approval on terms or in circumstances
that could deter a future takeover attempt. Further, if the Company were to
issue preferred stock, it is possible that the interests of existing
stockholders would be diluted. The Board of Directors of the Company has no
present intention to issue preferred stock.
In addition, the Indiana Business Corporation Law ("IBCL") provides for
certain restrictions on acquisition of the Company. The takeover statute,
which is codified in Chapter 43 of the IBCL, among other things, prohibits the
Company from engaging in certain business combinations (including a merger) with
a person who is the beneficial owner of 10% or more of the Company's outstanding
voting stock (an "Interested Stockholder") during the five-year period following
the date such person became an Interested Stockholder. Also under the IBCL,
voting rights of the Common Stock are limited above various levels of ownership
of the Common Stock unless such individual followed certain procedures outlined
in the IBCL before and after acquiring such shares.
6
<PAGE>
These Articles of Incorporation, Bylaw, and statutory provisions, as well
as certain other provisions of state and federal law and certain provisions in
the Company's and the Bank's employee benefit plans and employment and severance
agreements, may have the effect of discouraging or preventing a future takeover
attempt in which stockholders of the Company otherwise might receive a
substantial premium for their shares over then-current market prices. For a
detailed discussion of those provisions, including the extent to which they
affect the exercise of revocable proxies by management and others, see
"Management of the Bank -- Certain Benefit Plans and Agreements," "Description
of Capital Stock," "Certain Restrictions on Acquisition of the Company and the
Bank" and "Certain Anti-Takeover Provisions in the Articles of Incorporation and
Bylaws."
POTENTIALLY ADVERSE INCOME TAX CONSEQUENCES OF DISTRIBUTION OF SUBSCRIPTION
RIGHTS
If the subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are deemed to have an
ascertainable value, receipt of such rights would be taxable to recipients who
exercise the subscription rights in an amount equal to such value and the Bank
could recognize a gain on such distribution. Whether subscription rights are
considered to have any ascertainable value is an inherently factual
determination. Westwood Homestead has received an opinion from RP Financial
that such rights have no value. The opinion of RP Financial is not binding on
the Internal Revenue Service ("IRS"). See "The Conversion -- Effect of
Conversion to Stock Form on Depositors and Borrowers of the Bank -- Tax
Effects."
DEPENDENCE ON KEY PERSONNEL
The Company and the Bank depend to a considerable degree on key management
personnel, and the loss of such personnel could adversely affect the Company or
the Bank. The Company and the Bank have entered into an employment agreement
with the chief executive officer and are expected to enter into severance
agreements with the chief lending officer and the chief financial officer. See
"Management of the Bank." Additionally, the Bank is currently in the process of
obtaining a "key man" insurance policy for Michael P. Brennan, its chief
executive officer.
ROLE OF THE MARKETING ADVISOR/BEST EFFORTS OFFERING
The Bank and the Company have engaged Charles Webb as a financial and
marketing advisor, and Charles Webb has agreed to use its best efforts to
solicit subscriptions and purchase orders for Common Stock in the Conversion.
Charles Webb has not prepared any report or opinion constituting a
recommendation or advice to the Bank or the Company. Charles Webb has expressed
no opinion as to the prices at which Common Stock to be issued in the Conversion
may trade. Furthermore, Charles Webb has not verified the accuracy or
completeness of the information contained in the Prospectus. See "The
Conversion -- Plan of Distribution and Marketing Agent."
RISK OF LOSS OF PRINCIPAL
The shares of Common Stock offered by this Prospectus are not savings
accounts or deposits and are not insured or guaranteed by the FDIC, the SAIF or
any other governmental agency, and involve investment risk, including the
possible loss of principal.
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
The Company, an Indiana corporation, was organized by the Bank to be a
savings institution holding company whose only subsidiary immediately after the
Conversion will be the Bank. The Company was organized at the direction of the
Bank in March 1996 to acquire all of the capital stock to be issued by the Bank
in the Conversion. Prior to the Conversion, the Company will not engage in any
material operations.
Upon consummation of the Conversion, the Company will have no significant
assets other than the outstanding capital stock of the Bank, a portion of the
net proceeds of the Conversion and a note receivable from
7
<PAGE>
the ESOP. The Company is headquartered in Cincinnati, Ohio, and its business
activities will initially be limited to the State of Ohio.
The resulting holding company structure will permit the Company to expand
the financial services currently offered through the Bank. As a holding
company, the Company will have greater flexibility than the Bank to diversify
its business activities, through newly formed subsidiaries, or through
acquisition or merger with other financial institutions. Management expects
that the Company will explore opportunities for acquiring other financial
institutions as part of the Bank's strategic growth plans, although currently
there are no specific arrangements or understandings with respect to such
acquisitions or mergers. Currently, the regulations of the Superintendent and
the FDIC generally do not restrict the activities of a savings and loan holding
company.
The executive offices of the Company are located at 3002 Harrison Avenue,
Cincinnati, Ohio 45211-5789, and its telephone number is (513) 661-5735.
THE WESTWOOD HOMESTEAD SAVINGS BANK
Westwood Homestead traces its origin to 1883, when its predecessor was
organized under the name The Westwood Homestead Co. In 1993, the Bank converted
from an Ohio chartered mutual savings and loan association to an Ohio chartered
mutual savings bank and in connection therewith adopted its current name. The
Bank conducts operations from its main office in Cincinnati, Ohio, which it has
occupied since 1922, and its branch facility located in the Mount Adams section
of Cincinnati, Ohio which opened in June 1996. The Bank is principally engaged
in the business of accepting deposits from the general public through a variety
of deposit programs and investing these funds by originating loans secured by
one- to four-family residential properties located in its market area, and, to a
lesser extent, construction loans and consumer loans. The Bank had also been
active in the past in the origination of multifamily and non-residential real
estate loans. However, such loans are no longer aggressively originated and the
Bank does not anticipate a significant increase in such lending in the near
future. At March 31, 1996, the Bank had total assets of $97.9 million, deposits
of $83.0 million, net loans receivable of $75.3 million and retained income of
$14.4 million.
Westwood Homestead's business strategy is to operate a well capitalized,
profitable community savings bank dedicated to financing home ownership in its
market area and providing quality service to its customers.
The Bank's deposits are insured by the SAIF, which is administered by the
FDIC, up to applicable limits for each depositor. The Bank is a member of the
FHLB of Cincinnati, which is one of the 12 district banks comprising the FHLB
System. The Bank is subject to comprehensive examination, supervision and
regulation by the Superintendent and the FDIC. Such regulation is intended
primarily for the protection of depositors.
Westwood Homestead's executive offices are located at 3002 Harrison Avenue,
Cincinnati, Ohio 45211-5789, and its telephone number is (513) 661-5735. For
additional information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business of the Bank."
USE OF PROCEEDS
The Company intends to use at least 50% of the net Conversion
proceeds to purchase all of the capital stock of the Bank to be issued in the
Conversion and such funds will become part of the Bank's general corporate funds
to be used primarily to fund growth in the Bank's loan portfolio. The Bank
anticipates investing its portion of the net proceeds of the Conversion
primarily in the origination of one- to four-family residential loans and, to a
much lesser extent, the origination of multi-family and non-residential real
estate loans. In addition, since the Bank's lending and deposit gathering
activities are limited by the fact that the Bank currently operates from a
single location, the Bank is actively seeking to establish one or more branch
locations either DE NOVO, or by
8
<PAGE>
purchasing an existing deposit base and/or location. In this regard, the Bank
opened a branch facility in the Mount Adams section of the city of Cincinnati,
Ohio in June 1996. It is expected that the new branch will cost approximately
$90,000 in its first year of operation. Other branching possibilities are being
studied; however, there can be no assurance that additional branching or
acquisition efforts will be successful. Management believes that expansion
beyond a single office will facilitate increased loan originations and expanded
services. Management expects to spend between $25,000 and $50,000 over the next
two years to upgrade and modernize its computer system, including the placement
of a home page on the Internet. Additionally, management is currently studying
the feasibility of building a drive-up service window at the Bank's main office
to better serve the Bank's customers, and a portion of the net Conversion
proceeds may be used to construct a drive-up service window. It is currently
estimated that a drive-up service window would cost between $35,000 and $50,000
to construct. Management also expects to use up to $1.0 million of the net
Conversion proceeds to expand consumer lending within the year following the
Conversion. The Bank expects to offer automobile loans, small unsecured loans,
home improvement loans, and credit card loans as part of this expanded lending
program. The Bank has recently hired a full time loan originator in an attempt
to expand its consumer loan originations. This individual, who has considerable
experience in the consumer lending area, will assume responsibility for the
Bank's consumer lending program. It is also possible that a portion of the net
Conversion proceeds will be used to fund the MRP through the purchase of Common
Stock in the open market. In addition, the Bank may use a portion of the
proceeds to pay down future FHLB advances and to rebuild its liquidity
portfolio, in order to meet potential withdrawal of high rate CDs maturing in
late 1997 through 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The remaining proceeds will be retained by the Company. Based on the sale
of $21,500,000 of Common Stock (the midpoint of the Current Valuation Range),
the net proceeds from the sale of Common Stock are estimated to be $20,800,000.
Based on the foregoing assumption and the purchase of 8% of the shares to be
issued in the Conversion by the ESOP, it is anticipated that the Bank would
receive $10.4 million in cash and the Company would retain $8.68 million in cash
and $1.72 million in the form of a note receivable from the ESOP. This note
receivable is expected to be amortized over a 12 year period. The portion of
the net proceeds retained by the Company initially may be used to invest in low-
risk U.S. Government and federal agency securities of various maturities,
insured jumbo CDs and FHLB time deposits, and will be available for a variety of
corporate purposes, including the possible payment of regular cash dividends
and/or special cash dividends, repurchases of the Common Stock, additional
capital contributions to the Bank, and acquisitions of other financial
institutions. Management of the Company expects to explore opportunities for
acquiring other financial institutions in the Bank's market area, and intends to
pursue such acquisitions as an integral part of the Bank's strategic growth
plans. Neither the Bank nor the Company has any specific plans, arrangements,
or understandings, however, regarding any acquisitions or diversification of
activities at this time, other than described herein, and there can be no
assurance that such acquisitions or diversifications can or will be
accomplished. A portion of the Conversion proceeds may also be utilized to
establish a financial services subsidiary of the Company, which would offer
investment financial products such as financial planning and the sale of
annuities, mutual funds, stocks, and bonds to the Bank's customers.
Based on the Company's consolidated pro forma capital as of March 31, 1996
of approximately $32.6 million and pro forma net income for the three months
ended March 31, 1996 of $186,000 (based on the midpoint of the Current Valuation
Range), the Company would have reported to stockholders a return on ending
equity of .57%. It is expected that the Company's return on equity may be low
initially as the Company and the Bank deploy the proceeds from the Conversion.
See "Risk Factors -- Post Conversion Return on Equity and Operating Expenses."
While the Board of Directors and management recognize this challenge will exist
for the foreseeable future, the Company intends to manage capital through
controlled growth. In addition, the Company may repurchase the Common Stock as
market and regulatory limits permit.
The Bank's ability to use the proceeds of the Conversion for the payment of
dividends to the Company will be limited by regulatory restrictions on capital
distributions by Westwood Homestead. See "Regulation -- Regulation of the Bank
- -- Dividend Restrictions." However, the Company believes that the offering
proceeds which it will retain after the Conversion will be adequate to meet the
Company's financial needs.
9
<PAGE>
The total number of shares of Common Stock to be issued in the Conversion
cannot be stated with certainty at this time, since the number of shares to be
issued will depend upon the estimated pro forma market value of such stock at
the time of sale. See "The Conversion -- Stock Pricing and Number of Shares to
be Issued." The Common Stock must be sold for an aggregate price within a
valuation range which is based upon an independent appraisal prepared by RP
Financial and approved by the Superintendent and the FDIC. The Current
Valuation Range approved by the Superintendent and the FDIC is from $18,275,000
to $24,725,000, with a midpoint of $21,500,000. The Company is offering the
Common Stock at $10.00 per share and will adjust the number of shares to reflect
the aggregate pro forma market value of the Common Stock as determined by the
independent appraiser at the close of the offering. Conversion expenses are
currently estimated at $700,000 at the minimum, midpoint and maximum of the
Current Valuation Range. Subject to the approval of the Superintendent and the
FDIC, the total number of shares to be issued in the Conversion may be
increased, without a resolicitation of subscriptions, to a maximum of 2,843,375
shares, which would result in gross proceeds of $28,433,750, estimated
Conversion expenses of $700,000 and estimated net proceeds of $27,733,750.
Set forth below are the estimated net proceeds to the Bank, assuming the
sale of Common Stock at the minimum, midpoint, maximum and maximum, as adjusted,
of the Current Valuation Range.
<TABLE>
<CAPTION>
Maximum, as
Minimum of Midpoint of Maximum of Adjusted, of
1,827,500 Shares 2,150,000 Shares 2,472,500 Shares 2,843,375 Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Gross offering proceeds . . . . . $ 18,275,000 $ 21,500,000 $ 24,725,000 $ 28,433,750
Estimated offering expenses . . . 700,000 700,000 700,000 700,000
------------- ------------- ------------- -------------
Estimated net offering
proceeds (1). . . . . . . . . . $ 17,575,000 $ 20,800,000 $ 24,025,000 $ 27,733,750
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
________________
(1) Includes the ESOP's expected purchase of 8% of the shares sold in the
Conversion with funds borrowed from the Company. Does not reflect the
MRP's possible purchase of a number of additional newly issued shares
equal to 4% of the shares to be issued in the Conversion, within the
year following the Conversion. See "Capitalization" and "Pro Forma
Data."
DIVIDENDS
Payment of cash dividends on the Common Stock will be subject to the
requirements of applicable law and the determination by the Board of Directors
that the Company's net income, financial condition and need for capital in
connection with possible acquisitions and general business growth, regulatory
and tax considerations, and economic and thrift industry conditions justify the
payment of dividends. While the Board of Directors has not determined whether
to pay dividends on the Common Stock, the Board will consider paying dividends
after the Conversion in light of all these factors. There can be no assurance
that dividends will in fact be paid.
In addition, since the Company initially will have no significant source of
income other than dividends from the Bank and earnings from investment of the
net Conversion proceeds retained by the Company, the payment of dividends by the
Company will depend in part upon the receipt of dividends from the Bank, which
is subject to various tax and regulatory restrictions. Pursuant to applicable
regulations, the Bank will not be permitted to pay dividends on its capital
stock or repurchase shares of its stock if its stockholders' equity would be
reduced below the amount required for the liquidation account or if
stockholders' equity would be reduced below the amount required by applicable
regulatory capital rules. See "The Conversion -- Effects of Conversion to Stock
Form on Depositors and Borrowers of the Bank -- Liquidation Account" and
"Regulation -- Regulation of the Bank -- Dividend Restrictions." The Company
also is subject to the requirements of Indiana law, which generally permits the
payment of dividends by a corporation only if, after giving effect to the
dividend, the corporation is able to pay its debts as they become due in the
usual course of business and the corporation's assets exceed its total
liabilities.
10
<PAGE>
MARKET FOR THE COMMON STOCK
The Company and Bank have not previously issued capital stock, and,
consequently, there is no established market for the Common Stock at this time.
The Company has received approval from the NASD to have its Common Stock quoted
on the Nasdaq National Market under the symbol "WEHO," conditioned upon
completion of the Conversion and satisfaction of Nasdaq National Market entry
requirements. One of the requirements for continued quotation of the Common
Stock on the Nasdaq National Market is that there be at least two market makers
for the Common Stock. The Company will seek to encourage and assist at least
two market makers to make a market in its Common Stock. Making a market
involves maintaining bid and ask quotations and being able, as principal, to
effect transactions in reasonable quantities at those quoted prices, subject to
various securities laws and other regulatory requirements. FBR has advised the
Company that it intends to make a market in the Common Stock following the
completion of the Conversion, but it is under no obligation to do so. The
Company has attempted to obtain commitments from other broker-dealers to act as
market makers, and it anticipates that prior to completion of the Conversion it
will be able to obtain the commitment from at least one other broker-dealer to
act as market maker for the Common Stock. Additionally, the development of a
liquid public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of the Company, the Bank or any
market maker. The number of active buyers and sellers of the Common Stock at
any particular time may be limited. There can be no assurance that an active
and liquid trading market for the Common Stock will develop or that, if
developed, it will continue, nor is there any assurance that persons purchasing
shares will be able to sell them at or above the purchase price or that
quotations will be available on the Nasdaq National Market as contemplated.
Accordingly, under such circumstances, investors in the Common Stock could have
difficulty disposing of their shares on short notice and should not view the
Common Stock as a short-term investment.
11
<PAGE>
PROPOSED MANAGEMENT PURCHASES
The following table sets forth certain information as to the approximate
number of shares of Common Stock intended to be purchased by each of the
directors of the Company and the Bank, including their associates, and for all
directors and executive officers as a group, including their associates. Such
purchases will be made at the same price as purchases by the general public.
For purposes of the percentage in the following table, it has been assumed that
2,150,000 shares of the Common Stock will be sold, (the midpoint of the Current
Valuation Range (see "The Conversion -- Stock Pricing and Number of Shares to be
Issued")) and that sufficient shares will be available to satisfy subscriptions
in all categories.
<TABLE>
<CAPTION>
Approximate
Percent Aggregate Purchase
Total of Price of
Name Shares(1) Total Proposed Purchases
- ---- -------- ----- ------------------
<S> <C> <C> <C>
John B. Bennet, Sr. 6,500 * $ 65,000
Robert H. Bockhorst 8,500 * 85,000
Michael P. Brennan 10,000 * 100,000
Raymond J. Brinkman 10,000 * 100,000
Roger M. Higley 10,000 * 100,000
Carl H. Heimerdinger 10,000 * 100,000
Mary Ann Jacobs 10,000 * 100,000
James D. Kemp 8,500 * 85,000
All directors and executive
officers as a group
(10 persons) 80,000 3.72% 800,000
ESOP (2) 172,000 8.00 1,720,000
MRP (3) 86,000 4.00 860,000
------- ------ ------------
Total (4) 338,000 15.72% $ 3,380,000
------- ------ ------------
------- ------ ------------
</TABLE>
__________
* Represents less than 1% of shares to be outstanding assuming the sale
of Common Stock at the midpoint of the Current Valuation Range.
(1) Includes shares purchased under the Directors' Plan.
(2) Consists of shares that could be allocated to participants in the
ESOP, under which executive officers and other employees would be
allocated in the aggregate 8% of the Common Stock issued in the
Conversion. See "Management of the Bank -- Certain Benefit Plans and
Agreements -- Employee Stock Ownership Plan."
(3) Consists of shares that, subject to regulatory and stockholder
approval, are expected to be issued under the MRP to directors,
officers and employees in the year following the Conversion. The MRP
is currently expected to purchase either newly issued shares or shares
in the open market equal to 4% of the Common Stock issued in the
Conversion. The dollar amount of the Common Stock to be purchased by
the MRP is based on the price per share in the Conversion and does not
reflect possible increases or decreases in the value of such stock
relative to the price per share in the Conversion. Implementation of
the MRP will require regulatory and stockholder approval. See
"Management of the Bank -- Certain Benefit Plans and Agreements --
Management Recognition Plan."
(4) Does not include shares that possibly could be purchased by
participants in an Option Plan, if implemented, in an aggregate amount
of Common Stock equal to 10% of the shares issued in the Conversion
which would be reserved for issuance to directors, officers and
employees. Options would be granted at exercise prices equal to the
market price of the Common Stock on the date of grant. Shares issued
pursuant to the exercise of options could be from treasury stock or
newly issued shares. Implementation of the Option Plan would require
regulatory and stockholder approval. Assumes shares to fund the MRP
are purchased in the open market. See "Management of the Bank --
Certain Benefit Plans and Agreements -- Stock Option and Incentive
Plan."
12
<PAGE>
CAPITALIZATION
Set forth below is the capitalization, including deposits, of the Bank at
March 31, 1996 and the consolidated pro forma capitalization of the Company
after giving effect to the sale of Common Stock in the Conversion at the
minimum, midpoint, maximum and maximum, as adjusted, of the Current Valuation
Range, assuming that the expenses of the Conversion are as set forth in "Use of
Proceeds." A CHANGE IN THE NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION MAY
MATERIALLY AFFECT SUCH PRO FORMA CAPITALIZATION. SEE "USE OF PROCEEDS" AND "THE
CONVERSION -- STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED."
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization of
Capitalization the Company at March 31, 1996 Based on the Sale of
of the ----------------------------------------------------------------------
Bank at 1,827,500 Shares 2,150,000 Shares 2,472,500 Shares 2,843,375 Shares
March 31, at $10.00 at $10.00 at $10.00 at $10.00
1996 Per Share Per Share Per Share Per Share
---------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Deposits (1). . . . . . . . . . . . . . $ 83,004 $ 83,004 $ 83,004 $ 83,004 $ 83,004
FHLB advances . . . . . . . . . . . . . 136 136 136 136 136
--------- --------- --------- --------- ---------
Total deposits and borrowed funds . . $ 83,140 $ 83,140 $ 83,140 $ 83,140 $ 83,140
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Capital stock
Preferred stock, $0.01 par value per share:
authorized - 1,000,000 shares;
assumed outstanding - none. . . . . $ -- $ -- $ -- $ -- $ --
Common stock, $0.01 par value per share
authorized - 15,000,000 shares;
shares to be outstanding - as shown -- 18 22 25 28
Paid-in capital (2). . . . . . . . . . -- 17,557 20,778 24,000 27,706
Less: Common stock acquired by ESOP . -- (1,462) (1,720) (1,978) (2,275)
Common stock acquired by MRP. . -- (731) (860) (989) (1,137)
Retained income -- substantially restricted 14,417 14,417 14,417 14,417 14,417
--------- --------- --------- --------- ---------
Total stockholders' equity. . . . . $ 14,417 $ 29,799 $ 32,637 $ 35,475 $ 38,739
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
_______________
(1) Withdrawals from savings accounts for the purchase of stock have not
been reflected in these adjustments. Any withdrawals will reduce pro
forma capitalization by the amount of such withdrawals.
(2) Based upon the estimated net proceeds from the sale of capital stock
less the par value of shares sold.
13
<PAGE>
PRO FORMA DATA
The following table sets forth the actual and, after giving effect to the
Conversion for the periods and at the dates indicated, unaudited pro
forma consolidated net income, stockholders' equity and other data of the Bank
prior to the Conversion and of the Company following the Conversion. The
computations are based upon the assumptions that 1,827,500 shares (minimum of
the Current Valuation Range), 2,150,000 shares (midpoint of the Current
Valuation Range), 2,472,500 shares (maximum of the Current Valuation Range) or
2,843,375 shares (approximately 15% above the maximum of the Current Valuation
Range) are sold in the Conversion at a price of $10.00 per share. It is also
assumed that no shares of Common Stock are sold by NASD member firms under
selected dealers' agreements (see "The Conversion -- Plan of Distribution and
Marketing Agent"). Unaudited pro forma consolidated income and related data
have been calculated for the three months ended March 31, 1996 and the year
ended December 31, 1995, as if the Common Stock to be issued in the Conversion
had been sold at the beginning of the period, and the estimated net proceeds had
been invested at 5.51% and 5.14% at the beginning of the respective periods.
The assumed yields are based on the March 31, 1996 and December 31, 1995 market
yield of short-term U.S. government securities. Applying an effective tax rate
of 34% resulted in an after-tax yield of 3.64% and 3.39% for the three months
ended March 31, 1996 and the year ended December 31, 1995, respectively. The
use of this current rate is viewed as more relevant in the current interest rate
environment than the use of an arithmetic average of the Bank's weighted average
yield on all interest-earning assets and weighted average rate paid on deposits
during such periods (as set forth in federal regulations). Unaudited pro forma
consolidated stockholders' equity and related data have been calculated as if
the Common Stock had been sold and was outstanding at the end of the periods,
without any adjustment of historical or pro forma equity to reflect assumed
earnings on estimated net proceeds. Per share amounts have been computed as if
the Common Stock had been outstanding at the beginning of the period or at the
dates shown, but without any adjustment of historical or pro forma stockholders'
equity to reflect the earnings on estimated net proceeds. The pro forma data
set forth below does not reflect withdrawals from deposit accounts to purchase
shares, and, in the case of newly issued shares, outstanding Common Stock upon
the exercise of options by participants in the Option Plan, under which an
aggregate amount of Common Stock equal to 10% of the shares issued in the
Conversion (215,000 shares at the midpoint of the Current Valuation Range) are
expected to be reserved for issuance to directors, officers and employees upon
the exercise of stock options at exercise prices equal to the market price of
the Common Stock on the date of grant. In accordance with federal guidelines,
the pro forma data reflect the open-market purchase by the MRP of a number of
shares equal to 4% of the shares issued in the Conversion, notwithstanding the
possibility that such shares will be purchased by the MRP from authorized but
unissued shares. See footnote (2) below. The Option Plan and the MRP are
subject to regulatory approval and approval of the Company's stockholders at a
meeting to be held no earlier than six months following the Conversion. For
additional financial information regarding the Bank, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes appearing elsewhere herein. The pro
forma data does not reflect a recovery of expense which will be recorded during
the third quarter of 1996 due to a reduction in the benefits provided for under
the Directors' Plan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Comparison of Operating Results for the
Years Ended December 31, 1995 and 1994."
THE CONSOLIDATED STOCKHOLDERS' EQUITY AND RELATED DATA PRESENTED HEREIN ARE
NOT INTENDED TO REPRESENT THE FAIR MARKET VALUE OF THE COMMON STOCK, THE CURRENT
VALUE OF ASSETS OR LIABILITIES, OR THE AMOUNTS, IF ANY, THAT WOULD BE AVAILABLE
FOR DISTRIBUTION TO STOCKHOLDERS IN THE EVENT OF LIQUIDATION. FOR ADDITIONAL
INFORMATION REGARDING THE LIQUIDATION ACCOUNT, SEE "THE CONVERSION -- EFFECTS OF
CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK -- LIQUIDATION
ACCOUNT." THE PRO FORMA INCOME AND RELATED DATA DERIVED FROM THE ASSUMPTIONS
SET FORTH ABOVE SHOULD NOT BE CONSIDERED INDICATIVE OF THE ACTUAL RESULTS OF
OPERATIONS OF THE BANK AND THE COMPANY FOR ANY PERIOD. SUCH PRO FORMA DATA MAY
BE MATERIALLY AFFECTED BY A CHANGE IN THE NUMBER OF SHARES TO BE ISSUED IN THE
CONVERSION AND OTHER FACTORS. SEE "THE CONVERSION -- STOCK PRICING AND NUMBER
OF SHARES TO BE ISSUED."
14
<PAGE>
<TABLE>
<CAPTION>
At or for the Three Months Ended March 31, 1996
----------------------------------------------------------------------
Maximum, as
Minimum of Midpoint of Maximum of Adjusted, of
1,827,500 2,150,000 2,472,500 2,843,375
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- ---------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross offering proceeds . . . . . . . . . . $ 18,275 $ 21,500 $ 24,725 $ 28,434
Less estimated offering expenses. . . . . . (700) (700) (700) (700)
--------- --------- --------- ---------
Estimated net offering proceeds . . . . 17,575 20,800 24,025 27,734
Less: Common Stock acquired by ESOP . . . (1,462) (1,720) (1,978) (2,275)
Common Stock acquired by MRP. . . . (731) (860) (989) (1,137)
--------- --------- --------- ---------
Estimated net investable proceeds . . . $ 15,382 $ 18,220 $ 21,058 $ 24,322
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss):
Historical net income (loss) . . . . . . . $ 104 $ 104 $ 104 $ 104
Pro forma income on net investable proceeds 140 166 192 221
Pro forma ESOP adjustment (1). . . . . . . (20) (24) (27) (31)
Pro forma MRP adjustment (2) . . . . . . . (24) (29) (33) (38)
Pro forma adjustment for Ohio franchise tax (3) (27) (32) (36) (42)
--------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . $ 173 $ 185 $ 200 $ 214
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share: (4)
Historical net income (loss). . . . . . . $ 0.06 $ 0.05 $ 0.05 $ 0.04
Pro forma income on net investable proceeds 0.08 0.08 0.08 0.08
Pro forma ESOP adjustment (1) . . . . . . (0.01) (0.01) (0.01) (0.01)
Pro forma MRP adjustment (2). . . . . . . (0.01) (0.01) (0.01) (0.01)
Pro forma adjustment for Ohio franchise tax (3) (0.02) (0.02) (0.02) (0.02)
--------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . $ 0.10 $ 0.09 $ 0.09 $ 0.08
--------- --------- --------- ---------
--------- --------- --------- ---------
Stockholders' equity: (5)
Historical . . . . . . . . . . . . . . . $ 14,417 $ 14,417 $ 14,417 $ 14,417
Estimated net offering proceeds (2). . . 17,575 20,800 24,025 27,734
Less: Common Stock acquired by ESOP (1) (1,462) (1,720) (1,978) (2,275)
Common Stock acquired by MRP (2) (731) (860) (989) (1,137)
--------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . $ 29,799 $ 32,637 $ 35,475 $ 38,739
--------- --------- --------- ---------
--------- --------- --------- ---------
Stockholders' equity per share: (4)(5)
Historical . . . . . . . . . . . . . . . $ 7.89 $ 6.71 $ 5.83 $ 5.07
Estimated net offering proceeds (2). . . 9.62 9.67 9.72 9.75
Less: Common Stock acquired by ESOP (1) (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by MRP (2) (0.40) (0.40) (0.40) (0.40)
--------- --------- --------- ---------
Total . . . . . . . . . . . . . . . . $ 16.31 $ 15.18 $ 14.35 $ 13.62
--------- --------- --------- ---------
--------- --------- --------- ---------
Offering price as a percentage of
pro forma stockholders' equity
per share (4)(5). . . . . . . . . . . . . 61.31% 65.88% 69.69% 73.42%
--------- --------- --------- ---------
--------- --------- --------- ---------
Ratio of offering price to pro
forma net income per share (4)(6) . . . . 25.00 27.78 27.78 31.25
--------- --------- --------- ---------
--------- --------- --------- ---------
(Footnotes on succeeding page)
</TABLE>
15
<PAGE>
_________________
(1) Assumes 8% of the shares to be sold in the Conversion are purchased by
the ESOP under all circumstances, and that the funds used to purchase
such shares are borrowed from the Company. The approximate amount
expected to be borrowed by the ESOP is reflected in this table as a
reduction of consolidated stockholders' equity. Although repayment of
such debt will be secured solely by the shares purchased by the ESOP,
the Bank expects to make discretionary contributions to the ESOP in an
amount at least equal to the principal and interest payments on the
ESOP debt. Pro forma consolidated net income has been adjusted to
give effect to such contributions, based upon a fully amortizing debt
with a twelve-year term. Since the Company will be providing the ESOP
loan, only principal payments on the ESOP loan are reflected as
employee compensation and benefits expense. The provisions of SOP 93-
6 have been applied for shares to be acquired by the ESOP and for
purposes of computing earnings per share; however, no appreciation or
depreciation in the market value of such shares is included as such
appreciation or depreciation cannot reasonably be determined. See
"Management of the Bank -- Certain Benefit Plans and Arrangements --
Employee Stock Ownership Plan."
(2) Assuming the receipt of stockholder approval at a meeting of the
Company's stockholders to be held no earlier than six months following
the Conversion, the Company intends to implement the MRP. Assuming
such implementation, the MRP will purchase an amount of shares equal
to 4% of the Common Stock sold in the Conversion for issuance to
directors, officers and employees of the Company and the Bank. Such
shares may be purchased from authorized but unissued shares or in the
open-market. The table above reflects the purchase from the open-
market in accordance with federal guidelines. The dollar amount of
the Common Stock possibly to be purchased by the MRP is based on the
price per share in the Conversion and represents unearned compensation
and is reflected as a reduction of consolidated stockholders' equity.
Such amount does not reflect possible increases or decreases in the
market value of such stock relative to the price per share in the
Conversion. As the Bank accrues compensation expense to reflect the
vesting of such shares pursuant to the MRP, the charge against
stockholders equity will be reduced accordingly. If all shares under
the Option Plan were newly issued and exercised at the end of the
period and the exercise price for the option shares were equal to the
price per share in the Conversion, at the minimum of the Current
Valuation Range, the Company's pro forma consolidated net income for
such period would be $173,000, or $0.09 per share, and the Company's
pro forma consolidated stockholders' equity at such date would be
$31,627,000, or $15.73 per share, and at the maximum, as adjusted, of
the Estimated Valuation Range, the Company's pro forma consolidated
net income for such period would be $214,000, or $0.07 per share, and
the Company's pro forma consolidated stockholders' equity at such date
would be $41,582,000, or $13.29 per share. In the event the shares
issued under these plans consist of shares of Common Stock newly
issued at the price per share in the Conversion, the per share
financial condition and results of operations of the Company would be
proportionately reduced and to that extent the interests of existing
stockholders would be diluted by approximately 14%. See "Management
of the Bank -- Certain Benefit Plans and Arrangements" and "Risk
Factors -- Possible Dilutive Effect of MRP and Option Plan."
(3) The pro forma Ohio franchise tax adjustment assumes an amount equal to
50% of the net proceeds from the Offering is allocated to the Bank and
taxed at an Ohio franchise tax rate of 1.5% and amount equal to 50% of
the net proceeds from the Offering is allocated to the Company and
taxed at an Ohio franchise tax rate of .596%. The resulting combined
franchise tax has been reduced by the Federal tax benefit at a rate of
34.0%.
(4) In accordance with SOP 93-6, per share data is computed based on the
assumed numbers of shares sold in the Conversion, less the shares
acquired by the ESOP for earnings per share amounts, and ESOP shares
are not included in earnings per share calculations until such shares
are committed to be released, which will occur at the end of operating
periods as related compensation is earned by the participants. The
pro forma average weighted number of shares used to calculate the pro
forma earnings per share at the minimum, midpoint, maximum and
maximum, as adjusted was 1,684,346, 1,981,583, 2,278,821, 2,620,644,
respectively. All ESOP shares are included for the purpose of
calculating pro forma consolidated stockholders' equity per share,
without taking into account the impact of SOP 93-6.
(5) Consolidated stockholders' equity represents the excess of the
carrying value of the assets of the Company over its liabilities. The
amounts shown do not reflect the federal income tax consequences of
the potential restoration to income of the bad debt reserves for
income tax purposes, which would be required in the event of
liquidation. The amounts shown also do not reflect the amounts
required to be distributed in the event of liquidation to eligible
depositors from the liquidation account which will be established upon
the consummation of the Conversion. Pro forma consolidated
stockholders' equity information is not intended to represent the fair
market value of the Common Stock, the current value of the Bank's
assets or liabilities, or the amounts, if any, that would be available
for distribution to stockholders in the event of liquidation. Such
pro forma data may be materially affected by a change in the number of
shares to be sold in the Offerings and by other factors.
(6) Annualized.
16
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31, 1995
----------------------------------------------------------------------
Maximum, as
Minimum of Midpoint of Maximum of Adjusted, of
1,827,500 2,150,000 2,472,500 2,843,375
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- ---------- -----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross offering proceeds . . . . . . . . . . $ 18,275 $ 21,500 $ 24,725 $ 28,434
Less estimated offering expenses. . . . . . (700) (700) (700) (700)
--------- --------- --------- ---------
Estimated net offering proceeds . . . . 17,575 20,800 24,025 27,734
Less: Common Stock acquired by ESOP. . . . (1,462) (1,720) (1,978) (2,275)
Common Stock acquired by MRP . . . . (731) (860) (989) (1,137)
--------- --------- --------- ---------
Estimated net investable proceeds . . . $ 15,382 $ 18,220 $ 21,058 $ 24,322
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss):
Historical net income (loss). . . . . . . $ (223) $ (223) $ (223) $ (223)
Pro forma income on net investable proceeds 522 618 714 825
Pro forma ESOP adjustment (1) . . . . . . (80) (95) (109) (125)
Pro forma MRP adjustment (2). . . . . . . (96) (114) (131) (150)
Pro forma adjustment for Ohio franchise tax (3) (106) (126) (146) (168)
--------- --------- --------- ---------
Total. . . . . . . . . . . . . . . . $ 17 $ 60 $ 105 $ 159
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share: (4)
Historical net income (loss) . . . . . . $ (0.13) $ (0.11) $ (0.10) $ (0.08)
Pro forma income on net investable proceeds 0.31 0.31 0.31 0.31
Pro forma ESOP adjustment (1). . . . . . (0.05) (0.05) (0.05) (0.05)
Pro forma MRP adjustment (2) . . . . . . (0.06) (0.06) (0.06) (0.06)
Pro forma adjustment for Ohio franchise tax (3) (0.06) (0.06) (0.06) (0.06)
--------- --------- --------- ---------
Total. . . . . . . . . . . . . . . . $ 0.01 $ 0.03 $ 0.04 $ 0.06
--------- --------- --------- ---------
--------- --------- --------- ---------
Stockholders' equity: (5)
Historical. . . . . . . . . . . . . . . $ 14,190 $ 14,190 $ 14,190 $ 14,190
Estimated net offering proceeds (2) . . 17,575 20,800 24,025 27,734
Less: Common Stock acquired by ESOP (1) (1,462) (1,720) (1,978) (2,275)
Common Stock acquired by MRP (2) (731) (860) (989) (1,137)
--------- --------- --------- ---------
Total. . . . . . . . . . . . . . . . $ 29,572 $ 32,410 $ 35,248 $ 38,512
--------- --------- --------- ---------
--------- --------- --------- ---------
Stockholders' equity per share: (4)(5)
Historical. . . . . . . . . . . . . . . $ 7.76 $ 6.60 $ 5.74 $ 4.99
Estimated net offering proceeds (2) . . 9.62 9.67 9.72 9.75
Less: Common Stock acquired by ESOP (1) (0.80) (0.80) (0.80) (0.80)
Common Stock acquired by MRP (2) (0.40) (0.40) (0.40) (0.40)
--------- --------- --------- ---------
Total. . . . . . . . . . . . . . . . $ 16.18 $ 15.07 $ 14.26 $ 13.54
--------- --------- --------- ---------
--------- --------- --------- ---------
Offering price as a percentage of
pro forma stockholders' equity
per share (4)(5). . . . . . . . . . . . . 61.80% 66.36% 70.13% 73.86%
--------- --------- --------- ---------
--------- --------- --------- ---------
Ratio of offering price to pro
forma net income per share (4)(6) . . . . 1,000.00 333.33 250.00 166.67
--------- --------- --------- ---------
--------- --------- --------- ---------
(Footnotes on succeeding page)
</TABLE>
17
<PAGE>
___________________
(1) Assumes 8% of the shares to be sold in the Conversion are purchased by
the ESOP under all circumstances, and that the funds used to purchase
such shares are borrowed from the Company. The approximate amount
expected to be borrowed by the ESOP is reflected in this table as a
reduction of consolidated stockholders' equity. Although repayment of
such debt will be secured solely by the shares purchased by the ESOP,
the Bank expects to make discretionary contributions to the ESOP in an
amount at least equal to the principal and interest payments on the
ESOP debt. Pro forma consolidated net income has been adjusted to
give effect to such contributions, based upon a fully amortizing debt
with a twelve-year term. Since the Company will be providing the ESOP
loan, only principal payments on the ESOP loan are reflected as
employee compensation and benefits expense. The provisions of SOP 93-
6 have been applied for shares to be acquired by the ESOP and for
purposes of computing earnings per share; however, no appreciation or
depreciation in the market value of such shares is included as such
appreciation or depreciation cannot reasonably be determined. See
"Management of the Bank -- Certain Benefit Plans and Arrangements --
Employee Stock Ownership Plan."
(2) Assuming the receipt of stockholder approval at a meeting of the
Company's stockholders to be held no earlier than six months following
the Conversion, the Company intends to implement the MRP. Assuming
such implementation, the MRP will purchase an amount of shares equal
to 4% of the Common Stock sold in the Conversion for issuance to
directors, officers and employees of the Company and the Bank. Such
shares may be purchased from authorized but unissued shares or in the
open-market. The table above reflects the purchase from the open-
market in accordance with federal guidelines. The dollar amount of
the Common Stock possibly to be purchased by the MRP is based on the
price per share in the Conversion and represents unearned compensation
and is reflected as a reduction of consolidated stockholders' equity.
Such amount does not reflect possible increases or decreases in the
market value of such stock relative to the price per share in the
Conversion. As the Bank accrues compensation expense to reflect the
vesting of such shares pursuant to the MRP, the charge against
stockholders equity will be reduced accordingly. If all shares under
the Option Plan were newly issued and exercised at the end of the
period and the exercise price for the option shares were equal to the
price per share in the Conversion, at the minimum of the Current
Valuation Range, the Company's pro forma consolidated net income for
such period would be $16,000, or $0.01 per share, and the Company's
pro forma consolidated stockholders' equity at such date would be
$31,400,000, or $15.62 per share, and at the maximum, as adjusted, of
the Estimated Valuation Range, the Company's pro forma consolidated
net income for such period would be $159,000, or $0.05 per share, and
the Company's pro forma consolidated stockholders' equity at such date
would be $41,355,000, or $13.22 per share. In the event the shares
issued under these plans consist of shares of Common Stock newly
issued at the price per share in the Conversion, the per share
financial condition and results of operations of the Company would be
proportionately reduced and to that extent the interests of existing
stockholders would be diluted by approximately 14%. See "Management
of the Bank -- Certain Benefit Plans and Arrangements" and "Risk
Factors -- Possible Dilutive Effect of MRP and Option Plan."
(3) The pro forma Ohio franchise tax adjustment assumes an amount equal to
50% of the net proceeds from the Offering is allocated to the Bank and
taxed at an Ohio franchise tax rate of 1.5% and amount equal to 50% of
the net proceeds from the Offering is allocated to the Company and
taxed at an Ohio franchise tax rate of .596%. The resulting combined
franchise tax has been reduced by the Federal tax benefit at a rate of
34.0%.
(4) In accordance with SOP 93-6, per share data is computed based on the
assumed numbers of shares sold in the Conversion, less the shares
acquired by the ESOP for earnings per share amounts, and ESOP shares
are not included in earnings per share calculations until such shares
are committed to be released, which will occur at the end of operating
periods as related compensation is earned by the participants. The
pro forma average weighted number of shares used to calculate the pro
forma earnings per share at the minimum, midpoint, maximum and
maximum, as adjusted was 1,693,483, 1,992,333, 2,291,183, 2,634,861,
respectively. All ESOP shares are included for the purpose of
calculating pro forma consolidated stockholders' equity per share,
without taking into account the impact of SOP 93-6.
(5) Consolidated stockholders' equity represents the excess of the
carrying value of the assets of the Company over its liabilities. The
amounts shown do not reflect the federal income tax consequences of
the potential restoration to income of the bad debt reserves for
income tax purposes, which would be required in the event of
liquidation. The amounts shown also do not reflect the amounts
required to be distributed in the event of liquidation to eligible
depositors from the liquidation account which will be established upon
the consummation of the Conversion. Pro forma consolidated
stockholders' equity information is not intended to represent the fair
market value of the Common Stock, the current value of the Bank's
assets or liabilities, or the amounts, if any, that would be available
for distribution to stockholders in the event of liquidation. Such
pro forma data may be materially affected by a change in the number of
shares to be sold in the Offerings and by other factors.
(6) Annualized.
18
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The table below presents the Bank's historical and pro forma capital
position relative to its various minimum statutory and regulatory capital
requirements at March 31, 1996 at the minimum, midpoint, maximum and maximum, as
adjusted, of the Current Valuation Range. For a discussion of the assumptions
underlying the pro forma capital calculations presented below, see "Use of
Proceeds," "Capitalization," "Pro Forma Data" and the financial statements and
related notes appearing elsewhere herein. For a detailed description of the
regulatory capital requirements applicable to the Bank and the proposed
amendments to these requirements, see "Regulation -- Regulation of the Bank --
Regulatory Capital Requirements."
<TABLE>
<CAPTION>
Pro Forma as of March 31 1996 Based on the Sale of (1):
-------------------------------------------------------------------------
Maximum, as
Minimum of Midpoint of Maximum of Adjusted, of
1,827,500 Shares 2,150,000 Shares 2,472,500 Shares 2,843,375 Shares
Historical at at $10.00 at $10.00 at $10.00 at $10.00
March 31, 1996 Per Share Per Share Per Share Per Share
-------------------- --------------- ------------------ ------------------ ------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets (2)Amount Assets (2) Amount Assets (2) Amount Assets (2) Amount Assets (2)
------ ---------- ----- --------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles . . . $ 14,417 14.73% $21,012 19.83% $22,237 20.70% $23,463 21.54% $24,872 22.48%
--------- ----- ------- ------ ------- ----- ------- ----- ------- -----
--------- ----- ------- ------ ------- ----- ------- ----- ------- -----
Tangible capital. . . . . . . $ 14,621 15.05% $21,216 20.02% $22,441 20.89% $23,667 21.73% $25,076 22.67%
Tangible capital requirement. 1,468 1.50 1,589 1.50 1,611 1.50 1,634 1.50 1,659 1.50
--------- ----- ------- ------ ------- ----- ------- ----- ------- -----
Excess. . . . . . . . . . $ 13,153 13.55% $19,627 18.52% $20,830 19.39% $22,033 20.23% $23,417 21.17%
--------- ----- ------- ------ ------- ----- ------- ----- ------- -----
--------- ----- ------- ------ ------- ----- ------- ----- ------- -----
Core capital. . . . . . . . . $ 14,621 15.05% $21,216 20.02% $22,441 20.89% $23,667 21.73% $25,076 22.67%
Core capital requirement. . . 2,937 3.00 3,178 3.00 3,223 3.00 3,267 3.00 3,319 3.00
--------- ----- ------- ------ ------- ----- ------- ----- ------- -----
Excess . . . . . . . . . . $ 11,684 12.05% $18,038 17.02% $19,218 17.89% $20,400 18.73% $21,757 19.67%
--------- ----- ------- ------ ------- ----- ------- ----- ------- -----
--------- ----- ------- ------ ------- ----- ------- ----- ------- -----
Total capital . . . . . . . . $ 14,738 29.47% $21,333 41.32% $22,558 43.45% $23,784 45.55% $25,193 47.93%
Risk-based capital requirement 4,001 8.00 4,130 8.00 4,154 8.00 4,177 8.00 4,205 8.00
--------- ----- ------- ------ ------- ----- ------- ----- ------- -----
Excess. . . . . . . . . . . $ 10,737 21.47% $17,203 33.32% $18,404 35.45% $19,607 37.55% $20,988 39.93%
--------- ----- ------- ------ ------- ----- ------- ----- ------- -----
--------- ----- ------- ------ ------- ----- ------- ----- ------- -----
</TABLE>
____________________
(1) Assumes the Company will purchase all of the capital stock of the Bank
to be issued upon Conversion in exchange for 50% of the net Conversion
proceeds. Assumes net proceeds distributed to the Company or the Bank
initially are invested in assets with a weighted average risk rate of
20%. Assumes 8% of the shares to be sold in the Conversion are
purchased by the ESOP under all circumstances, and that the funds used
to purchase such shares are borrowed from the Company. Although
repayment of such debt will be secured solely by the shares purchased
by the ESOP, the Bank expects to make discretionary contributions to
the ESOP in an amount at least equal to the principal and interest
payments on the ESOP debt. The approximate amount expected to be
borrowed by the ESOP is not reflected in this table as borrowed funds
but is reflected as a reduction of capital. As the Bank makes
contributions to the ESOP for simultaneous payment in an equal amount
on the ESOP debt, there will be a corresponding reduction in the
charge against capital. Also assumes in accordance with federal
guidelines that the MRP will purchase in the open-market Common Stock
equal to 4% of the Common Stock to be sold in the Conversion with
funds contributed to the MRP by the Company. The implementation of
the MRP is subject to stockholder approval. The dollar amount of the
Common Stock possibly to be purchased by the MRP is based on the price
per share in the Conversion and represents unearned compensation and
is reflected as a reduction of capital. Such amount does not reflect
possible increases or decreases in the market value of such stock
relative to the price per share in the Conversion. As the Bank
accrues compensation expense to reflect the vesting of such shares
pursuant to the MRP, the charge against capital will be reduced
accordingly. Does not reflect a possible increase in capital upon the
exercise of options by participants in the Option Plan, under which
directors, officers and other employees could be granted options to
purchase an aggregate amount of Common Stock equal to 10% of the
shares issued in the Conversion at exercise prices equal to the market
price of the Common Stock on the date of grant. Under the MRP and the
Option Plan, shares issued to participants could be newly issued
shares or, subject to regulatory restrictions, shares purchased in the
market. See "Management of the Bank -- Certain Benefit Plans and
Arrangements -- Stock Option and Incentive Plan" and " -- Management
Recognition Plan."
(2) Based on total assets determined under generally accepted accounting
principles for purpose of equity, adjusted total average assets for
the purposes of the tangible and core capital requirements and risk-
weighted assets for the purpose of the risk-based capital requirement.
19
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
STATEMENTS OF OPERATIONS
The Statements of Operations of Westwood Homestead for each of the years in
the three-year period ended December 31, 1995 have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, whose report thereon
appears elsewhere herein. The Statements of Operations for the three-month
periods ended March 31, 1996 and 1995 are unaudited, but in the opinion of
management reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of results for such periods. The Statements
of Operations should be read in conjunction with the Financial Statements and
Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
--------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
---------- ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans receivable. . . . . . . . . . . $ 1,503,983 $ 1,401,576 $ 5,751,852 $ 5,322,206 $ 5,207,285
Mortgage-backed securities. . . . . . 270,369 565,572 1,837,236 2,158,025 2,296,792
Interest-bearing deposits with banks,
investment securities and other . . 40,718 41,790 167,259 173,002 244,742
---------- ------------ ------------ ------------ ------------
Total interest income. . . . . . 1,815,070 2,008,938 7,756,347 7,653,233 7,748,819
---------- ------------ ------------ ------------ ------------
Interest expense:
Deposits (Note 8) . . . . . . . . . 1,207,505 1,245,256 4,966,676 4,894,548 5,010,175
Borrowings. . . . . . . . . . . . . 2,815 127,823 295,478 152,123 --
---------- ------------ ------------ ------------ ------------
Total interest expense . . . . . 1,210,320 1,373,079 5,262,154 5,046,671 5,010,175
---------- ------------ ------------ ------------ ------------
Net interest income. . . . . . . 604,750 635,859 2,494,193 2,606,562 2,738,644
Provision for loan losses (Note 4). . 15,087 -- 37,876 30,780 12,000
---------- ------------ ------------ ------------ ------------
Net interest income after provision
for loan losses . . . . . . . . . . 589,663 635,859 2,456,317 2,575,782 2,726,644
---------- ------------ ------------ ------------ ------------
Noninterest income (loss):
Securities losses (Notes 2 and 3) . (2,813) -- (814,178) -- --
Gain on loan sales. . . . . . . . . 35,172 -- -- -- --
Service charges and other fees. . . 13,172 29,308 76,572 78,694 72,291
---------- ------------ ------------ ------------ ------------
Total noninterest income (loss). 45,531 29,308 (737,606) 78,694 72,291
---------- ------------ ------------ ------------ ------------
Noninterest expense:
Compensation and benefits
(Note 11) . . . . . . . . . . . . 238,143 184,678 1,184,801 644,293 556,853
Occupancy costs . . . . . . . . . . 32,853 23,686 99,259 99,374 80,103
Franchise tax . . . . . . . . . . . 52,500 53,250 160,798 194,996 185,671
Federal deposit insurance premiums. 46,258 53,611 207,008 226,175 167,770
Data processing . . . . . . . . . . 21,422 21,840 73,485 71,183 60,345
Legal, accounting, and examination
fees . . . . . . . . . . . . . . 16,540 13,385 70,967 76,291 96,377
Consulting fees . . . . . . . . . . 17,682 -- 61,021 -- --
Advertising . . . . . . . . . . . . 9,884 12,942 40,144 53,500 36,584
Other . . . . . . . . . . . . . . . 42,646 33,855 158,353 128,093 142,612
---------- ------------ ------------ ------------ ------------
Total noninterest expense. . . . 477,928 397,247 2,055,836 1,493,905 1,326,315
---------- ------------ ------------ ------------ ------------
Income (loss) before income tax
expense (benefit). . . . . . . 157,266 267,920 (337,125) 1,160,571 1,472,620
Income tax expense (benefit) (Note 10) 53,500 91,600 (114,000) 400,000 500,000
---------- ------------ ------------ ------------ ------------
Net income (loss). . . . . . . . $ 103,766 $ 176,320 $ (223,125) $ 760,571 $ 972,620
---------- ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------
</TABLE>
20
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations at this time. As a result, this discussion relates to the
financial condition and results of operations of the Bank. The principal
business of the Bank consists of accepting deposits from the general public and
investing these funds primarily in loans and in investment securities and
mortgage-backed securities. The Bank's loans consist primarily of loans secured
by residential real estate located in its market area, with a limited amount of
loans secured by non-residential real estate and consumer loans, though the Bank
is seeking to expand its consumer lending.
The Bank's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loans,
investment securities and mortgage-backed securities portfolios and interest
paid on interest-bearing liabilities. Net interest income is determined by
(i) the difference between yields earned on interest-earning assets and rates
paid on interest-bearing liabilities ("interest rate spread") and (ii) the
relative amounts of interest-earning assets and interest-bearing liabilities.
The Bank's interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. To a lesser extent, the Bank's net income also is affected by the
level of noninterest income, which primarily consists of fees and service
charges, and levels of noninterest expense such as compensation and benefits
and FDIC insurance premiums.
The operations of the Bank are significantly affected by prevailing
economic conditions, competition and the monetary, fiscal and regulatory
policies of governmental agencies. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, the level of
interest rates and the availability of funds. Deposit flows and costs of funds
are influenced by prevailing market rates of interest, primarily on competing
investments, account maturities and the levels of personal income and savings in
the Bank's market area.
The increase in equity associated with the Conversion is likely to
adversely affect the Company's ability to obtain a return on average equity at
historical levels. Further, the Bank's operating expenses may increase in future
periods. See "Risk Factors -- Post Conversion Return on Equity and Operating
Expenses."
ASSET/LIABILITY MANAGEMENT
Net interest income, the primary component of the Bank's net income, is
derived from the difference or "spread" between the yield on interest-earning
assets and the cost of interest-bearing liabilities. The Bank has sought to
reduce its exposure to changes in interest rates by matching more closely the
effective maturities or repricing characteristics of its interest-earning assets
and interest-bearing liabilities. The matching of the Bank's assets and
liabilities may be analyzed by examining the extent to which its assets and
liabilities are interest rate sensitive and by monitoring the expected effects
of interest rate changes on the Bank's net interest income.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Bank's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the Bank's net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. If the Bank's assets mature or reprice more slowly or to a lesser extent
than its liabilities, the Bank's net interest income would tend to decrease
during periods of rising interest rates but increase during periods of falling
interest rates. The Bank's goal has been to mitigate the interest rate risk
inherent in the historical savings institution business of originating long-term
loans funded by short-term deposits by pursuing certain strategies designed to
decrease the vulnerability of its earnings to material and prolonged changes in
interest rates.
21
<PAGE>
The Bank has established an Asset/Liability Management Committee which
currently is comprised of the chief executive officer, director of lending,
chief financial officer, the manager of savings and three outside directors.
This Committee meets at least monthly and reviews the maturities of the Bank's
assets and liabilities and establishes policies and strategies designed to
regulate the Bank's flow of funds and to coordinate the sources, uses and
pricing of such funds. The first priority in structuring and pricing the Bank's
assets and liabilities is to maintain an acceptable interest rate spread while
reducing the net effects of changes in interest rates.
Management's principal strategy in managing the Bank's interest rate risk
has been to emphasize origination of one- to four-family adjustable rate
mortgages and shorter term fixed rate mortgages for portfolio and recently
started selling long term fixed rate mortgages in the secondary market. In
addition, in managing its portfolio of investment securities and mortgage-backed
securities, the Bank in recent periods has emphasized the sale of long-term and
fixed-rate investment securities and mortgage-backed securities so as to reduce
the Bank's exposure to increases in interest rates. The Bank adopted SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
effective January 1, 1994. Pursuant to the adoption and subsequent transition
guidelines in 1995 the entire portfolio of investment securities and mortgage-
backed securities with an amortized cost of $17.6 million and an aggregate
market value of $17.3 million are classified as available for sale at March 31,
1996. The Bank is holding these investment securities and mortgage-backed
securities as available for sale because it may sell these investment securities
and mortgage-backed securities prior to maturity should it need to do so for
liquidity or asset and liability management purposes.
Management also has shortened the average repricing period of its assets by
emphasizing the origination of short-term, fixed-rate or adjustable-rate
residential mortgage loans, most of which are retained by the Bank for its
portfolio. Beginning in the fourth quarter of 1995, the Bank commenced selling
newly originated long term fixed-rate residential mortgage loans in the
secondary market. There were $944,000 of these loans held for sale at March 31,
1996 with an aggregate market value of $936,000. At March 31, 1996, the Bank
held approximately $22.3 million in loans with adjustable interest rates, which
represented approximately 29.6% of the Bank's loan portfolio.
In addition to shortening the average repricing period of its assets, the
Bank has sought to reduce the amount of shorter-term certificates of deposit and
higher costing long-term certificates of deposit in favor of lower costing, less
interest-sensitive "core deposits" in the form of savings accounts and checking
accounts.
The Bank's Board of Directors is responsible for reviewing the Bank's asset
and liability policies. The Asset/Liability Management Committee reports to the
Board monthly on interest rate risk and trends, as well as liquidity and capital
ratios and requirements. The Bank's management is responsible for administering
the policies and determinations of the Board of Directors with respect to the
Bank's asset and liability goals and strategies.
INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. At March 31, 1996, the Bank had a negative one-year interest
rate sensitivity gap of (15.2%). Generally, during a period of rising interest
rates, a negative gap position would be expected to adversely affect net
interest income while a positive gap position would be expected to result in an
increase in net interest income, while conversely during a period of falling
interest rates, a negative gap would be expected to result in an increase in net
interest income and a positive gap would be expected to adversely affect net
interest income.
22
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1996 which are expected to
mature or reprice in each of the time periods shown.
<TABLE>
<CAPTION>
Over One Over Five
One Year Through Through Over Ten
or Less Five Years Ten Years Years Total
-------- ---------- --------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans:
One- to four-family:
Fixed. . . . . . . . . . . . . . . $5,108 $16,583 $14,130 $10,102 $45,923
Adjustable . . . . . . . . . . . . 6,035 3,515 -- -- 9,550
Multifamily and non-residential:
Fixed. . . . . . . . . . . . . . . 891 1,690 1,807 2,801 7,189
Adjustable . . . . . . . . . . . . 10,277 2,516 -- -- 12,793
Consumer . . . . . . . . . . . . . . 146 -- -- -- 146
Mortgage-backed and
investment securities . . . . . . . 15,619 1,193 534 -- 17,346
Other interest-earning assets (1) . 2,614 -- -- -- 2,614
------- ------- ------- ------- -------
Total . . . . . . . . . . . . . . 40,690 25,497 16,471 12,903 95,561
------- ------- ------- ------- -------
Interest-bearing liabilities:
Certificates of deposit. . . . . . . $37,658 $24,863 $2,601 $-- $65,122
Money market deposit . . . . . . . . 12,462 -- -- -- 12,462
NOW accounts . . . . . . . . . . . . 1,637 -- -- -- 1,637
Savings deposits . . . . . . . . . . 3,783 -- -- -- 3,783
FHLB advances. . . . . . . . . . . . -- 136 -- -- 136
------- ------- ------- ------- -------
Total . . . . . . . . . . . . . . 55,540 24,999 2,601 -- 83,140
------- ------- ------- ------- -------
Interest sensitivity gap . . . . . . . $(14,850) $498 $13,870 $12,903 $12,421
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Cumulative interest sensitivity gap. . $(14,850) $(14,352) $(482) $12,421
------- ------- ------- -------
------- ------- ------- -------
Ratio of interest-earning assets
to interest-bearing liabilities . . 73.3% 102.0% 633.3% --% 114.9%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Ratio of cumulative gap to
total assets . . . . . . . . . . . . (15.2)% (14.7)% (.5)% 12.7%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
- --------------------
(1) Includes FHLB stock.
The preceding table was prepared utilizing the following assumptions
regarding the interest rate sensitivity of loans and deposits:
(i) Fixed rate certificate amounts will not be withdrawn prior to
maturity.
(ii) Transaction accounts are assumed to reprice during the first period
included in the table.
(iii) Loans are assumed to prepay at the following rates annually and the
amortized balances are shown as being due in the period in which the
interest rates are next subject to change:
Loan Type Prepayment Rate
--------- ---------------
1-4 Family adjustable 19.5%
1-4 Family fixed-rate 8.0%
Multifamily and non-residential 6.5%
Consumer 7.0%
These prepayment assumptions are based on recent prepayment history of
similar loans in the State of Ohio.
23
<PAGE>
While management believes that these assumptions are reasonable, the actual
interest rate sensitivity of the Bank's assets and liabilities could vary
significantly from the information set forth in the table due to market and
other factors. The interest rate sensitivity of the Bank's assets and
liabilities illustrated in the table above could vary substantially if different
assumptions were used or actual experience differs from the assumptions used.
NET PORTFOLIO VALUE AND NET INTEREST INCOME
Management also measures the Bank's interest rate risk by computing
estimated changes in net interest income and the net portfolio value ("NPV") of
its cash flows from assets, liabilities and off-balance sheet items in the event
of a range of assumed changes in market interest rates. These computations
estimate the effect on the Bank's net interest income and NPV of sudden and
sustained 1% to 4% increases and decreases in market interest rates. The Bank's
Board of Directors has adopted an interest rate risk policy which establishes
maximum decreases in the Bank's estimated net interest income of 5%, 10%, 20%
and 30% in the event of 1%, 2%, 3% and 4% increases and decreases in the market
interest rates, respectively. Limits have also been established for changes in
NPV of 20%, 30%, 50% and 75% in the event of 1%, 2%, 3% and 4% increases and
decreases in the market interest rates, respectively. The following table
presents the Bank's projected change in net interest income and NPV for the
various rate shock levels at March 31, 1996.
<TABLE>
<CAPTION>
Board of Board of
Director Director
Net Portfolio Value Limits Net Interest Income Limits
Change ---------------------------- -------- -------------------------- --------
in Rates $ Amount $ Change % Change % Change $ Amount $ Change % Change % Change
- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
+ 400 bp $5,870 $(5,757) (49.5)% (75) $2,149 $(775) (26.5)% (30)
+ 300 bp 7,124 (4,523) (38.9) (50) 2,372 (551) (18.9) (20)
+ 200 bp 8,465 (3,162) (27.2) (30) 2,588 (336) (11.5) (10)
+ 100 bp 9,967 (1,660) (14.3) (20) 2,774 (149) (5.1) (5)
0 bp 11,627 -- -- 2,924 -- -- --
- - 100 bp 13,465 1,838 15.8 (20) 3,040 116 4.0 (5)
- - 200 bp 15,504 3,877 33.3 (30) 3,149 224 7.7 (10)
- - 300 bp 17,770 6,143 58.8 (50) 3,320 295 10.1 (20)
- - 400 bp 20,291 8,664 74.5 (75) 3,273 349 11.9 (30)
</TABLE>
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit run-offs, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Bank may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in
both the computation of NPV and in the analysis presented in prior tables
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in differing degrees to changes in market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable rate
loans, which represent the Bank's primary loan product, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. In addition, the proportion of adjustable rate loans in the Bank's
portfolios could decrease in future periods if market interest rates remain at
or decrease below current levels due to refinance activity. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in the tables. Finally,
the ability of many borrowers to service their adjustable-rate debt may decrease
in the event of an interest rate increase.
24
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Net interest income is affected by (i) the difference ("interest rate
spread") between rates of interest earned on interest-earning assets and rates
of interest paid on interest-bearing liabilities and (ii) the relative amounts
of interest-earning assets and interest-bearing liabilities. When interest-
earning assets approximate or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income. Savings institutions
have traditionally used interest rate spreads as a measure of net interest
income. Another indication of an institution's net interest income is its "net
yield on interest-earning assets" which is net interest income divided by
average interest-earning assets. The following table sets forth certain
information relating to the Bank's average interest-earning assets and interest-
bearing liabilities and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. During the periods
indicated, nonaccruing loans, if any, are included in the net loan category.
Average balances are derived from month-end average balances. Management does
not believe that the use of month-end average balances instead of average daily
balances has caused any material difference in the information presented.
<TABLE>
<CAPTION>
Three Months Ended March 31,
At March 31, -------------------------------------------------------------------
1996 1996 1995
------------------ -------------------------------- --------------------------------
Weighted Average Average
Average Average Yield/ Average Yield/
Balance Rate Balance Interest Cost Balance Interest Cost
------- -------- ------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net . . . . . . . $75,334 8.08% $75,020 $ 1,504 8.02% $ 69,992 $ 1,402 8.01%
Investment securities . . . . . . . 988 5.35 988 13 5.41 1,899 27 5.70
Mortgage-backed securities. . . . . 16,358 6.58 17,071 270 6.34 39,309 565 5.76
Other interest-earning assets . . . 2,614 5.86 1,905 28 5.74 888 15 6.64
------- ------- -------- -------- --------
Total interest-earning assets. . . 95,294 7.74 94,984 1,815 7.64 112,088 2,009 7.17
-------- --------
Noninterest-earning assets . . . . . 2,598 2,120 2,365
Total assets . . . . . . . . . . . $97,892 $97,104 $114,453
------- ------- --------
------- ------- --------
Interest-bearing liabilities:
Deposits. . . . . . . . . . . . . . $83,004 5.86 $82,315 1,207 5.87 $ 90,811 1,245 5.49
Federal funds purchased and FHLB
advances . . . . . . . . . . . . . 136 8.17 137 3 8.23 8,947 128 5.72
------- ------- -------- -------- --------
Total interest-bearing liabilities 83,140 5.86 82,452 1,210 5.87 99,758 1,373 5.51
Noninterest-bearing liabilities. . . 335 300 476 --------
------- ------- --------
Total liabilities. . . . . . . . . 83,475 82,752 100,234
Retained income. . . . . . . . . . . 14,417 14,352 14,219
------- ------- --------
Total liabilities and retained
income. . . . . . . . . . . . . . $97,892 $97,104 $114,453
------- ------- --------
------- ------- --------
Net interest-earning assets. . . . . $12,532 $ 12,330
------- --------
------- --------
Net interest income. . . . . . . . . $ 605 $ 636
-------- --------
-------- --------
Interest rate spread . . . . . . . . 1.88% 1.77% 1.66%
------ ------ ------
------ ------ ------
Net yield on interest-earning
assets . . . . . . . . . . . . . . 2.55% 2.27%
------ ------
------ ------
Ratio of average interest-earning
assets to average interest-
bearing liabilities. . . . . . . . 114.62% 115.20% 112.36%
------- ------- -------
------- ------- -------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------- ------------------------------ ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net . . . . . . . . . $ 71,395 $ 5,752 8.06% $ 67,266 $ 5,322 7.91% $ 59,866 $ 5,207 8.70%
Investment securities . . . . . . . . . 1,842 95 5.16 1,943 110 5.67 2,005 120 5.96
Mortgage-backed securities . . . . . . . 27,765 1,837 6.62 42,079 2,158 5.13 43,558 2,297 5.27
Other interest-earning assets. . . . . . 1,089 72 6.61 1,168 63 5.38 2,958 125 4.23
-------- ------- -------- ------- -------- -------
Total interest-earning assets . . . . . 102,091 7,756 7.60 112,456 7,653 6.81 108,387 7,749 7.15
------- ------- -------
Noninterest-earning assets . . . . . . . 2,105 1,951 2,217
-------- -------- --------
Total assets. . . . . . . . . . . . . . $104,196 $114,407 $110,604
-------- -------- --------
-------- -------- --------
Interest-bearing liabilities:
Deposits . . . . . . . . . . . . . . . . $ 85,421 4,967 5.81 $ 96,413 $ 4,894 5.08 96,690 5,010 5.18
Federal funds purchased and FHLB
advances. . . . . . . . . . . . . . . . 4,318 295 6.84 3,322 152 4.58 -- -- --
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities . . 89,739 5,262 5.86 99,735 5,046 5.06 96,690 5,010 5.18
------- ------- -------
Noninterest-bearing liabilities . . . . . 385 567 382
-------- -------- --------
Total liabilities. . . . . . . . . . . 90,124 100,302 97,072
Retained income . . . . . . . . . . . . . 14,072 14,105 13,532
-------- -------- --------
Total liabilities and retained income $104,196 $114,407 $110,604
-------- -------- --------
-------- -------- --------
Net interest-earning assets . . . . . . . $12,352 $ 12,721 $11,697
-------- -------- --------
-------- -------- --------
Net interest income . . . . . . . . . . . $ 2,494 $ 2,607 $ 2,739
------- ------- -------
------- ------- -------
Interest rate spread. . . . . . . . . . . 1.74% 1.75% 1.97%
----- ----- -----
----- ----- -----
Net yield on interest-earning assets. . . 2.44% 2.32% 2.53%
----- ----- -----
----- ----- -----
Ratio of average interest-earning assets
to average interest-bearing liabilities 113.76% 112.75% 112.10%
------ ------ ------
------ ------ ------
</TABLE>
26
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to: (i) changes in volume
(changes in volume multiplied by old rate); (ii) changes in rate (changes in
rate multiplied by old volume); and (iii) changes in rate-volume (changes in
rate multiplied by changes in volume).
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------
1996 vs. 1995
------------------------------------------
Increase (Decrease)
Due to
------------------------------------------
Rate/
Volume Rate Volume Total
------ ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable. . . . . . . . . $ 100 $ 2 $ -- $ 102
Investment securities . . . . . . (13) (1) -- (14)
Mortgage-backed securities. . . . (320) 57 (32) (295)
Other interest-earning assets . . 17 (2) (2) 13
------ ------ ------ ------
Total interest-earning assets. . (216) 56 (34) (194)
------ ------ ------ ------
Interest expense:
Deposits. . . . . . . . . . . . . (117) 87 (8) (38)
Federal funds purchased and
FHLB advances. . . . . . . . . . (126) 56 (55) (125)
------ ------ ------ ------
Total interest-bearing
liabilities. . . . . . . . . . (243) 143 (63) (163)
------ ------ ------ ------
Change in net interest income. . . $ 27 $ (87) $ 29 $ (31)
------ ------ ------ ------
------ ------ ------ ------
<CAPTION>
Year Ended December 31,
------------------------------------------ ------------------------------------------
1995 vs. 1994 1994 vs. 1993
------------------------------------------ ------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------------ ------------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
(In thousands)
<C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable. . . . . . . . . $ 326 $ 97 $ 6 $ 429 $ 644 $(471) $ (58) $ 115
Investment securities . . . . . . (6) (10) 1 (15) (4) (6) -- (10)
Mortgage-backed securities. . . . (734) 626 (213) (321) (78) (63) 2 (139)
Other interest-earning assets . . (4) 15 (1) 10 (75) 34 (21) (62)
------ ------ ------ ------ ------ ------ ------ ------
Total interest-earning assets. . (418) 728 (207) 103 487 (506) (77) (96)
------ ------ ------ ------ ------ ------ ------ ------
Interest expense:
Deposits. . . . . . . . . . . . . (558) 711 (81) 72 (14) (102) -- (116)
Federal funds purchased and
FHLB advances. . . . . . . . . . 46 75 23 144 152 -- -- 152
------ ------ ------ ------ ------ ------ ------ ------
Total interest-bearing
liabilities. . . . . . . . . . (512) 786 (58) 216 138 (102) -- 36
------ ------ ------ ------ ------ ------ ------ ------
Change in net interest income. . . $ 94 $ (58) $ (149) $ (113) $ 349 $(404) $ (77) $ (132)
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
27
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1996, DECEMBER 31, 1995 AND
DECEMBER 31, 1994
ASSETS. Total assets increased $1.3 million, or 1.3%, to $97.9 million at
March 31, 1996 from $96.6 million at December 31, 1995. This increase was
primarily attributable to an increase of $1.6 million in cash equivalents. Total
assets decreased $16.4 million, or 14.5%, to $96.6 million at December 31, 1995
from $113.0 million at December 31, 1994. This decrease was due primarily to a
decrease in mortgage backed securities and investment securities of $20.4
million, or 52.7%, to $18.4 million at December 1995 from $38.8 million at
December 1994. This decrease was due to sales of $21.4 million and principal
paydowns of $1.4 million, offset by changes in market valuation of $2.4 million.
This decrease was offset by an increase in net loans receivable of $4.7 million
or 6.7% to $74.9 at December 31, 1995 from $70.2 million at December 31, 1994.
LIABILITIES. Deposits increased $1.3 million, or 1.6%, to $83.0 million at
March 31, 1996 from $81.7 million at December 31, 1995. This increase was
primarily attributable to an increase of $1.6 million in certificates of
deposits offset by a decrease of $355,000 in transaction accounts. Deposits
decreased $10.8 million, or 11.7%, to $81.7 million at December 31, 1995 from
$92.5 million at December 31, 1994. This decrease was due to a decrease in CDs
of $10.3 million, or 14.0%, to $63.5 million at December 31, 1995 from $73.8
million at December 31, 1994. Federal funds and advances from the FHLB decreased
$7.4 million to $139,000 at December 31, 1995 from $7.5 million at December 31,
1994.
RETAINED INCOME. Retained income increased $227,000, or 1.6%, to $14.4
million at March 31, 1996 from $14.2 million at December 31, 1995. The increase
was primarily attributable to net income of $104,000 and a decrease in
unrealized losses on securities of $123,000. Retained income increased $1.9
million, or 15.4%, to $14.2 million at December 31, 1995 from $12.3 million at
December 31, 1994. This increase was due to a reduction in unrealized losses on
available for sale securities, net of tax, of $2.1 million to $327,000 at
December 31, 1995 from $2.5 million at December 31, 1994, offset by the 1995 net
loss of $223,000.
GENERAL. Prior to 1994, the Bank accepted brokered and out of state jumbo
CDs to supplement local deposits. Total deposits increased $11.1 million, or
12.5%, to $99.9 million at December 31, 1993, from $88.8 million at December 31,
1992. This increase was due primarily to brokered and out of state jumbos.
During this period of rapidly falling interest rates, these funds were taken at
25-50 basis points lower than that paid on local deposits. Out of state deposits
totaled $7.8 million, $8.1 million, $21.3 million, $28.5 million, $13.5 million
and $9.1 million at March 31, 1996, December 31, 1995, 1994, 1993, 1992 and
1991, respectively. As of October 1993, the Bank stopped accepting out of state
jumbo CDs.
February 1995 marked a dramatic change in management of the Bank with the
employment of Michael P. Brennan as President and Chief Executive Officer.
Mr. Brennan formalized the management team with officer positions in lending,
deposits and accounting. On March 27, 1995 the Board of Directors affirmed
its intention to operate as a traditional thrift and re-emphasize one- to
four-family residential lending using local deposits. The Bank has been in
the process of expanding its deposit and lending products to better meet the
needs of the community.
In March 1995, with $9.8 million of overnight borrowings and $9.2 million
in low rate volatile out of state deposits maturing in 1995, the Bank contracted
a third party study to analyze the investment portfolio as a source of
liquidity. This extensive study analyzed individual securities for past
performance, market value, extension risk, interest rate risk and earnings
potential. A priority list was developed and strategically controlled sales
provided the necessary liquidity. The proceeds from such sales (which generated
losses of $814,000) repaid federal funds purchased and FHLB advances, and funded
the run off of maturing out of state jumbos CDs. At March 31, 1996, $2.7 million
of the $7.8 million in out of state deposits are volatile jumbo CDs which will
need to be funded when they mature over the next seven years. For information on
how the Bank expects to expand its deposit base in the future, see "Business of
the Bank -- Deposit Activity and Other Sources of Funds."
28
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1994 AND DECEMBER 31, 1993
ASSETS. Total assets decreased $1.3 million, or 1.1%, to $113.0 million at
December 31, 1994 from $114.3 million at December 31, 1993. Cash and cash
equivalents decreased $1.9 million to $700,000 at December 31,1994 from $2.6
million at December 31, 1993. Investment securities and mortgage backed
securities decreased $7.7 million, or 16.5%, to $38.9 million at December 31,
1994 from $46.6 million at December 31, 1993. This decrease in investments was
partially due to $7.0 million of principal repayments and $3.7 million in
unrealized losses reported due to the adoption of SFAS 115. Loans receivable
increased $7.0 million, or 11.1%, to $70.2 million at December 31, 1994 from
$63.2 million at December 31, 1993. This increase was due to a net increase in
one- to four-family residential loans.
LIABILITIES. Deposits decreased $7.4 million, or 7.4%, to $92.5 million at
December 31, 1994 from $99.9 million at December 31, 1993. This decrease was due
primarily to a decrease in MMDAs of $3.8 million, or 22%, to $13.5 million at
December 31, 1994, from $17.3 million at December 31, 1993 and a decrease in CDs
of $3.0 million, or 4%, to $73.8 million at December 31, 1994 from $76.8 million
at December 31, 1993. FHLB advances and federal funds purchased increased to
$7.5 million at December 31, 1994 from zero at December 31, 1993.
RETAINED INCOME. Retained income decreased $1.7 million, or 12.2%, to $12.3
million at December 31, 1994 from $14.0 million at December 31, 1993. This
decrease was due to net income of $761,000 offset by the unrealized loss on
securities of $2.5 million, net of tax.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND
1995
NET INCOME. The Bank's net income decreased $72,000, or 40.9%, to $104,000
for the three months ended March 31, 1996 from $176,000 for the three months
ended March 31, 1995. The decrease was primarily due to a decrease in net
interest income after provision for loan loss of $46,000 and an increase in
noninterest expenses of $81,000. These expenses were partially offset by a
reduction of federal income tax expense of $38,000.
NET INTEREST INCOME. Net interest income after provision for loan losses
decreased $46,000, or 7.2%, to $590,000 for the three months ended March 31,
1996, from $636,000 for the three months ended March 31, 1995. Such decrease was
due primarily to a decrease of $17.1 million, or 15.3%, in the Bank's average
interest earning assets resulting from security sales to fund certificate of
deposit withdrawals, and an increase of $15,000 in the provision for loan
losses.
INTEREST INCOME. Total interest income decreased $194,000, or 9.7%, to $1.8
million for the three months ended March 31, 1996, from $2.0 million for the
three months ended March 31, 1995. Such decrease was due primarily to a decrease
of $295,000 in interest on mortgage-backed securities partially offset by an
increase of $102,000 in interest on loans receivable.
The average balance of mortgage-backed securities decreased $22.2 million,
or 56.5%, to $17.1 million for the three months ended March 31, 1996 (due to the
sale of mortgage-backed securities during 1995), from $39.3 million for the
three months ended March 31, 1995. This decrease in average balance more than
offset the increase in average yield to 6.34% from 5.76% for the three months
ended March 31, 1996 and 1995, respectively. The average balance of loans
receivable increased $5.0 million, or 7.1%, to $75.0 million for the three
months ended March 31, 1996, from $70.0 million for the three months ended March
31, 1995.
INTEREST EXPENSE. Total interest expense, which consists primarily of
interests on deposits, decreased $163,000, or 11.9%, to $1.2 million for the
three months ended March 31, 1996, from $1.4 million for the three months ended
March 31, 1995. Such decrease was due primarily to a decrease of $125,000 in
interest on borrowed funds and a decrease of $38,000 in interest on deposits.
29
<PAGE>
The average balance of borrowed funds decreased $8.8 million to $137,000 for the
three months ended March 31, 1996, from $8.9 million for the three months ended
March 31, 1995. This decrease in average balance more than offset the increase
in the average cost of borrowed funds to 8.23% for the three months ended March
31, 1996, from 5.72% for the three months ended March 31, 1995. The average
balance of deposits decreased $8.5 million, or 9.4%, to $82.3 million for the
three months ended March 31, 1996, from $90.8 million for the three months ended
March 31, 1995.
PROVISION FOR LOAN LOSSES. The provision for loan losses is charged to
earnings to maintain the total allowance for loan losses at a level
considered adequate by management to provide for probable loan losses, based
on prior loss experience, volume and type of lending conducted by the Bank,
industry standards and past due loans in the Bank's loan portfolio. The
Bank's policies require the review of assets on a regular basis, and the Bank
appropriately classifies loans as well as other assets if warranted. See
"Business of the Bank -- Lending Activities -- Nonperforming Loans and Other
Problem Assets" and "--Asset Classification and Allowance for Loan Losses."
Management believes it uses the best information available to make a
determination with respect to the allowance for loan losses, recognizing that
future adjustments may be necessary depending upon a change in economic
conditions and other factors. In recent years, the Bank's provisions for loan
losses have not, for the most part, been attributable to specific problem
loans. Rather they have been based on comments received by regulators, the
reserves established by members of the Bank's peer group and on management's
assessment of the risk inherent in the loan portfolio. The Bank allocates its
loan loss allowance to each category based upon the relative dollar amounts
of each type of loan in the loan portfolio. Management anticipates that the
Bank's provision for loan losses will increase in the future as it implements
the Board of Directors' strategy of continuing existing lines of business
while gradually expanding the origination of one- to four-family residential
loans that do not conform to secondary market guidelines and consumer loans.
These loans generally entail greater risks than conforming one- to
four-family residential mortgage loans, which have historically represented
the vast majority of the Bank's loan portfolio. See "Business of the Bank --
Lending Activities -- Asset Classification and Allowance for Loan Losses."
The Bank provided $15,000 and zero for loan losses for the three months ended
March 31, 1996 and 1995, respectively. The increase in the provision for loan
losses was primarily attributable to a program initiated by the Bank in
December of 1995 that allows for the origination of loans with loan-to-value
ratios of 100%, which loans generally involve greater credit risk than loans
with lower loan-to-value ratios. The increase in the provision was not made
in response to specific charge offs or non-performing loans. See "Business
of the Bank --Lending Activities -- One to Four Family Real Estate Loans" and
Note 4 to the Financial Statements included herein.
NONINTEREST INCOME. Total noninterest income increased $16,000, or 55.2%,
to $45,000 for the three months ended March 31, 1996, from $29,000 for the three
months ended March 31, 1995. This increase was due primarily to a $35,000 gain
on loan sales incurred during the three months ended March 31, 1996. Other
noninterest income decreased $19,000 from $29,000 for the three months ended
March 31, 1995 to $10,000 for the three months ended March 31, 1996 as a result
of an unusually large number of early withdrawal penalties collected during the
three months ended March 31, 1995.
NONINTEREST EXPENSES. Total noninterest expenses increased $81,000, or
20.4%, to $478,000 for the three months ended March 31, 1996, from $397,000 for
the three months ended March 31, 1995, as compensation and benefits increased
$53,000, or 29.0%, to $238,000 for the three months ended March 31, 1996, from
$185,000 for the three months ended March 31, 1995. This increase in
compensation and benefits was primarily due to a $48,000 expense associated with
the Westwood Homestead Savings Bank Directors' Retirement Plan (the "Directors'
Plan"), normal salary increases and the hiring of additional personnel. As a
result of a recent amendment to the Directors' Plan, it is expected that there
will be a recovery of a portion of the expense associated with the Directors'
Plan which will be recorded during the third quarter of 1996. See " --
Comparison of Operating Results for the Years Ended December 31, 1995 and 1994."
Occupancy cost increased $9,000, or 37.5%, to $33,000 for the three months ended
March 31, 1996, from $24,000 for the three months ended March 31, 1995. This
increase was primarily due to expenses associated with leasing a modular
facility to accommodate the additional personnel. Consulting fees increased to
$18,000 for the three months ended March 31, 1996 as compared to the same period
in 1995 due to consulting expenses associated with addressing various regulatory
compliance issues.
INCOME TAXES. Income tax expense decreased $38,000 for the three months
ended March 31, 1996 to $54,000 for the three months ended March 31, 1996, from
$92,000 for the three months ended March 31, 1995. The decrease was primarily
attributable to a decrease in income before taxes.
30
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
NET INCOME (LOSS). The Bank's net income (loss) decreased $984,000 to a net
loss of $223,000 for the year ended December 31, 1995 from net income of
$761,000 for the year ended December 31, 1994. The reduction in net income was
primarily due to the previously mentioned loss on sale of securities of
$814,000, a charge of $375,000 to adopt the Directors' Plan and an increase in
other operating expenses of $187,000. These expenses were partially offset by a
reduction in income tax expense of $514,000.
NET INTEREST INCOME. Net interest income decreased $113,000, or 4.3%, to
$2.5 million for the year ended December 31, 1995, from $2.6 million for the
year ended December 31, 1994. Such decrease was due primarily to an increase in
the Bank's short term borrowing cost during 1995. This increase was partially
offset by the change in mix of interest earning assets. Average loans receivable
for the year ended December 31, 1994 were $67.3 million, or 60% of earning
assets, compared to $71.4 million or 70% of earning assets for the year ended
December 31, 1995. Although the average interest rate spread for 1995 was
slightly lower than 1994, 1.74% compared to 1.75%, the interest rate spread at
December 31, 1995 was 1.90%. Management believes this trend is a result of the
shift in the composition of interest earning assets and liabilities in the
Bank's portfolio.
INTEREST INCOME. Total interest income increased $103,000 , or 1.3%, to
$7.8 million for the year ended December 31, 1995, from $7.7 million for the
year ended December 31, 1994. Such increase was due primarily to a 79 basis
point increase in the average yield on interest-earning assets.
Interest on loans receivable increased $430,000, or 8.1%, to $5.8 million
for the year ended December 31, 1995 from $5.3 million for the year ended
December 31, 1994. This increase was due primarily to an increase of $4.1
million, or 6.1%, in the average balance of loans receivable to $71.4 million
for the year ended December 31, 1995, from $67.3 million for the year ended
December 31, 1994, reflecting increased origination of loans primarily from
single-family secured residential real estate. Interest on mortgage-backed
securities decreased $321,000, or 14.9%, to $1.8 million for the year ended
December 31, 1995, from $2.2 million for the year ended December 31, 1994. Such
decrease was due to a decrease of $14.3 million, or 34.0%, in the average
balance of mortgage-backed securities to $27.8 million for the year ended
December 31, 1995, from $42.1 million for the year ended December 31, 1994,
which more than offset a 149 basis point increase in the average yield on
mortgage-backed securities. The proceeds from the sale and scheduled payments on
mortgage-backed securities were used to fund increased loan originations during
the year ended December 31, 1995. Interest on investment securities decreased
$15,000, or 13.6%, to $95,000 for the year ended December 31, 1995, from
$110,000 for the year ended December 31, 1994. Such decrease was due primarily
to a decrease of $101,000, or 5.2%, in the average balance of investment
securities to $1.8 million for the year ended December 31, 1995, from $1.9
million for the year ended December 31, 1994. The decrease in the average
balance of investment securities reflected management's strategy of funding loan
demand with investment sales to improve the Bank's interest rate spread.
INTEREST EXPENSE. Total interest expense, which consists primarily of
interest on deposits, increased $215,000, or 4.3%, to $5.3 million for the year
ended December 31, 1995, from $5.0 million for the year ended December 31, 1994.
Interest expense on deposits increased $72,000, or 1.5%, to $5.0 million for the
year ended December 31, 1995, from $4.9 million for the year ended December 31,
1994. Such increase was due primarily to a 73 basis point increase in the
average cost of deposits due to increased prevailing market interest rates. This
increase in the average cost offset the decrease in the average balance of
deposits to $85.4 million for the year ended December 31, 1995, from $96.4
million for the year ended December 31, 1994. During the year ended December 31,
1995, the Bank made use of short term FHLB advances to fund the decrease in
deposits until investments were sold. As a result, interest on borrowings
increased $143,000, or 94.1%, to $295,000 for the year ended December 31, 1995,
from $152,000 for the year ended December 31, 1994. The increased interest
expense on borrowings also was due to a 226 basis point increase in the average
cost of borrowings.
PROVISION FOR LOAN LOSSES. The Bank increased its provision for loan
losses by $7,000, or 23%, from $31,000 for year ended December 31, 1994 to
$38,000 for the year ended December 31, 1995. The Bank increased its
provision during 1995 as a result of (i) changes in general economic
conditions (i.e., increases in the level of consumer debt and the rate of
delinquencies on such debt) affecting both the Bank and its industry peers in
Ohio and nationally and (ii) the Bank's origination of a residential
construction loan during this period with greater risk characteristics than
those of the rest of its construction loan portfolio, including a
loan-to-value ratio in excess of 80%. This loan has at all times performed
in accordance with its terms. The increase in the Bank's provision during
1995 was not attributable to any specific charge-offs or non-performing loans.
31
<PAGE>
NONINTEREST INCOME (LOSS). Total noninterest income decreased $816,000, to
($737,000) for the year ended December 31, 1995, from $79,000 for the year ended
December 31, 1994. This decrease in noninterest income primarily was
attributable to the $814,000 loss on sale of securities incurred during the year
ended December 31, 1995, as discussed previously. Other noninterest income
decreased by $2,000, or 2.7%, from $79,000 for the year ended December 31, 1994
to $77,000 for the year ended December 31, 1995.
NONINTEREST EXPENSES. Total noninterest expenses increased $562,000, or
37.6%, to $2.1 million for the year ended December 31, 1995, from $1.5 million
for the year ended December 31, 1994, as compensation and benefits increased
$541,000, or 83.9%, to $1,185,000 for the year ended December 31, 1995, from
$644,000 for the year ended December 31, 1994. This increase in compensation and
benefits primarily was due to a $375,000 expense associated with the adoption of
the Directors' Plan, normal salary increases and the hiring of additional
personnel. The $375,000 expense recognized in 1995 includes prior service cost
as of December 31, 1995. Consulting expenses increased by approximately $61,000
during 1995 due to the Bank's use of advisory services in connection with the
extensive evaluation of its securities portfolio, development of the Bank's
business plan, and implementation of the Directors' Plan.
At the request of federal regulators, the Bank adopted the Directors' Plan
in 1995 to formalize the Bank's director emeritus program (the "Emeritus
Program") which was adopted in 1989. The Emeritus Program was approved by the
members of the Bank at its annual meeting in March 1989 and provided certain
benefits to three Board members. The Directors' Plan, which was effective
January 1, 1995, was approved by the members of the Bank at its annual meeting
on February 12, 1996. However, following discussions with federal regulators, in
June of 1996 the Board of Directors of the Bank voted to reduce the benefits
provided for under the Directors' Plan and to submit the Directors' Plan for
approval by the stockholders of the Company following completion of the
Conversion. Provided stockholder approval is obtained, this reduction in
benefits will be reflected in a recovery of approximately $100,000 of the
expense associated with the Directors' Plan. This recovery is expected to be
recorded during the fiscal quarter in which the Directors' Plan is approved by
the stockholders of the Company, which is expected to be the third quarter of
1996. In the event that the stockholders of the Company do not approve the
Directors' Plan, there will be a recovery of most of the expense associated with
the Directors' Plan. It is anticipated that this recovery would be recorded in
the third quarter of 1996. See "Management of the Bank -- Director Compensation
- -- Director Retirement Plan."
INCOME TAXES. The Bank's income tax expense (benefit) was ($114,000) and
$400,000 for the years ended December 31, 1995 and 1994, respectively. The
Bank's effective tax rate was (33.8%) and 34.5% for the years ended December 31,
1995 and 1994, respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
NET INCOME. The Bank's net income decreased $212,000 to $761,000 for the
year ended December 31, 1994 from $973,000 for the year ended December 31, 1993.
The reduction in net income was primarily due to a decrease in net interest
income of $132,000 and an increase in non interest expense of $168,000. These
expenses were offset by a reduction of federal income tax expense of $100,000.
NET INTEREST INCOME. Net interest income decreased $132,000, or 4.8%, to
$2,607,000 for the period ended December 31, 1994, from $2,739,000 for the year
ended December 31, 1993. The average interest rate spread decreased 22 basis
points to 1.75% for the year ended December 31, 1994, from 1.97% for the year
ended December 31, 1993.
INTEREST INCOME. Total interest income decreased $96,000 to $7,653,000 for
the year ended December 31, 1994, from $7,749,000 for the year ended December
31, 1993. Such decrease was due primarily to a decrease of 34 basis points in
the average yield on interest earning assets to 6.81% for the year ended
December 31, 1994, from 7.15% for the year ended December 31, 1993, reflecting
the downward trend in rates experienced during 1994.
32
<PAGE>
Although the average loans receivable balance increased $7,400,000 for the year
ended December 31, 1994, the average yield decreased 79 basis points to 7.91%
for the year ended December 31, 1994, from 8.70% for the year ended December 31,
1993.
INTEREST EXPENSE. Total interest expense, which consists primarily of
interest on deposits, increased $36,000 to $5,046,000 for the year ended
December 31, 1994, from $5,010,000 for the year ended December 31, 1993.
Interest expense on deposits decreased $116,000 to $4,894,000 for the year ended
December 31, 1994, from $5,010,000 for the year ended December 31, 1993. Such
decrease was due to a 10 basis point decrease in the average cost of deposits
due to decreased prevailing market interest rates. During the year ended
December 31, 1994, the Bank made use of short term FHLB advances to fund the
decrease in deposits as discussed earlier. As a result, interest on borrowings
increased $152,000 for the year ended December 31, 1994, from no borrowing for
the year ended December 31, 1993.
PROVISION FOR LOAN LOSSES. The Bank increased its provision for loan
losses by $19,000, or 157%, from $12,000 for year ended December 31, 1993 to
$31,000 for the year ended December 31, 1994. This increase in the Bank's
provision was taken as a result of comments from regulators following a
routine examination of the Bank. The increase in the provision was not made
in response to specific charge offs or non-performing loans. See Note 4 to
the Financial Statements included herein.
NONINTEREST INCOME. Total noninterest income increased $7,000, to $79,000
for the year ended December 31, 1994, from $72,000 for the year ended December
31, 1993. This increase in noninterest income was due to increased service
charges on deposit accounts.
NONINTEREST EXPENSE. Total noninterest expense increased $168,000, or
12.7%, to $1,494,000 for the year ended December 31, 1994, from $1,326,000 for
the year ended December 31, 1993, as compensation and benefits increased
$87,000, or 15.6%, to $644,000 for the year ended December 31, 1994, from
$557,000 for the year ended December 31, 1993. This increase in compensation and
benefits primarily was due to normal salary increases and the hiring of
additional personnel. In addition, federal deposit insurance premiums increased
$58,000 to $226,000 for the year ended December 31, 1994 from $168,000 for the
year ended December 31, 1993. The increase was primarily attributable to a
$41,000 credit for final distribution of the secondary reserve balance received
during 1993.
INCOME TAXES. The Bank's income tax expense was $400,000 and $500,000 for
the years ended December 31, 1994 and 1993, respectively. The Bank's effective
tax rate was 34.5% and 34.0% for the years ended December 31, 1994 and 1993,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Following the completion of the Conversion, the Company initially will have
no b usiness other than that of the Bank and investing the net Conversion
proceeds retained by it. Management believes that the net proceeds to be
retained by the Company, earnings on such proceeds and principal and interest
payments on the ESOP loan, together with dividends that may be paid from the
Bank to the Company following the Conversion, will provide sufficient funds for
its initial operations and liquidity needs; however, no assurance can be given
that the Company will not have a need for additional funds in the future. The
Bank, as a stock savings bank will be subject to certain regulatory limitations
with respect to the payment of dividends to the Company. See "Dividend Policy"
and "Regulation -- Regulation of the Bank -- Dividend Restrictions." The Company
intends to lend a portion of the net proceeds retained from the Stock Conversion
to the ESOP to permit its purchase of Common Stock in the Conversion. See "Use
of Proceeds."
At March 31, 1996, the Bank exceeded all regulatory minimum capital
requirements. For a detailed discussion of the regulatory capital requirements,
and for a tabular presentation of the Bank's compliance with such requirements,
see "Regulation -- Regulation of the Bank -- Capital Requirements."
33
<PAGE>
The following table reconciles the Bank's retained income as reported in
its financial statements at March 31, 1996 to its tangible, core and risk-based
capital levels and compares such totals to the regulatory requirements. FDIC
regulations eliminate the effect of unrealized gains and losses, net of tax
effect, on available for sale securities from the computation of regulatory
capital. This regulation has the effect of increasing each of the Bank's
tangible, core and risk-based capital by $204,000 above the amounts set forth
below.
<TABLE>
<CAPTION>
Actual Requirement Excess Capital
------------------------ ------------------------- -----------------------
Percent of Percent of Percent of
Average Average Average
Amount Assets Amount Assets Amount Assets
------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Bank's retained income. . . $14,417
Adjustments . . . . . . . . 204
-------
Tangible capital. . . . . . 14,621 15.05% $ 1,468 1.5% $ 13,153 13.55%
Core capital. . . . . . . . 14,621 15.05 2,937 3.0 11,684 12.05
Plus allowable portion of
general allowance for
loan losses . . . . . . . 117
-------
Risk-based capital. . . . . $14,738 29.47 4,001 8.0 10,737 21.47
-------
-------
</TABLE>
For information regarding the Bank's actual, pro forma and minimum required
capital ratios at March 31, 1996, see "Historical and Pro Forma Regulatory
Capital Compliance." The Bank will, as a result of the Conversion, have
substantially increased capital. There can be no assurance, however, that the
Company's sources of funds will be sufficient to satisfy the liquidity needs of
the Company in the future.
The Bank's primary sources of funds are deposits and proceeds from
maturing investment securities and mortgage-backed securities and principal
and interest payments on loans. While maturities and scheduled amortization
of mortgage-backed securities and loans are a predictable source of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, competition and other factors.
In past years, the primary investing activities of the Bank were the
origination of loans and the purchase of investment securities and
mortgage-backed securities with the most recent emphasis on loan origination.
During the years ended December 31, 1995 and 1994, the Bank had $13.6 million
and $18.9 million, respectively, of loan originations. During the year ended
December 31, 1995 the Bank purchased no investment securities or
mortgage-backed securities. The primary financing activities of the Bank are
the attraction of savings deposits and obtaining FHLB advances.
The Bank has other sources of liquidity. As stated earlier, the Bank has a
portfolio of investment securities and mortgage-backed securities with an
aggregate market value of $17.3 million at March 31, 1996 classified as
available for sale. Another source of liquidity is the Bank's ability to obtain
advances from the FHLB of Cincinnati. In addition, the Bank has agreements to
purchase and/or sell federal funds at other financial institutions, if needed.
The Bank is required to maintain minimum levels of liquid assets as defined
by FDIC regulations. This requirement, which may be changed at the direction of
the FDIC depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. At March 31, 1996, the Bank's
liquidity ratio was 24.9%, consisting of mortgage-backed securities, investment
securities, FHLB stock and cash equivalents totaling $16.3 million, $988,000,
$905,000 and $2.5 million, respectively.
34
<PAGE>
Following the completion of the Conversion, the Bank will receive at
least 50% of the net proceeds from the Conversion. As discussed earlier, the
Bank plans to use these proceeds to rebuild its liquidity portfolio. This
portfolio will be used to accommodate fluctuations in daily operations. As
shown in the deposit section of the tabular data, the Bank has approximately
$13.4 million of CDs with rates between 8% and 10%. Of this amount, $9.9
million, is due to mature in the next three years.
During the period of September 1997 to December 1999, $11.9 million in high
rate long-term certificates of deposit will mature. The Bank also has $1.0
million in low rate out of state jumbo CDs maturing in 1996. Some of these
certificates of deposit may not be reinvested in products offered by the Bank,
thereby adversely affecting the Bank's liquidity. See "Business of the Bank --
Deposit Activity and Other Sources of Funds." Therefore, the Bank could in the
future be criticized for maintaining inadequate liquidity levels if such
deposits are withdrawn in a short time period. Loss of these funds could be
funded by the liquidity portfolio. Management plans to "ladder" maturities of
future short term investments to provide the most flexibility and yield.
The Bank anticipates that it will have sufficient funds available to meet
its current commitments. Certificates of deposit which are scheduled to mature
in less than one year at March 31, 1996 totaled $32.7 million. Management
believes that a significant portion of such deposits will remain with the Bank.
However, in the event that such deposits are not renewed, the Bank could, if
necessary, sell securities and/or obtain FHLB advances to meet its liquidity
requirements. The Bank's liquidity will also be enhanced through receipt of the
net Conversion Proceeds.
POTENTIAL IMPACT ON FUTURE RESULTS OF OPERATIONS OF PENDING LEGISLATION
The Bank's savings deposits are insured by the SAIF, which is administered
by the FDIC. The assessment rate currently ranges from 0.23% of deposits for
well capitalized institutions to 0.31% of deposits for undercapitalized
institutions. The Bank is currently assessed at the rate of 0.23% of deposits.
The FDIC also administers the BIF, which has the same designated reserve ratio
as the SAIF. The deposit insurance assessment rate for most commercial banks and
other depository institutions with deposits insured by the BIF ranges from 0.27%
of insured deposits for undercapitalized BIF-insured institutions to a statutory
minimum of $2,000 annually for well-capitalized institutions, which constitute
over 90% of BIF-insured institutions. The existing substantial disparity in the
deposit insurance premiums paid by BIF and SAIF members places SAIF-insured
savings institutions such as the Bank at a significant competitive disadvantage
to BIF-insured institutions. This competitive disadvantage requires SAIF-insured
institutions such as the Bank to charge higher rates on loan products and
curtails the ability of such institutions to offer competitive rates on deposit
accounts.
A number of proposals have been considered to recapitalize the SAIF in
order to eliminate this premium disparity. The United States Senate and House of
Representatives have both, as part of a budget reconciliation package, approved
legislation requiring a one-time assessment currently expected to range between
0.85% and 0.90% of insured deposits to be imposed on all SAIF-insured deposits
held as of March 31, 1995. The assessment would result, on a pro forma basis as
of March 31, 1996, in a one-time charge to the Bank of up to approximately
$531,000 (assuming such charge would be tax deductible).
A number of other related proposals are also under consideration in
Congress, including those relating to merger of the SAIF and BIF, elimination of
the thrift charter and the federal tax consequences of thrifts' conversion to
national banks. The Bank is unable to accurately predict whether these proposals
will be adopted in their current form or the impact of such proposals on the
Bank.
35
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are monetary in
nature. As a result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
IMPAIRMENT OF LONG-LIVED ASSETS. In March 1995, the Financial Accounting
Standards Board (FASB) issued SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of." This Statement is
effective for years beginning after December 15, 1995 and requires, among other
things, recognition of impairment of long-lived assets, if any, based upon the
difference between the undiscounted expected future cash flows and the carrying
value. Further, the Statement requires that long-lived assets to be disposed of
be reported at the lower of carrying amount or fair value less costs to sell.
The Bank adopted the provisions of SFAS No. 121 on January 1, 1996, and the
adoption of this Statement did not have a material effect on the Bank's
financial position or results of operations.
MORTGAGE SERVICING RIGHTS. In May 1995, the FASB issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS No. 122"). SFAS No. 122 is effective for years beginning after
December 15, 1995. Earlier application is permitted. The Statement will require,
among other things, the Bank to capitalize the estimated fair value of servicing
rights on loans originated for sale, and amortize such amount over the estimated
servicing life of the loan. The Bank adopted the provisions of SFAS No. 122
during the first quarter of fiscal year 1996, and the adoption of this Statement
did not have a material effect on the Bank's financial position or results of
operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION. In November 1995, the FASB issued
Statement of Financial Accounting Standards No. 123 "Accounting for Awards of
Stock-Based Compensation to Employees" ("SFAS No. 123"). SFAS No. 123 is
effective for years beginning after December 15, 1995. Earlier application is
permitted. The Statement defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for an employee stock option or similar
equity instrument. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("Opinion 25"). Under the fair value based method, compensation cost
is measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. Most fixed stock
option plans -- the most common type of stock compensation plan -- have no
intrinsic value at grant date, and as such, under Opinion 25 no compensation
cost is recognized. Compensation cost is recognized for other types of stock
based compensation plans under Opinion 25, including plans with variable,
usually performance-based, features. This Statement requires that an employer's
financial statements include certain fair value disclosures about stock-based
employee compensation arrangements regardless of the method used to account for
them. The Bank adopted the provisions of SFAS No. 123 during the first quarter
of fiscal year 1996 and utilizes the intrinsic value based method. As such, the
adoption of this Statement did not have a material effect on the Bank's
financial position or results of operations.
36
<PAGE>
BUSINESS OF THE COMPANY
The Company was organized at the direction of the Board of Directors of
Westwood Homestead for the purpose of becoming a holding company to own all of
the outstanding capital stock of the Bank. Upon consummation of the Conversion,
the Bank will become a wholly owned subsidiary of the Company. For additional
information, see "Westwood Homestead Financial Corporation."
The Company currently is not an operating company. Following the
Conversion, the Company will be primarily engaged in the business of directing,
planning and coordinating the business activities of the Bank. In the future,
the Company may become an operating company or acquire or organize other
operating subsidiaries, including other financial institutions. Management also
expects to explore opportunities for acquiring other financial institutions in
the Bank's market area, and intends to pursue such acquisitions as an integral
part of the Bank's strategic growth plans. However, there are no specific
agreements or understandings for an expansion of the Company's operations at
this time, and there can be no assurance that the Bank will be successful in
implementing its strategic growth plan. Initially, the Company will not
maintain offices separate from those of the Bank or employ any persons other
than its officers, who will not be separately compensated for such service.
BUSINESS OF THE BANK
GENERAL
Westwood Homestead traces its origin to 1883, when its predecessor was
formed as a mutual savings institution under the laws of the State of Ohio under
the name of The Westwood Homestead Co. The Bank conducts its business from its
main office in the community of Westwood in Cincinnati, Ohio, and from its
branch facility located in the Mount Adams section of Cincinnati, Ohio which
opened in June 1996. The Bank has occupied its main office since 1922. In
1993, the Bank converted from an Ohio chartered mutual savings and loan
association to an Ohio chartered mutual savings bank and in connection therewith
adopted the name of The Westwood Homestead Savings Bank. At March 31, 1996, the
Bank had approximately $97.9 million in assets, $83.0 million in deposits and
$14.4 million in retained income.
The Bank derives its income principally from interest earned on loans and,
to a lesser extent, investment securities. The Bank's principal expenses are
interest expense on deposits and noninterest expenses such as salary and
employee benefits, deposit insurance premiums, and other expenses such as
occupancy and data processing. Funds for these activities are provided
primarily by deposits, repayments of outstanding loans, maturing investments and
operating revenues.
MARKET AREA
The Bank considers its primary market area to consist of a 35 mile radius
around the Bank's facility, which includes the counties of Hamilton, Butler,
Warren and Clermont in Ohio; Boone, Kenton and Campbell in Kentucky; and
Dearborn in Indiana. Management believes that most of the Bank's depositors and
borrowers are residents of these counties. The community of Westwood is located
in Hamilton County and is approximately 10 miles northwest of Cincinnati's
central business district. Based upon the 1990 population census, the greater
Cincinnati area had a population of approximately 1,744,000 and approximately
866,500 persons lived in Hamilton County.
The Cincinnati area, which includes Hamilton County, has a stable economic
base supported by a variety of industries and employment sectors. Cincinnati is
the second largest metropolitan area in the state of Ohio, and is the
headquarters for many Fortune 500 companies, including Procter and Gamble, E.W.
Scripps, Federated Department Stores, and Cincinnati Milacron, and many other
Fortune 500 companies have also established operations in Cincinnati, including
Ford Motor Corp. and General Electric. In addition, Toyota is expected to build
its North
37
<PAGE>
American Headquarters in Boone County, which is part of the Bank's
market area, by the year 2000. The unemployment rate in Hamilton County as of
June 1995 was 4.1% as compared to 4.6% for the State of Ohio and 5.8% for the
United States.
LENDING ACTIVITIES
GENERAL. Westwood Homestead's primary lending activity is the origination
of conventional mortgage loans for the purpose of purchasing or refinancing one-
to four-family residential properties in its primary market area. In addition
to one- to four-family lending the Bank has historically originated multi-family
residential loans, non-residential real estate loans, and a minor amount of
residential construction loans and non-mortgage loans. In recent years, the
Bank has purchased participation interests in loans secured by multi-family and
non-residential real estate located in the Bank's market area. Management plans
to expand Westwood Homestead's consumer lending activities with a portion of the
proceeds from the Conversion. See "Use of Proceeds."
At March 31, 1996, the maximum amount that the Bank could have loaned to
any one borrower was $2.16 million. At such date, the largest aggregate amount
of loans that the Bank had outstanding to any one borrower or group of borrowers
was approximately $2.03 million, which was a loan secured by a 72 unit apartment
building located in the Bank's primary market area. At March 31, 1996 this loan
was performing according to its terms.
38
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth selected data
relating to the composition of the Bank's loan portfolio by type of loan at the
dates indicated. At March 31, 1996, the Bank had no concentrations of loans
exceeding 10% of total loans that are not otherwise disclosed below.
<TABLE>
<CAPTION>
At December 31,
At March 31, -----------------------------------------------------
1996 1995 1994 1993
---------------- ---------------- ---------------- -----------------
Amount % Amount % Amount % Amount %
------- ------- ------- ------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN:
Real estate loans:
One- to four-family residential . . . . . . . . . $55,473 72.31% $55,629 73.56% $52,326 73.07% $ 45,354 70.24%
Multi-family residential. . . . . . . . . . . . . 10,903 14.21 10,989 14.53 9,440 13.18 10,402 16.11
Construction. . . . . . . . . . . . . . . . . . . 1,445 1.88 525 .69 1,779 2.49 1,670 2.59
Other residential and non-residential (1) . . . . 8,745 11.41 8,390 11.09 7,942 11.09 7,019 10.87
Consumer loans . . . . . . . . . . . . . . . . . . . 146 .19 95 .13 123 .17 121 .19
------- ------- ------- ------- ------- ------- -------- -------
Total . . . . . . . . . . . . . . . . . . . . . 76,712 100.00% 75,628 100.00% 71,610 100.00% 64,566 100.00%
------- ------- ------- -------
------- ------- ------- -------
Less:
Loans in process. . . . . . . . . . . . . . . . . 1,111 437 1,198 1,145
Deferred loan fees. . . . . . . . . . . . . . . . 150 147 163 183
Allowance for loan losses . . . . . . . . . . . . 117 102 64 33
------- ------- ------- --------
Total. . . . . . . . . . . . . . . . . . . . . $75,334 $74,942 $70,185 $63,205
------- ------- ------- --------
------- ------- ------- --------
</TABLE>
- ----------
(1) Includes home equity loans.
39
<PAGE>
LOAN MATURITY SCHEDULE
The following table sets forth certain information at March 31, 1996
regarding the dollar amount of loans maturing in the Bank's portfolio based
on their contractual terms to maturity, including scheduled repayments of
principal. The table does not include any estimate of prepayments which
significantly shorten the average life of all mortgage loans and may cause
the Bank's repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
Due after Due after Due after Due after
1 through 3 through 5 through 10 through Due after 20
Due by 3 years after 5 years after 10 years after 20 years after years after
March 31, March 31, March 31, March 31, March 31, March 31,
1997 1996 1996 1996 1996 1996 Total
--------- ------------- ------------- -------------- -------------- ------------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
One- to four-family residential. . . $ 15 $153 $ 408 $5,880 $30,068 $18,949 $55,473
Multi-family and non-residential . . 432 204 802 1,313 14,902 1,995 19,648
Construction . . . . . . . . . . . . -- -- -- -- 1,445 -- 1,445
Consumer . . . . . . . . . . . . . . 94 19 33 -- -- -- 146
------ ---- ------ ------ ------- ------- -------
Total . . . . . . . . . . . . . $541 $376 $1,243 $7,193 $46,415 $20,944 $76,712
------ ---- ------ ------ ------- ------- -------
------ ---- ------ ------ ------- ------- -------
</TABLE>
The next table sets forth at March 31, 1996, the dollar amount of all loans
due one year or more after March 31, 1996 which have predetermined interest
rates and have floating or adjustable interest rates.
Predetermined Floating or
Rate Adjustable Rates
------------- ----------------
(In thousands)
One- to four-family residential . . . . . . . $45,907 $ 9,551
Multi-family and non-residential. . . . . . . 6,832 12,384
Construction. . . . . . . . . . . . . . . . . 1,445 --
Consumer. . . . . . . . . . . . . . . . . . . 52 --
------- -------
Total. . . . . . . . . . . . . . . . . . $54,236 $21,935
------- -------
------- -------
40
<PAGE>
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. In
addition, the Bank's mortgage loans generally give Westwood Homestead the right
to declare a loan due and payable in the event, among other things, that a
borrower sells the real property subject to the mortgage and the loan is not
repaid.
ONE- TO FOUR-FAMILY REAL ESTATE LOANS. The primary emphasis of the Bank's
lending activity is the origination of loans secured by first mortgages on one-
to four-family residential properties. At March 31, 1996, $55.5 million, or
72.3%, of the Bank's gross loan portfolio consisted of loans secured by one- to
four-family residential real properties primarily located in the Bank's market
area.
The Bank originates both fixed rate and adjustable rate mortgage loans
("ARMs"). The Bank generally offers fixed rate mortgage loans with terms of 15
or 30 years. Adjustable rate loans are originated for terms of up to 30 years.
Currently, ARM loans offered by the Bank have six month, one year, or three year
adjustment terms that are indexed to the respective constant maturity treasury
yields on U.S. securities, with a margin ranging from 3 to 4 percentage points.
All of the Bank's ARMs have minimum rates, which are currently between 6% and
7%. The Bank's ARM products with six month adjustment periods are subject to
0.75% adjustment caps per six month period with 5% or 6% lifetime adjustment
limits. All other ARM loans are subject to 2% adjustment caps with 6% lifetime
adjustment limits. At March 31, 1996, approximately 83% of the Bank's one- to
four-family mortgage loans were fixed rate loans and approximately 17% were
ARMs.
Prior to 1994 the Bank's lending policies generally limited the maximum
loan-to-value ratio on one- to four-family mortgage loans to 80% of the lesser
of the appraised value or the purchase price of the property. As such, the
amount of the Bank's one- to four-family mortgage loans having loan-to-value
ratios in excess of 80% were negligible prior to 1994. In early 1994, the Bank
began to offer one- to four-family mortgage loans at loan to value ratios above
80%, and at March 31, 1996, approximately 5% of the Bank's one- to four-family
mortgage loans held loan to value ratios between 80% and 95%. Private mortgage
insurance or additional collateral is generally required for mortgage loans with
loan to value ratios in excess of 80%, except for loans originated under the
Bank's first time home buyer lending program.
In December 1995, the Bank began offering, on a limited basis, one- to
four-family mortgage loans to qualified borrowers with loan-to-value ratios of
100%. The Bank will loan the borrower 80% of the lesser of the appraised value
or purchase price of the property as a first mortgage, and up to the additional
20% needed to purchase the property as a second mortgage. The interest charged
under the second mortgage loan is a fixed rate, which is currently 12.4%.
Private mortgage insurance is not required for this type of mortgage loan. The
Board of Directors has authorized the Bank to lend up to $1.0 million of these
second mortgage loans, which would allow the Bank to lend up to $5.0 million of
mortgages with combined loan-to-value ratios of 100%. At March 31, 1996, the
Bank had eight of these loans outstanding, with an aggregate balance of first
mortgages of $731,000 and an aggregate balance of second mortgages of
$163,000. In addition, a 2% loan loss reserve is established on the second
mortgage.
The retention of ARMs in the portfolio helps reduce Westwood Homestead's
exposure to increases in interest rates. However, there are unquantifiable
credit risks resulting from potential increased costs to the borrower as a
result of repricing of ARMs. It is possible that during periods of rising
interest rates, the risk of default on ARMs may increase due to the upward
adjustment of interest costs to the borrower. Although ARMs allow Westwood
Homestead to increase the sensitivity of its asset base to changes in interest
rates, the extent of this interest sensitivity is limited by the periodic and
lifetime interest rate ceiling contained in ARM contracts. Accordingly, there
can be no assurance that yields on Westwood Homestead's ARMs will adjust
sufficiently to compensate for increases in its cost of funds.
MULTI-FAMILY AND NON-RESIDENTIAL REAL ESTATE LOANS. The Bank has in the
past been active in the origination of loans secured by non-residential real
estate and multi-family properties. At March 31, 1996, multi-family and non-
residential real estate loans totaled $10.9 million and $8.7 million,
respectively, and represented 14.2%
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<PAGE>
and 11.4%, respectively, of the Bank's gross loan portfolio. Some of these
loans have been participation interests with other financial institutions on
loans to builders of multi-family properties located within the Bank's market
area. However, originations of loans secured by multi-family and
non-residential real estate represent a relatively insignificant part of
current originations, and the Bank does not intend to actively promote such
originations in future periods.
Multi-family and non-residential real estate loans are made in amounts of
up to 75% of the appraised value of the property and may be on a fixed or
adjustable rate basis with fixed rate loans underwritten for terms of up to 20
years and amortization schedules of up to 30 years. A majority of the loans
have adjustable rates of interest. Prior to committing to make a multi-family
or non-residential real estate loan, the Bank requires that the prospective
borrower provide a cash flow statement indicating sufficient cash flow from the
property to service the loan. The Bank reviews any tenant leases and requires
that the payments under such leases be assigned to the Bank. The Bank follows
strict underwriting guidelines before originating this type of loan, and the
Bank does not originate such loans beyond its normal lending territory.
The Bank's multi-family real estate loans consist primarily of loans
secured by apartment buildings which are primarily located in the Bank's market
area. Generally, these apartment buildings are small with an average of 12 to
24 units. However, occasionally, the loans are secured by larger developments.
The Bank's largest multi-family real estate loan amounted to $2.03 million at
March 31, 1996 and was secured by a 72 unit apartment complex. The Bank's
second largest multi-family real estate loan amounted to $1.4 million at March
31, 1996 and was secured by a 48 unit apartment building. Both of these loans
are located in the Bank's primary lending area and were performing according to
their terms at March 31, 1996.
The Bank's non-residential real estate portfolio consists of loans secured
by medical office buildings, office condominiums, retail properties and
commercial offices. The Bank's largest non-residential real estate loan is
secured by an orthopedic medical office and rehabilitation center located in
Blue Ash, Ohio. Such loan had a balance of $803,000 at March 31, 1996. The
Bank's second largest non-residential real estate loan amounted to $698,000 at
March 31, 1996 and was secured by an executive office building. Both of these
loans are located in the Bank's market area and were performing according to
their terms at March 31, 1996.
Multi-family and non-residential real estate lending entails significant
additional risks as compared to one-to four-family residential lending. Such
loans typically involve large loans to single borrowers or related borrowers,
though the average size of the Bank's multi-family and non-residential real
estate loans has declined significantly in recent years. The Bank's six largest
multi-family and non-residential loans at March 31, 1996 ranged from $720,000 to
$2.0 million. At March 31, 1996, the average size of the Bank's multi-family
and non-residential real estate loans was $147,000 as compared to the average
size of residential real estate loans which was $55,000. Such loans also
involve a greater repayment risk as repayment is typically dependent on the
successful operation of the project such that the income generated by the
project is sufficient to cover operating expenses and debt service, and these
risks can be significantly affected by the supply and demand conditions in the
market for non-residential property and multi-family residential units. In
addition, non-residential real estate is more likely to be subject to some form
of environmental contamination. The interest rates charged by the Bank on
multi-family and non-residential loans it originates are generally higher than
the rates charged on its one-to four-family real estate loans and, therefore,
reflect a premium to compensate the Bank for these additional risks. To
minimize the additional risks associated with this type of lending, the Bank
generally limits itself to loans secured by properties located in the Bank's
market area and follows strict underwriting guidelines before originating these
types of loans.
CONSTRUCTION LOANS. Westwood Homestead engages on a limited basis in
construction lending involving loans to qualified borrowers generally for
construction of one- to four-family or multi-family residential properties.
Such loans convert to permanent financing upon completion of construction.
These properties are primarily located in the Bank's market area. At March 31,
1996, the Bank's loan portfolio included $1.4 million of loans secured by
properties under construction. All construction loans are secured by a first
lien on the property under
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<PAGE>
construction. Loan proceeds are disbursed as construction progresses and as
inspections warrant. Construction/permanent loans may have either an
adjustable or fixed rate and are underwritten in accordance with the same
terms and requirements as the Bank's permanent mortgages. Interest that has
accrued during the construction phase is due monthly. Monthly principal and
interest payments commence when the loan is converted to permanent financing.
Borrowers must satisfy all credit requirements which would apply to the
Bank's permanent mortgage loan financing for the subject property.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with collateral having a value which is insufficient to assure full repayment.
The Bank has sought to minimize this risk by limiting construction lending to
qualified borrowers (I.E., borrowers who satisfy all credit requirements and
whose loans satisfy all other underwriting standards which would apply to the
Bank's permanent mortgage loan financing for the subject property) in the Bank's
market area.
CONSUMER LOANS. The consumer loans currently originated by the Bank
primarily include passbook loans. The Bank makes passbook account loans for
terms of up to one year, securing the loan for up to 90% of the balance in the
passbook account or certificate of deposit account. The interest rate charged
on these loans is normally 1% above the prime rate as reported by THE WALL
STREET JOURNAL and the account must be pledged as collateral to secure the loan.
At March 31, 1996, the Bank's consumer loans totaled $146,000, or .19%, of the
Bank's gross loan portfolio.
Management intends to apply approximately $1.0 million of the net
conversion proceeds to expand consumer lending, including the origination of
automobile, home improvement and small unsecured loans. The Bank has recently
hired a full time loan originator with considerable experience in the consumer
lending area to assume responsibility for the Bank's consumer lending program.
Management expects that consumer loans will represent between 1% and 2% of the
Bank's loan portfolio within one year to 18 months following the Conversion,
when this program is fully implemented.
Consumer loans tend to be originated at higher interest rates than mortgage
loans and for shorter terms. However, consumer loans generally involve more
risk than one- to four-family residential real estate loans. Repossessed
collateral for a defaulted loan may not provide an adequate source of repayment
of the outstanding loan balance as a result of damage, loss or depreciation, and
the remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, loan collections are dependent on
the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Further, the application of various state and federal laws, including federal
and state bankruptcy and insolvency law, may limit the amount which may be
recovered. In underwriting consumer loans, the Bank considers the borrower's
credit history, an analysis of the borrower's income and ability to repay the
loan, and the value of the collateral.
LOAN SOLICITATION AND PROCESSING. Loan originations are derived from a
number of sources, including walk-in customers and referrals, realtors,
depositors and previous borrowers. In addition, in the past the Bank has
employed the services of a local Cincinnati group known as Diversified
Solutions, Inc., which is a minority owned company, to help market the Bank's
loan products to low-to-moderate income people in the Bank's market area. It is
management's intention to aggressively grow the mortgage loan portfolio using
outside commissioned originators. Recently, the Bank has added two loan
originators as employees of the Bank. The Bank encounters substantial lending
competition, and as such, there can be no assurance that this objective will be
achieved.
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<PAGE>
Upon receipt of a loan application from a prospective borrower, a credit
report and employment and other verifications are ordered to verify specific
information relating to the loan applicant's employment, income and credit
standing. An appraisal of the real estate intended to secure the proposed loan
is undertaken by an appraiser approved by the Bank.
All loans above $250,000 are required to be presented to the Board of
Directors for final approval. One- to four-family and consumer loans below
$175,000 and $125,000 may be approved by the President and Vice President of the
Bank, respectively. Together, they can approve mortgage loans up to $250,000.
Non-residential real estate loans must be approved by the Board of Directors.
Loan applicants are promptly notified of the decision of the Bank. Interest
rates on approved loans are subject to change if the loan is not funded within
45 days after application, although the Bank will commit to provide the
financing for a longer period depending on the circumstances causing the delay.
It has been management's experience that substantially all approved loans are
funded. Fire and casualty insurance, as well as flood insurance, are required
for all loans as appropriate, and a title opinion is required for most loans
secured by real estate.
ORIGINATIONS AND SALES OF LOANS. The Bank's loans are primarily originated
by commissioned loan originators and salaried officers of the Bank. The
following table sets forth certain information with respect to originations and
sales (there were no purchases) of loans during the periods indicated. The Bank
does not anticipate being active in purchasing loans from others except perhaps
on a case by case basis provided such loans are in conformance with the Bank's
underwriting standards. The Bank anticipates increasing volume through use of
outside commissioned loan originators.
Three Months Ended
March 31, Year Ended December 31,
------------------- -----------------------
1996 1995 1995 1994 1993
-------- ------- ------- ------ ------
(In thousands)
Loans originated:
Real estate loans:
One- to four-family. . . . . $4,053 $416 $11,026 $10,074 $14,930
Multi-family residential . . -- -- 1,184 4,845 2,478
Construction . . . . . . . . 920 -- 525 2,352 1,399
Non-residential. . . . . . . 233 -- 818 1,635 2,883
------ ---- ------- ------- -------
Total loans originated. . $5,206 $416 $13,553 $18,906 $21,690
------ ---- ------- ------- -------
------ ---- ------- ------- -------
Loans sold . . . . . . . . . . . $1,227 $ -- $ 200 $ -- $ --
------ ---- ------- ------- -------
------ ---- ------- ------- -------
The Bank has recently begun originating fixed rate residential mortgage
loans for sale in the secondary market to the Federal Home Loan Mortgage
Corporation ("FHLMC"). The first such sale occurred in November 1995. As part
of its strategy of selling fixed-rate residential mortgages in the secondary
market, the Bank classified a portion of existing fixed rate loans as available
for sale. Westwood Homestead does not retain any participation interest in any
loans which are sold, but in most cases the Bank retains servicing rights on the
loans sold at rates from 1/4 to 3/8 of 1% of the loan amount.
February 1995 marked a dramatic change in management of the Bank with the
employment of Michael P. Brennan as President and Chief Executive Officer. Mr.
Brennan formalized the management team with officer positions in lending,
deposits and accounting. On March 27, 1995 the Board of Directors affirmed its
intention to operate as a traditional thrift and re-emphasize one- to four-
family residential lending using local deposits. The Bank is expanding its
deposit and lending products to better meet the needs of the community.
44
<PAGE>
INTEREST RATES AND LOAN FEES. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area. Mortgage loan rates reflect factors such as general interest rate
levels, the supply of money available to the savings industry and the demand for
such loans. These factors are in turn affected by general economic conditions,
the monetary policies of the Federal government, including the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the
general supply of money in the economy, tax policies and governmental budget
matters.
In addition to the interest earned on loans, the Bank receives fees in
connection with originations, late payments and fees for miscellaneous services
related to its loans. The Bank generally charges an origination fee for its
adjustable and fixed-rate nonowner-occupied and owner-occupied mortgage loans.
However, due to current market conditions, no origination fee is currently
charged for owner-occupied residential mortgage loans.
ASSET CLASSIFICATION AND ALLOWANCE FOR LOAN LOSSES. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is
classified loss, the insured institution must either establish specified
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount. Currently, general loss allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses do not qualify as regulatory
capital. See "Regulation -- Regulation of the Bank -- Regulatory Capital
Requirements." FDIC examiners may disagree with the insured institution's
classifications and amounts reserved. If an institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
FDIC. The Board of Directors of the Bank reviews assets, valuation allowances
and all classified assets on a quarterly basis and at the end of each quarter
prepares an asset classification listing in conformity with the FDIC
regulations.
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate allowance for loan losses based on, among other things, the Bank's and
the industry's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality. The
Bank increases its allowance for loan losses by charging provisions for loan
losses against the Bank's income. Management anticipates that the Bank's
provisions for loan losses will increase in the future as it implements the
Board's strategy of continuing existing lines of business while gradually
expanding one- to four-family residential non-conforming loans to secondary
market guidelines and consumer lending.
General allowances are made pursuant to management's assessment of risk in
the Bank's loan portfolio as a whole. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
The Bank also establishes a 1% to 2% allowance on all loans originated under a
special loan program for first time home buyers having a loan to value ratio
greater than 95% or that pose greater credit risk. Management also reviews
individual loans for which full collectibility may not be reasonably assured and
evaluates among other things the net realizable value of the underlying
collateral. General allowances are included in calculating the Bank's risk-
based capital, while specific allowances are not so included. Management
continues to actively monitor the Bank's asset quality and will charge off loans
against the allowance for loan losses when appropriate or to provide specific
loss reserves when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowance for
loan losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.
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<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated. For information relating to factors
influencing management's judgment in making additions to the allowance for loan
losses for the periods below, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Comparison of Operating Results
for the Three Months Ended March 31, 1996 and 1995 -- Provision for Loan
Losses", "-- Comparison of Operating Results for the Years Ended December 31,
1995 and 1994 -- Provision for Loan Losses" and " -- Comparison of Operating
Results for the Years Ended December 31, 1994 and 1993 -- Provision for Loan
Losses."
Three Months Ended
March 31, Year Ended December 31,
------------------- -----------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Balance at beginning of period . $101,709 $63,833 $63,833 $32,520 $19,423
Loans charged off. . . . . . . . -- -- -- (167) --
Recoveries - real estate mortgage -
residential. . . . . . . . . . -- -- -- 700 1,097
Provision for loan losses. . . . 15,087 -- 37,876 30,780 12,000
-------- ------- -------- ------- -------
Balance at end of period . . . . $116,796 $63,833 $101,709 $63,833 $32,520
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
Ratio of net charge-offs to
average loans outstanding
during the period . . . . . . . --% --% --% --% --%
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
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<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses
in any category. The Bank increased its allowance for loan losses during
1994 as a result of comments received by regulators following a routine
examination of the Bank. The Bank increased its provision during 1995 as a
result of (i) changes in general economic conditions (i.e., increases in the
level of consumer debt and the rate of delinquencies on such debt) affecting
both the Bank and its industry peers in Ohio and nationally and (ii) the
Bank's origination of a residential construction loan during this period with
greater risk characteristics than those of the rest of its construction loan
portfolio, including a loan-to-value ratio in excess of 80%. This loan has
at all times performed in accordance with its terms. The Bank further
increased its allowance during 1995 to more closely approximate the
allowances for loan losses established by members of its peer group located
in Ohio, despite the fact that the Bank did not have a history of loan
losses. The Bank increased its allowance for loan losses during the first
quarter of 1996 primarily due to the initiation of a program which allows for
the origination of loans with loan-to-value ratios of 100%. For more
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Comparison of Operating Results for the Three
Months Ended March 31, 1996 and 1995 -- Provision for Loan Losses", "--
Comparison of Operating Results for the Years Ended December 31, 1995 and
1994 -- Provision for Loan Losses" and " -- Comparison of Operating Results
for the Years Ended December 31, 1994 and 1993 -- Provision for Loan Losses."
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
At March 31, 1996 1995 1994 1993
--------------------- ---------------------- --------------------- -----------------------
Percent of Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each Loans in Each
Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------- ------------ -------- ------------- ------- ------------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family . . . . . . . $62,139 72.31% $ 50,102 73.56% $26,172 73.07% $12,025 70.24%
Multi-family and non-residential. 54,657 25.62 51,607 25.62 37,661 24.27 20,495 26.98
Construction. . . . . . . . . . . -- 1.88 -- .69 -- 2.49 -- 2.59
Consumer . . . . . . . . . . . . -- .19 -- .13 -- .17 -- .19
-------- ------- -------- ------ ------- ------ ------- ------
Total allowance for loan losses $116,796 100.00% $101,709 100.00% $63,833 100.00% $32,520 100.00%
-------- ------- -------- ------ ------- ------ ------- ------
-------- ------- -------- ------ ------- ------ ------- ------
</TABLE>
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<PAGE>
NON-PERFORMING LOANS AND OTHER PROBLEM ASSETS. Management reviews the
Bank's loans on a regular basis. Loans are placed on a non-accrual status when
the loan is past due in excess of 90 days and collection of principal and
interest is doubtful.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. The Bank generally tries to
sell the property at a price no less than its net book value, however, it will
consider slight discounts to the appraised value to expedite the return of the
funds to an earning status. When such property is acquired, it is recorded at
its fair value less estimated costs of sale. Any required write-down of the
loan to its appraised fair market value upon foreclosure is charged against the
allowance for loan losses. Subsequent to foreclosure, in accordance with
generally accepted accounting principles, a valuation allowance is established
if the carrying value of the property exceeds its fair value net of related
selling expenses.
The following table sets forth information with respect to the Bank's non-
performing assets at the dates indicated. No loans were recorded as
restructured loans within the meaning of SFAS No. 15 at the dates indicated. In
addition, the Bank had no real estate acquired as a result of foreclosure.
At At December 31,
March 31, ----------------------
1996 1995 1994 1993
--------- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a
nonaccrual basis:
Real estate - Residential . . . $ -- $ -- $ -- $109
Commercial. . . . . . . . . . . -- -- -- --
Consumer. . . . . . . . . . . . -- -- -- --
---- ---- ---- ----
Total. . . . . . . . . . . . $ -- $ -- $ -- $109
---- ---- ---- ----
---- ---- ---- ----
Accruing loans which are
contractually past due 90 days
or more:
Real estate - Residential . . . $ 14 $ -- $ 24 $ --
Commercial. . . . . . . . . . . -- -- -- --
Consumer. . . . . . . . . . . . -- -- -- --
---- ---- ---- ----
Total. . . . . . . . . . . . $ 14 $ -- $ 24 $ --
---- ---- ---- ----
---- ---- ---- ----
Total nonperforming loans. . $ 14 $ -- $ 24 $109
---- ---- ---- ----
---- ---- ---- ----
Percentage of total loans. . . . . .02% --% .03% .17%
---- ---- ---- ----
---- ---- ---- ----
Other non-performing assets. . . . $ -- $ -- $ -- $ --
---- ---- ---- ----
---- ---- ---- ----
Loans modified in troubled debt
restructurings . . . . . . . . . $ -- $ -- $ -- $ --
---- ---- ---- ----
---- ---- ---- ----
At March 31, 1996, the Bank did not have any loans which are not currently
classified as non-accrual, 90 days past due or restructured but where known
information about possible credit problems of borrowers caused management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms and may result in disclosure as non-accrual, 90 days past
due or restructured. Also, the Bank had no impaired loans under SFAS 114/118.
As such, the impact of adopting these statements was not significant to the
Bank.
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<PAGE>
INVESTMENT ACTIVITIES
Westwood Homestead is permitted to make certain investments, including
investments in securities issued by various federal agencies and state and
municipal governments, deposits at the FHLB of Cincinnati, certificates of
deposits in federally insured institutions, certain bankers' acceptances and
federal funds. The Bank may also invest, subject to certain limitations, in
commercial paper having one of the two highest investment ratings of a
nationally recognized credit rating agency, and certain other types of corporate
debt securities and mutual funds. Federal regulations require the Bank to
maintain an investment in FHLB of Cincinnati stock and a minimum amount of
liquid assets which may be invested in cash and specified securities. From time
to time, the FDIC adjusts the percentage of liquid assets which savings
institutions are required to maintain. For additional information, see
"Regulation -- Regulation of the Bank -- Liquidity Requirements."
The Bank invests in investment securities in order to diversify its assets,
manage cash flow, obtain yield and maintain the minimum levels of liquid assets
required by regulatory authorities. The investment activities of the Bank
consist primarily of investments in mortgage-backed and related securities and
other investment securities, consisting primarily of securities issued or
guaranteed by the U.S. government or agencies thereof.
The Board of Directors is responsible for approving the Investment Policy
of the Bank and delegates to the Asset Liability Committee the responsibility
for investment management of the portfolio. Day to day investment portfolio
actively is conducted by the chief financial officer with approval by the chief
executive officer. Under recent prior management of the Bank, the Bank's
investment policy was to purchase mortgage-backed and related securities as a
means of deploying excess liquidity. The Bank also accepted brokered CDs and
out of state jumbo CDs and with such funds purchased mortgage-backed securities
and collateralized mortgage obligations ("CMOs"). As such deposits were
withdrawn, they were replaced with FHLB advances. The current investment
strategy of the Bank reflects a shift of prior policy. During calendar year
1995, approximately $20.4 million of "available for sale" mortgage-backed
securities that were purchased with funds from brokered CDs were sold, and the
Bank does not intend to fund future activities with brokered CDs or out of state
jumbo CDs.
MORTGAGE-RELATED SECURITIES. The Bank invests in mortgage-related
securities such as CMOs, primarily as an alternative to mortgage loans or
mortgage-backed securities. CMOs are typically issued by a special purpose
entity, which may be organized in a variety of legal forms, such as a trust, a
corporation or a partnership. The entity aggregates pools of pass-through
securities, which are used to collateralize the mortgage-related securities.
Once combined, the cash flows can be divided into "tranches" or "classes" of
individual securities, thereby creating more predictable average lives for each
security than the underlying pass-through pools. Accordingly, under this
security structure, all principal paydowns from the various mortgage pools are
allocated to a mortgage-related securities' class or classes structured to have
priority until it has been paid off. These securities generally are issued as
either fixed interest rates or adjustable interest rates.
Some mortgage-related instruments are like traditional debt instruments due
to their stated principal amounts and traditionally defined interest rate terms.
Purchasers of certain other mortgage-related securities instruments are entitled
to the excess, if any, of the issuer's cash flows. The Bank does not purchase
or own any residual interests in mortgage-related securities.
Prepayments in the Bank's mortgage-related securities portfolio may be
affected by declining and rising interest rate environments. In a low and
declining interest rate environment, prepayments would be expected to increase.
In such an event, the Bank's CMOs purchased at a premium price could result in
actual yields to the Bank that are lower than anticipated yields. The Bank's
floating rate CMOs would be expected to generate lower yields as a result of the
effect of falling interest rates on the indexes for determining payment of
interest. Additionally, the increased principal payments received may be
subject to reinvestment at lower rates. Conversely, in a period of rising
rates, prepayments would be expected to decrease, which would make less
principal available for reinvestment at higher rates. In a rising rate
environment, floating rate instruments would generate higher yields to
49
<PAGE>
the extent that the indexes for determining payment of interest did not
exceed the life-time interest rate caps. Such prepayment may subject the
Bank's CMOs to yield and price volatility.
The Bank's CMOs are all monthly adjustable securities indexed primarily to
the 11th district cost of funds ("COFI"). This lagging index has a close
resemblance to the overall cost of funds of financial institutions and has
historically provided attractive yields. Because of its lagging effect, COFI
tends to be more attractive during periods of falling interest rates. The
remaining securities are indexed to the 10 year treasury ("CMT"), a long term
index that tends to be more attractive during periods of a steep yield curve.
At March 31, 1996, these CMOs had a market value of $12.3 million and
amortized cost of $12.6 million representing 12.6% of the Bank's total assets.
Although management believes this unrealized loss of $361,000, or 2.9%, to be
temporary, par value market prices are not anticipated until a period of falling
interest rates.
MORTGAGE-BACKED SECURITIES. The Bank also invests in traditional mortgage-
backed securities. Mortgage-backed securities represent a participation
interest in a pool of single-family or multi-family mortgages, the principal and
interest payments on which are passed from the mortgage originators through
intermediaries that pool and repackage the participation interest in the form of
securities to investors such as the Bank. Such intermediaries may include
quasi-governmental agencies such as FHLMC, FNMA and GNMA which guarantee the
payment of principal and interest to investors. Mortgage-backed securities
generally increase the quality of the Bank's assets by virtue of the guarantees
that back them, are more liquid than individual mortgage loans and may be used
to collaterize borrowings or other obligations of the Bank.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have similar maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable-
rate mortgage loans. Mortgage-backed securities generally are referred to as
mortgage participation certificates or pass-through certificates. As a result,
the interest rate risk characteristics of the underlying pool of mortgages,
I.E., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on
to the certificate holder. The life of a mortgage-backed pass-through security
is equal to the life of the underlying mortgages.
The actual maturity of a mortgage-backed security varies, depending on when
the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the mortgage-
backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated term of the securities using a
level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon rate, the age of the mortgages, the geographical location of the
underlying real estate collateralizing the mortgages and general levels of
market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the
coupon rate of the underlying mortgage significantly exceeds the prevailing
market interest rates offered for mortgage loans, refinancing generally
increases and accelerates the prepayment of the underlying mortgages.
Prepayment experience is more difficult to estimate for adjustable-rate
mortgage-backed securities.
The Bank's mortgage-backed securities portfolio consists primarily of
seasoned fixed-rate and adjustable-rate mortgage-backed securities insured or
guaranteed by FNMA, FHLMC or GNMA. At March 31, 1996, these securities had a
market value of $4.1 million and an amortized cost of $4.0, representing 4.2% of
the Bank's total assets. See Notes 2 and 3 to the Bank's financial statements
contained elsewhere herein.
50
<PAGE>
The following table sets forth the carrying value of the Bank's investments
at the dates indicated.
At At December 31,
March 31, ------------------------
1996 1995 1994 1993
--------- ---- ---- ----
(Dollars in thousands)
Securities available for sale (1):
U.S. government and agency securities. $ 988 $ 993 $ 1,886 $ --
Collateralized mortgage obligations. . 12,281 13,110 16,806 --
Mortgage-backed securities . . . . . . 4,077 4,270 15,754 --
Securities held to maturity (1):
U.S. government and agency securities. -- -- -- 2,003
Collateralized mortgage obligations. . -- -- -- 21,734
Mortgage-backed securities . . . . . . -- -- 4,375 22,866
------- ------- ------- -------
Total investment securities . . . . 17,346 18,373 38,821 46,603
Cash and cash equivalents . . . . . . . . 2,491 869 748 2,608
FHLB stock. . . . . . . . . . . . . . . . 905 890 845 799
------- ------- ------- -------
Total investments . . . . . . . . . $20,742 $20,132 $40,414 $50,010
------- ------- ------- -------
------- ------- ------- -------
- ----------------
(1) The Bank adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," on January 1, 1994. The adoption of SFAS No. 115
resulted in an after tax decrease to retained income of $204,000, $327,000
and $2.5 million as of March 31, 1996, December 31, 1995 and 1994,
respectively. For additional information, see Notes 2 and 3 to the Bank's
Financial Statements contained elsewhere herein.
51
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's investment securities at March
31, 1996.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Portfolio
---------------- ------------------ ----------------- ------------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities . . . . $ -- -- % $ 988 5.35% $ -- -- % $ -- -- % $ 988 $ 988 5.35%
Mortgage-backed securities -- 18 15.45 985 7.67 3,074 7.32 4,077 4,077 7.44
Collateralized mortgage
obligations. . . . -- -- -- 12,281 6.31 12,281 12,281 6.31
----- ------ ------ ------- ------- -------
Total. . . . . . . $ -- $1,006 $ 985 $15,355 $17,346 $17,346
----- ------ ------ ------- ------- -------
----- ------ ------ ------- ------- -------
</TABLE>
52
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, Westwood Homestead
derives funds primarily from loan principal repayments, maturing investment
securities, and interest payments. Loan repayments and interest payments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
DEPOSITS. Deposits are attracted principally from within the Bank's
primary market area through the offering of a variety of deposit instruments,
including passbook and statement accounts and certificates of deposit currently
ranging in term from 30 days to 5 years. The majority of deposits at the Bank
are CDs, which at March 31, 1996 represented 78.5% of total deposits. Westwood
Homestead has also received and accepted out of state CDs, which amounted to
$7.0 million, or 8.4%, of total deposits at March 31, 1996. In recent years the
Bank supplemented retail deposits with brokered deposits, and as the brokered
deposits were withdrawn such funds were replaced with FHLB advances. At March
31, 1996, however, most of the FHLB advances have been repaid and nearly all of
the brokered deposits have been withdrawn upon maturity. Deposit account terms
vary, principally on the basis of the minimum balance required, the time periods
the funds must remain on deposit and the interest rate. The Bank also offers
individual retirement accounts ("IRAs").
The Bank's policies are designed primarily to attract deposits from local
residents rather than to solicit deposits from areas outside its primary market.
The Bank attracts local deposits by offering a wide variety of accounts,
extended service hours and competitive interest rates and fees. Interest rates
paid, maturity terms, service fees and withdrawal penalties are established by
the Bank on a periodic basis. Determination of rates and terms are predicated
upon funds acquisition and liquidity requirements, rates paid by competitors,
growth goals and state and federal regulations.
In January 1996, the Bank introduced "Hassle Free Checking" and "No Hassle
Checking" to attract more deposit accounts. These products do not have a
minimum balance requirement, a monthly service charge or a per check charge.
Both of these products were designed to meet the needs of the community and, in
management's view, have made it easier for potential customers to establish a
banking relationship with Westwood Homestead.
Several years ago, when interest rates were significantly higher than at
present, the Bank initiated a 10 year certificate of deposit program. At March
31, 1996, such certificates of deposit represented $17.2 million, or
approximately 20.7%, of total deposits, with a 8.64% weighted average rate. In
addition, $11.9 million of these certificates of deposit have a weighted average
interest rate above 9.0%. Such certificates of deposit are, in large part,
responsible for the Bank's high costs of funds. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." These deposits
start to reach maturity beginning in late 1997 and continue to mature through
the end of 1999. Certificates of deposit in amounts of $100,000 or more
("Jumbos"), totaled $13.0 million, or 15.7%, of the Bank's total savings
portfolio at March 31, 1996. The majority of these Jumbos represent deposits by
individuals. This large amount of Jumbos as a percentage of total deposits
makes the Bank susceptible to large deposit withdrawals if one or more
depositors withdraw deposits from the Bank. Such withdrawals may adversely
affect the Bank's liquidity and funds available for lending if the Bank is
unable to obtain funds from alternative sources. For additional information
concerning maturing certificates of deposit and their effect on liquidity, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity."
53
<PAGE>
Savings deposits in the Bank as of March 31, 1996 were represented by the
various types of savings programs described below.
<TABLE>
<CAPTION>
Weighted
Average Minimum Minimum Percentage of
Yield Term Category Amount Balances Total Savings
- -------- ------- -------- ------- -------- -------------
(thousands)
<S> <C> <C> <C> <C> <C>
2.00% None Savings accounts $ 10 $ 3,783 4.56
1.95 None NOW accounts 300 1,444 1.74
- -- None NOW accounts, noninterest-bearing 500 193 .23
3.72 None Money market deposit accounts 1,000 12,462 15.01
Certificates of Deposit
-----------------------
5.79 12-month Fixed-term, fixed-rate 500 14,153 17.05
6.06 2 year Fixed-term, fixed-rate 500 8,693 10.48
5.33 3 year Fixed-term, fixed-rate 500 2,888 3.48
8.45 5 year and above Fixed-term, fixed-rate 500 12,362 14.89
7.13 22 month Fixed-term, fixed-rate 500 2,134 2.57
7.08 33 month Fixed-term, fixed-rate 500 2,797 3.37
5.44 182 days Fixed-term, fixed-rate 500 3,491 4.21
4.68 3-month Fixed-term, fixed-rate 500 762 .92
IRA Accounts
------------
5.78 1 year Fixed-term, fixed-rate 100 3,022 3.64
6.09 2 year Fixed-term, fixed-rate 100 1,656 2.00
5.90 3 year Fixed-term, fixed-rate 100 225 .27
7.00 4 year Fixed-term, fixed-rate 100 1 --
7.27 5 year Fixed-term, fixed-rate 100 1,621 1.95
9.17 10 year Fixed-term, fixed-rate 100 6,881 8.29
7.04 22-month Fixed-term, fixed-rate 100 617 .74
6.68 33-month Fixed-term, fixed-rate 100 3,819 4.60
------- ------
$83,004 100.00%
------- ------
------- ------
</TABLE>
54
<PAGE>
The following table sets forth, for the periods indicated, the average
balances and interest rates based on month-end balances for interest-bearing
demand deposits and time deposits.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------
1996 1995
----------------- -----------------
Average Average Average Average
Balance Rate Balance Rate
------- ------- ------- -------
<S> <C> <C> <C> <C>
Savings deposits . . . . . . $ 3,654 1.98% $ 3,568 1.98
NOW accounts . . . . . . . . 1,351 1.93 1,301 1.92%
Money market accounts. . . . 12,488 3.64 13,176 3.66
Noninterest-bearing
demand deposits. . . . . . 207 -- 106 --
Certificates of deposit. . . 64,614 6.64 72,660 6.17
---------- ----------
Total . . . . . . . . . $ 82,314 5.89 $ 90,811 5.57
---------- ----------
---------- ----------
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1995 1994 1993
----------------- ----------------- -----------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Savings deposits . . . . . . $ 3,608 1.98% $ 4,071 2.05% $ 3,950 3.06%
NOW accounts . . . . . . . . 1,349 1.93 1,455 1.99 1,469 2.74
Money market accounts. . . . 12,737 3.65 15,414 3.06 17,608 3.19
Noninterest-bearing
demand deposits. . . . . . 137 -- 56 -- 23 --
Certificates of deposit. . . 67,590 6.51 75,417 5.73 73,640 5.84
---------- ---------- ----------
Total . . . . . . . . . $ 85,421 5.80 $ 96,413 5.09 $ 96,690 5.20
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
55
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease)
Balance at from Balance at from
March 31, % of December 31, December 31, % of December 31,
1996 Deposits 1995 1995 Deposits 1994
----------- -------- ------------ ----------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings deposits . . . . $ 3,783 4.56% $ 163 $ 3,620 4.43% $ (63)
NOW. . . . . . . . . . . 1,637 1.97 (284) 1,921 2.35 417
Money market deposit . . 12,462 15.01 (234) 12,696 15.53 (818)
Certificates of deposit. 65,122 78.46 1,611 63,511 77.69 (10,314)
---------- ------ ---------- ---------- ------ ----------
Total . . . . . . . $ 83,004 100.00% $ 1,256 $ 81,748 100.00% $ (10,778)
---------- ------ ---------- ---------- ------ ----------
---------- ------ ---------- ---------- ------ ----------
<CAPTION>
Increase
(Decrease)
Balance at from Balance at
December 31, % of December 31, December 31, % of
1994 Deposits 1993 1993 Deposits
----------- -------- ------------ ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Savings deposits . . . . $ 3,683 3.98% $ (520) $ 4,203 4.21%
NOW. . . . . . . . . . . 1,504 1.62 (129) 1,633 1.63
Money market deposit . . 13,514 14.61 (3,760) 17,274 17.29
Certificates of deposit. 73,825 79.79 (2,960) 76,785 76.87
---------- ------ ---------- ---------- ------
Total . . . . . . . $ 92,526 100.00% $ (7,369) $ 99,895 100.00%
---------- ------ ---------- ---------- ------
---------- ------ ---------- ---------- ------
</TABLE>
56
<PAGE>
The following table sets forth the time deposits in the Bank classified by
nominal rates at the dates indicated.
<TABLE>
<CAPTION>
At At December 31,
March 31, ----------------------------------
1996 1995 1994 1993
--------- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
2.00 - 3.99% . . . . . $ -- $ -- $ 3,557 $ 13,982
4.00 - 5.99% . . . . . 31,425 26,913 43,688 36,951
6.00 - 7.99% . . . . . 20,285 22,250 10,820 7,853
8.00 - 9.99% . . . . . 13,412 14,348 15,760 17,492
10.00 - 11.99% . . . . . -- -- -- --
12.00 - 13.99% . . . . . -- -- -- 507
---------- ---------- ---------- ----------
$ 65,122 $ 63,511 $ 73,825 $ 76,785
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The following table sets forth the amount and maturities of time deposits
at March 31, 1996.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------------
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
- ---- -------- --------- --------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
4.00 - 5.99% . . . . . $ 23,870 $ 4,040 $ 2,025 $ 1,490 $ 31,425
6.00 - 7.99% . . . . . 9,306 4,994 329 5,656 20,285
8.00 - 9.99% . . . . . 112 7,350 2,450 3,500 13,412
---------- ---------- ---------- ---------- ----------
$ 33,288 $ 16,384 $ 4,804 $ 10,646 $ 65,122
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of March 31,
1996.
Certificates
Maturity Period of Deposits
--------------- -----------
(In thousands)
Three months or less. . . . . . . . $ 1,289
Over three through six months . . . 2,348
Over six through 12 months. . . . . 1,024
Over 12 months. . . . . . . . . . . 8,327
----------
Total . . . . . . . . . . . . . $ 12,988
----------
----------
57
<PAGE>
The following table sets forth the deposit activities of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
----------------------- ---------------------------------------
1996 1995 1995 1994 1993
-------- -------- ---------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits . . . . . . . . . . . $ 9,384 $ 9,538 $ 33,019 $ 35,045 $ 50,448
Withdrawals. . . . . . . . . . 9,336 13,695 48,764 47,309 44,334
---------- ---------- ---------- ---------- ----------
Net increase (decrease) before
interest credited. . . . . . 48 (4,157) (15,745) (12,264) 6,114
Interest credited. . . . . . . 1,208 1,245 4,967 4,895 5,010
---------- ---------- ---------- ---------- ----------
Net increase (decrease)
in deposits. . . . . . $ 1,256 $ (2,912) $ (10,778) $ (7,369) $ 11,124
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The large decrease in deposits during 1995 and 1994 was due to withdrawals
of large out of state certificates of deposit. For additional information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
BORROWINGS. Savings deposits historically have been the primary source of
funds for the Bank's lending and investment activities and for its general
business activities. The Bank is authorized, however, to use advances from the
FHLB of Cincinnati to supplement its supply of lendable funds, to meet deposit
withdrawal requirements, or to be used in connection with the FHLB's affordable
housing program. Westwood Homestead has a $10 million line of credit with the
FHLB of Cincinnati. Advances from the FHLB are secured by the Bank's one-to-
four-family mortgage loans. In addition, the Bank has agreements to purchase
federal funds from correspondent banks totaling $7.0 million, as needed. In
recent years, the Bank supplemented retail deposits with brokered deposits and
as the brokered deposits were withdrawn upon maturity such funds were replaced
with FHLB advances. At March 31, 1996, however, only $136,000 of FHLB advances
remained outstanding, down from $139,000 at December 31, 1995 and $5.3 million
at December 31, 1994.
The FHLB of Cincinnati functions as a central reserve bank providing credit
for savings institutions and certain other member financial institutions. As a
member, Westwood Homestead is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. See "Regulation -- Regulation of the
Bank -- Federal Home Loan Bank System."
58
<PAGE>
The following table sets forth certain information regarding the Bank's
federal funds purchased and FHLB advances at the dates and for the periods
indicated.
<TABLE>
<CAPTION>
At March 31, At December 31,
--------------------- ------------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Amounts outstanding at end of period:
Federal funds purchased . . . . . . . . . $ -- $ 3,600 $ -- $ 2,200 $ --
FHLB advances . . . . . . . . . . . . . . 136 6,246 139 5,349 --
Weighted average rate paid on:
Federal funds purchased . . . . . . . . . --% 6.22% -- 5.14% --
FHLB advances . . . . . . . . . . . . . . 8.17% 6.29% 8.17% 6.66% --
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
--------------------- ------------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
Federal funds purchased . . . . . . . . . $ -- $ 3,600 $ 3,600 $ 2,800 $ --
FHLB advances . . . . . . . . . . . . . . 138 6,900 7,700 5,350 --
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
--------------------- ------------------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Approximate average short-term borrowings
outstanding with respect to:
Federal funds purchased . . . . . . . . . $ -- $ 2,800 $ 1,600 $ 1,900 $ --
FHLB advances . . . . . . . . . . . . . . 137 6,200 3,600 3,700 --
Approximate weighted average rate paid on: (1)
Federal funds purchased . . . . . . . . . --% 5.95% 6.20% 4.95% --
FHLB advances . . . . . . . . . . . . . . 8.17% 6.32% 6.15% 4.85% --
</TABLE>
- ------------------------------
(1) Based on rates and amounts during periods borrowings were outstanding.
COMPETITION
The Bank experiences competition both in attracting and retaining savings
deposits and in the making of mortgage and other loans. Direct competition for
savings deposits and loans in Hamilton County and the other counties in the
Bank's market area comes from other savings institutions, credit unions,
commercial banks, money market mutual funds, brokerage firms and insurance
companies. As of June 30, 1994 there were 85 thrift branches and 259 branches
of commercial banks within Hamilton County. The Bank's primary competitors
have resources substantially greater than that of the Bank and can offer a wide
variety of deposit and loan products. The primary factors in competing for
loans are interest rates and loan origination fees and the range of services
offered by various financial institutions. For a discussion of the insurance
premium disparity that currently exists and which adversely affects the Bank's
competitive position as compared to commercial banks, see "Risk Factors --
Disparity Between SAIF and BIF Insurance Premiums; SAIF Special Assessment."
Additionally, the Bank may face increased competition due to recent changes
to federal interstate banking law. See "Regulation -- Interstate Banking.
59
<PAGE>
OFFICES
The following table sets forth the location and certain additional
information regarding the Bank's offices at March 31, 1996.
<TABLE>
<CAPTION>
Book Value at Deposits at
Year Owned or March 31, Approximate March 31,
Opened Leased 1996 Square Footage 1996
------ ------ ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
3002 Harrison Avenue 1922 Owned $489,000 4,000 $83.0 million
Cincinnati, Ohio
1101 St. Gregory Street 1996 Leased N/A 285 --
Cincinnati, Ohio
</TABLE>
EMPLOYEES
As of March 31, 1996, Westwood Homestead had 15 full-time employees and 2
part-time employees, none of whom was represented by a collective bargaining
agreement. Westwood Homestead believes that it enjoys good relations with its
personnel.
LEGAL PROCEEDINGS
Although Westwood Homestead, from time to time, is involved in various
legal proceedings in the normal course of business, there are no material legal
proceedings to which Westwood Homestead is a party or to which any of its
property is subject.
REGULATION
GENERAL. As an Ohio-chartered mutual savings bank, Westwood Homestead is
subject to extensive regulation by the Superintendent. In addition, as a state-
chartered insured bank that is not a member of the Federal Reserve System,
Westwood Homestead is subject to regulation by the FDIC. These regulations are
intended primarily for the protection of depositors. Upon the consummation of
the Conversion, Westwood Homestead will continue to be regulated by the
Superintendent and the FDIC, but as an Ohio-chartered stock savings bank.
The following discussion of statutes and regulations affecting Ohio-
chartered savings banks and bank holding companies does not purport to be
complete. To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. The operations of the Company
and the Bank may be affected by legislative changes and by the policies of
various regulatory authorities. The Company and the Bank are unable to predict
the nature or the extent of the effects on their business and earnings that
fiscal or monetary policies or new federal or state legislation or regulation
may have in the future.
REGULATION OF THE COMPANY. The Company is a bank holding company subject
to regulation by the Federal Reserve Board under the Bank Holding Company Act
(the "BHCA"). As a result, the activities of the Company are subject to certain
limitations, which are described below. In addition, as a bank holding company,
the Company is required to file annual and quarterly reports with the Federal
Reserve Board and to furnish such additional information as the Federal Reserve
Board may require pursuant to the BHCA. The Company is also subject to regular
examination by the Federal Reserve Board.
60
<PAGE>
With certain exceptions, the BHCA prohibits a bank holding company from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of a company that is not a bank or a bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve Board regulation or order, have been
identified as activities closely related to the business of banking. The
activities of the Company are subject to these legal and regulatory limitations
under the BHCA and the related Federal Reserve Board regulations.
Notwithstanding the Federal Reserve Board's prior approval of specific
nonbanking activities, the Federal Reserve Board has the power to order a
holding company or its subsidiaries to terminate any activity, or to terminate
its ownership or control of any subsidiary, when it has reasonable cause to
believe that the continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or stability of
any bank subsidiary of that holding company.
Under the BHCA, a bank holding company must obtain the prior approval of
the Federal Reserve Board before (1) acquiring direct or indirect ownership or
control of any voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company. Satisfactory financial
condition, particularly with regard to capital adequacy, and satisfactory
Community Reinvestment Act ("CRA") ratings generally are prerequisites to
obtaining federal regulatory approval to make acquisitions.
The BHCA prohibits the Federal Reserve Board from approving an application
by a bank holding company to acquire voting shares of a bank located outside the
state in which the operations of the holding company's bank subsidiaries are
principally conducted, unless such an acquisition is specifically authorized by
state law. See " -- Interstate Banking." The BHCA does not place territorial
restrictions on the activities of non-bank subsidiaries of bank holding
companies.
Under the BHCA, any company must obtain approval of the Federal Reserve
Board prior to acquiring control of the Company or the Bank. For purposes of
the BHCA, "control" is defined as ownership of more than 25% of any class of
voting securities of the Company or the Bank, the ability to control the
election of a majority of the directors, or the exercise of a controlling
influence over management or policies of the Company or the Bank. In addition,
the Change in Bank Control Act and the related regulations of the Federal
Reserve Board require any person or persons acting in concert (except for
companies required to make application under the BHCA), to file a written notice
with the Federal Reserve Board before such person or persons may acquire control
of the Company or the Bank. The Change in Bank Control Act defines "control" as
the power, directly or indirectly, to vote 25% or more of any voting securities
or to direct the management or policies of a bank holding company or an insured
bank.
The Federal Reserve Board has adopted guidelines regarding the capital
adequacy of bank holding companies, which require bank holding companies to
maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets. See "-- Capital Requirements."
HOLDING COMPANY DIVIDENDS AND STOCK REPURCHASES. The Federal Reserve Board
has the power to prohibit dividends by bank holding companies if their actions
constitute unsafe or unsound practices. The Federal Reserve Board has issued a
policy statement on the payment of cash dividends by bank holding companies,
which expresses the Federal Reserve Board's view that a bank holding company
should pay cash dividends only to the extent that the company's net income for
the past year is sufficient to cover both the cash dividends and a rate of
earnings retention that is consistent with the company's capital needs, asset
quality, and overall financial condition. The Federal Reserve Board also
indicated that it would be inappropriate for a bank holding company experiencing
serious financial problems to borrow funds to pay dividends. Under the prompt
corrective action regulations adopted by the Federal Reserve Board pursuant to
FDICIA, the Federal Reserve Board may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized." See "-- Prompt Corrective Regulatory Action."
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As a bank holding company, the Company is required to give the Federal
Reserve Board prior written notice of any purchase or redemption of its
outstanding equity securities if the gross consideration for the purchase or
redemption, when combined with the net consideration paid for all such purchases
or redemptions during the preceding 12 months, is equal to 10% or more of the
Company's consolidated net worth. The Federal Reserve Board may disapprove such
a purchase or redemption if it determines that the proposal would violate any
law, regulation, Federal Reserve Board order, directive, or any condition
imposed by, or written agreement with, the Federal Reserve Board. This
requirement does not apply to bank holding companies that are "well-
capitalized," received one of the two highest examination ratings at their last
examination and are not the subject of any unresolved supervisory issues.
BANK REGULATION. As a state-chartered savings bank which is not a member
of the Federal Reserve System (a "state non-member bank"), the Bank is subject
to the primary federal supervision of the FDIC under the Federal Deposit
Insurance Act (the "FDIA"). The Bank also is subject to comprehensive
regulation and supervision by the Superintendent. The prior approval of the
FDIC and of the Superintendent is required for the Bank to establish or relocate
a branch office or to engage in any merger, consolidation or significant
purchase of assets. In addition, the Bank is subject to numerous federal and
state laws and regulations that set forth specific restrictions and procedural
requirements with respect to the establishment of branches, investments,
interest rates on loans, credit practices, the disclosure of credit terms and
discrimination in credit transactions.
The FDIC and the Superintendent regularly examine the operations and
condition of the Bank, including but not limited to capital adequacy, reserves,
loans, investments and management practices. These examinations are for the
protection of the Bank's depositors and the SAIF and not its stockholders. In
addition, the Bank is required to furnish quarterly and annual reports to the
FDIC as well as annual reports to the Superintendent. The FDIC's enforcement
authority includes the power to remove officers and directors and the authority
to issue orders to prevent a bank from engaging in unsafe or unsound practices
or violating laws or regulations governing its business. Any Ohio savings bank
that does not operate in accordance with the regulations, policies and
directives of the Superintendent may be subject to sanctions for non-compliance.
The CRA requires that, in connection with examinations of financial
institutions within their jurisdiction, the Federal Reserve Board and the FDIC
evaluate the record of the financial institutions in meeting the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those banks. These factors are
also considered by the Federal Reserve Board and the FDIC in evaluating mergers,
acquisitions and applications to open a branch or facility.
In February 1995, the Bank received from the FDIC a "Needs to Improve"
rating under the Community Reinvestment Act ("CRA"). In response, the President
of the Bank recommended and the Board of Directors approved a number of steps to
improve the Bank's performance in the community development area. Among other
steps, several special mortgage loan programs and a specially targeted marketing
program have been implemented in an effort to expand the Bank's lending to low-
and moderate-income borrowers. Management and the Board have continued to
consult with community groups in order to increase the Bank's responsiveness to
the needs of its community. The Bank has renewed its emphasis on single-family
residential lending and has hired two outside loan originators for this purpose.
In March 1996, the Bank filed with the FDIC a CRA Strategic Plan which covers a
two year period beginning May 1, 1996. The plan establishes measurable goals by
which the Bank may improve its CRA rating to "satisfactory" or "outstanding."
In June 1996, the Bank received a "satisfactory" CRA rating from the FDIC as a
result of its examination through April 1996.
CAPITAL REQUIREMENTS. The Federal Reserve Board and the FDIC have
established guidelines with respect to the maintenance of appropriate levels of
capital by bank holding companies with consolidated assets of $150 million or
more and state non-member banks, respectively. For bank holding companies with
less than $150 million in consolidated assets, the Federal Reserve Board
applies the guidelines on a bank-only basis unless the bank holding company has
publicly held debt securities or is engaged in non-bank activities involving
significant leverage. The regulations impose two sets of capital adequacy
requirements: minimum leverage rules, which require bank holding companies and
state non-member banks to maintain a specified minimum ratio of capital to total
assets, and risk-based capital rules, which require the maintenance of specified
minimum ratios of capital to "risk-weighted" assets.
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The regulations of the FDIC and the Federal Reserve Board require bank holding
companies and state non-member banks, respectively, to maintain a minimum
leverage ratio of "Tier 1 capital" to total assets of 3.0%. Tier 1 capital is
the sum of common stockholders' equity, certain perpetual preferred stock (which
must be noncumulative with respect to banks), including any related surplus, and
minority interests in consolidated subsidiaries; minus all intangible assets
(other than certain purchased mortgage servicing rights and purchased credit
card receivables), identified losses and investments in certain subsidiaries.
As a SAIF-insured, state-chartered bank, the Bank must also deduct from Tier 1
capital an amount equal to its investments in, and extensions of credit to,
subsidiaries engaged in activities that are not permissible for national banks,
other than debt and equity investments in subsidiaries engaged in activities
undertaken as agent for customers or in mortgage banking activities or in
subsidiary depository institutions or their holding companies. Although setting
a minimum 3.0% leverage ratio, the capital regulations state that only the
strongest bank holding companies and banks, with composite examination ratings
of 1 under the rating system used by the federal bank regulators, would be
permitted to operate at or near such minimum level of capital. All other bank
holding companies and banks are expected to maintain a leverage ratio of at
least 1% to 2% above the minimum ratio, depending on the assessment of an
individual organization's capital adequacy by its primary regulator. Any bank
or bank holding companies experiencing or anticipating significant growth would
be expected to maintain capital well above the minimum levels. In addition, the
Federal Reserve Board has indicated that whenever appropriate, and in particular
when a bank holding company is undertaking expansion, seeking to engage in new
activities or otherwise facing unusual or abnormal risks, it will consider, on a
case-by-case basis, the level of an organization's ratio of tangible Tier 1
capital to total assets in making an overall assessment of capital.
In addition to the leverage ratio, the regulations of the Federal Reserve
Board and the FDIC require bank holding companies and state-chartered nonmember
banks to maintain a minimum ratio of qualifying total capital to risk-weighted
assets of at least 8.0% of which at least four percentage points must be Tier 1
capital. Qualifying total capital consists of Tier 1 capital plus Tier 2 or
supplementary capital items which include allowances for loan losses in an
amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and
preferred stock with a maturity of 20 years or more and certain other capital
instruments. The includable amount of Tier 2 capital cannot exceed the
institution's Tier 1 capital. Qualifying total capital is further reduced by
the amount of the bank's investments in banking and finance subsidiaries that
are not consolidated for regulatory capital purposes, reciprocal cross-holdings
of capital securities issued by other banks and certain other deductions. The
risk-based capital regulations assign balance sheet assets and the credit
equivalent amounts of certain off-balance sheet items to one of four broad risk
weight categories. The aggregate dollar amount of each category is multiplied by
the risk weight assigned to that category based principally on the degree of
credit risk associated with the obligor. The sum of these weighted values
equals the bank holding company or the bank's risk-weighted assets.
The federal bank regulators, including the Federal Reserve Board and the
FDIC, have proposed to revise their risk-based capital requirements to ensure
that such requirements provide for explicit consideration of interest rate risk.
Under the proposed rule, a bank's interest rate risk exposure would be
quantified using either the measurement system set forth in the proposal or the
bank's internal model for measuring such exposure, if such model is determined
to be adequate by the bank's examiner. If the dollar amount of a bank's
interest rate risk exposure, as measured under either measurement system,
exceeds 1% of the bank's total assets, the bank would be required under the
proposed rule to hold additional capital equal to the dollar amount of the
excess. Management of the Bank has not determined what effect, if any, the
FDIC's proposed interest rate risk component would have on the Bank's capital if
adopted as proposed. The FDIC has adopted a regulation that provides that the
FDIC may take into account whether a bank has significant risks from
concentrations of credit or nontraditional activities in determining the
adequacy of its capital. The Bank has not been advised that it will be required
to maintain any additional capital under this regulation. The proposed interest
rate risk component would not apply to bank holding companies on a consolidated
basis.
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The table below provides information with respect to the Bank's compliance
with its regulatory capital requirements at March 31, 1996.
Percent of
Amount Assets(1)
------ ----------
(Dollars in thousands)
Tangible capital. . . . . . . $ 14,621 15.05
Tangible capital requirement. 1,468 1.50
---------- ----------
Excess. . . . . . . . . . . $ 13,153 13.55%
---------- ----------
---------- ----------
Tier 1/Core capital(2). . . . $ 14,621 15.05%
Tier 1/Core capital requirement 2,937 3.00
---------- ----------
Excess. . . . . . . . . . . $ 11,684 12.05%
---------- ----------
---------- ----------
Risk-based capital. . . . . . $ 14,738 29.47%
Risk-based capital requirement 4,001 8.00
---------- ----------
Excess. . . . . . . . . . . $ 10,737 21.47%
---------- ----------
---------- ----------
- --------------------
(1) Based on average adjusted total assets for purposes of the tangible capital
and core capital requirements and risk-weighted assets for purpose of the
risk-based capital requirement.
(2) Reflects the capital requirement which the Bank must satisfy to avoid
regulatory restrictions that may be imposed pursuant to prompt corrective
action regulations. The core requirement applicable to the Bank may
increase if the FDIC amends its capital regulations, as it has proposed, in
response to the more stringent leverage ratio adopted by the Office of the
Comptroller of the Currency for national banks.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly undercapitalized institution may not receive bonuses or increases
in compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total
assets falls below a "critical capital level," the institution will be subject
to conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
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undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.
Effective December 19, 1992, the federal banking regulators, including the
FDIC, adopted regulations implementing the prompt corrective action provisions
of FDICIA. Under these regulations, the federal banking regulators will
generally measure a depository institution's capital adequacy on the basis of
the institution's total risk-based capital ratio (the ratio of its total capital
to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). Under the regulations, a savings association
that is not subject to an order or written directive to meet or maintain a
specific capital level will be deemed "well capitalized" if it also has: (i) a
total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based
capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater.
An "adequately capitalized" savings association is a savings association that
does not meet the definition of well capitalized and has: (i) a total risk-based
capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0%
or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if
the savings association has a composite 1 CAMEL rating). An "undercapitalized
institution" is a savings association that has (i) a total risk-based capital
ratio less than 8.0%; or (ii) a Tier 1 risk-based capital ratio of less than
4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if the association
has a composite 1 CAMEL rating). A "significantly undercapitalized" institution
is defined as a savings association that has: (i) a total risk-based capital
ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than
3.0%; or (iii) a leverage ratio of less than 3.0%. A "critically
undercapitalized" savings association is defined as a savings association that
has a ratio of "tangible equity" to total assets of less than 2.0%. Tangible
equity is defined as core capital plus cumulative perpetual preferred stock (and
related surplus) less all intangibles other than qualifying supervisory goodwill
and certain purchased mortgage servicing rights. The FDIC may reclassify a well
capitalized savings association as adequately capitalized and may require an
adequately capitalized or undercapitalized association to comply with the
supervisory actions applicable to associations in the next lower capital
category (but may not reclassify a significantly undercapitalized institution as
critically under-capitalized) if the FDIC determines, after notice and an
opportunity for a hearing, that the savings association is in an unsafe or
unsound condition or that the association has received and not corrected a less-
than-satisfactory rating for any CAMEL rating category. Westwood Homestead is
classified as "well capitalized" under the regulations.
The table below presents Westwood Homestead's capital position at March 31,
1996 relative to the various capital levels required for designation as an
"adequately capitalized" institution under the prompt corrective action
regulations.
Percent of
Amount Assets(1)
------ ----------
(Dollars in thousands)
Tangible capital. . . . . . . $ 14,621 15.05%
Tangible capital requirement. 1,468 1.50
Excess (deficit). . . . . . $ 13,153 13.55%
Tier 1/Core capital(2). . . . $ 14,621 15.05%
Tier 1/Core capital requirement 2,937 3.00
Excess (deficit). . . . . . $ 11,684 12.05%
Risk-based capital. . . . . . $ 14,738 29.47%
Risk-based capital requirement 4,001 8.00
Excess (Deficit). . . . . . $ 10,737 21.47%
- --------------------
(1) Based on average adjusted total assets for purposes of the tangible capital
and core capital requirements and risk-weighted assets for purpose of the
risk-based capital requirement.
(2) Reflects the capital requirement which the Bank must satisfy to avoid
regulatory restrictions that may be imposed pursuant to prompt corrective
action regulations. The core requirement applicable to the Bank may
increase if the FDIC amends its capital regulations, as it has proposed, in
response to the more stringent leverage ratio adopted by the Office of the
Comptroller of the Currency for national banks.
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DIVIDEND LIMITATIONS. The Bank may not pay dividends on its capital stock
if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of the Bank at the time of the Conversion to stock form.
Earnings of the Bank appropriated to bad debt reserves and deducted for
Federal income tax purposes are not available for payment of cash dividends or
other distributions to stockholders without payment of taxes at the then current
tax rate by the Bank on the amount of earnings removed from the reserves for
such distributions. The Bank intends to make full use of this favorable tax
treatment and does not contemplate use of any earnings in a manner which would
limit the Bank's bad debt deduction or create federal tax liabilities.
Under FDIC regulations, the Bank is prohibited from making any capital
distributions if after making the distribution, the Bank would have: (i) a total
risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital
ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%.
The Company is subject to limitations on dividends imposed by the Federal
Reserve Board. See "-- Holding Company Dividends and Stock Repurchases."
SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each Federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the Federal
banking agencies released Interagency Guidelines Establishing Standards for
Safety and Soundness and published a final rule establishing deadlines for
submission and review of safety and soundness compliance plans. The final rule
and the guidelines went into effect on August 9, 1995. The guidelines require
savings institutions to maintain internal controls and information systems and
internal audit systems that are appropriate for the size, nature and scope of
the institution's business. The guidelines also establish certain basic
standards for loan documentation, credit underwriting, interest rate risk
exposure, and asset growth. The guidelines further provide that savings
institutions should maintain safeguards to prevent the payment of compensation,
fees and benefits that are excessive or that could lead to material financial
loss, and should take into account factors such as comparable compensation
practices at comparable institutions. If the agency determines that a savings
institution is not in compliance with the safety and soundness guidelines, it
may require the institution to submit an acceptable plan to achieve compliance
with the guidelines. A savings institution must submit an acceptable compliance
plan to the agency within 30 days of receipt of a request for such a plan.
Failure to submit or implement a compliance plan may subject the institution to
regulatory sanctions. Management believes that Westwood Homestead has met
substantially all the standards adopted in the interagency guidelines.
Additionally under FDICIA, as amended by the CDRI Act, the Federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
Federal banking agencies, including the FDIC, issued proposed guidelines
relating to asset quality and earnings. Under the proposed guidelines a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the asset quality and earnings standards do not have a
material effect on the operations of Westwood Homestead.
DEPOSIT INSURANCE. Westwood Homestead is required to pay assessments based
on a percent of their insured deposits to the FDIC for insurance of their
deposits by the SAIF. Under the FDIA, the FDIC is required to set semi-annual
assessments for SAIF-insured institutions at a rate determined by the FDIC to be
necessary to increase the designated reserve ratio of the SAIF to 1.25% of
estimated insured deposits or to a higher percentage of insured deposits that
the FDIC determines to be justified for that year by circumstances raising a
significant risk of substantial future losses to the SAIF. Unless the SAIF
achieves the designated reserve ratio, the assessment rate for SAIF-insured
institutions may not be less than 0.23% of insured deposits until after December
31, 1997.
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The assessment rate for an insured depository institution is determined by
the assessment risk classification assigned to the institution by the FDIC based
on the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken. The
assessment rate currently ranges from 0.23% of deposits for well capitalized
institutions in Subgroup A to 0.31% of deposits for undercapitalized
institutions in Subgroup C.
The FDIC has recently amended the Bank Insurance Fund ("BIF") risk-based
assessment schedule to eliminate the deposit insurance premiums for most
commercial banks and other depository institutions with deposits insured by the
BIF. The FDIC has indicated it anticipates that the assessment rate for SAIF-
insured institutions in even the lowest risk-based premium category will not
fall below the current 0.23% of insured deposits before the year 2002 absent a
recapitalization. The FDIC action has resulted in a substantial disparity
between the deposit insurance premiums paid by BIF and SAIF members and could
place SAIF-insured savings associations at a significant competitive
disadvantage to BIF-insured institutions. Legislation currently being
considered by Congress would require savings associations with deposits insured
by the SAIF to pay a one-time special assessment in order to increase the
reserve level of the SAIF to the statutorily required 1.25% of insured deposits.
See "Risk Factors -- Disparity Between SAIF and BIF Insurance Premiums; SAIF
Special Assessment."
SAIF members are generally prohibited from converting to the status of BIF
members or merging with or transferring assets to a BIF member before the date
on which the SAIF first meets or exceeds the designated reserve rates. The
FDIC, however, may approve such a transaction in the case of a SAIF member in
default or if the transaction involves an insubstantial portion of the deposits
of each participant. In addition, mergers, transfers of assets and assumptions
of liabilities may be approved by the appropriate bank regulator so long as
deposit insurance premiums continue to be paid to the SAIF for deposits
attributable to the SAIF members plus an adjustment for the annual rate of
growth of deposits in the surviving bank without regard to subsequent
acquisitions. Each depository institution participating in a SAIF to BIF
conversion transaction is required to pay an exit fee to the SAIF and an
entrance fee to the BIF. A savings association may adopt a commercial bank or
savings bank charter if the resulting bank remains a SAIF member.
The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, would not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under FDIC regulations and minus
identified losses and investments in certain securities subsidiaries. Insured
depository institutions with Tier 1 capital equal to or greater than 2% of total
assets may also be deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level. The regulation further provides that in
considering applications that must be submitted to it by savings institutions,
the FDIC will take into account whether the savings institution is meeting with
the Tier 1 capital requirement for state non-member banks of 4% of total assets
for all but the most highly rated state non-member banks.
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LIQUIDITY REQUIREMENTS. FDIC policy requires that savings banks maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state, or federal agency
obligations) in an amount which it deems adequate to protect safety and
soundness of the savings bank. The FDIC currently has no specific level which
it requires. Management calculated, under the FDIC's calculation method,
Westwood Homestead's liquidity ratio as 24.9% of total assets at March 31, 1996,
which management believes is adequate.
LIMITS ON LOANS TO ONE BORROWER. Westwood Homestead generally is prohibited
by both FDIC regulations and Ohio law from making loans or otherwise extending
credit to any one borrower, including related entities, in an amount exceeding
the greater of $500,000 or 15% of Westwood Homestead's unimpaired capital and
surplus plus, as to loans and extensions of credit fully secured by readily
marketable collateral, an additional 10% of unimpaired capital and surplus. At
March 31, 1996, the maximum amount Westwood Homestead could lend to one borrower
was approximately $2.16 million, and Westwood Homestead's largest amount lent to
one borrower was $2.03 million. Management does not expect the loans to one
borrower limitations to have a material adverse effect on the Bank's lending
activities.
FEDERAL HOME LOAN BANK SYSTEM. Westwood Homestead is a member of the FHLB
System, which consists of 12 district FHLBs subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs provide a
central credit facility primarily for member institutions. As a member of the
FHLB of Cincinnati, Westwood Homestead is required to acquire and hold shares of
capital stock in the FHLB of Cincinnati in an amount at least equal to 1% of the
aggregate unpaid principal of its home mortgage loans, home purchase contracts,
and similar obligations at the beginning of each year, or 1/20 of their advances
(borrowings) from the FHLB of Cincinnati, whichever is greater. Westwood
Homestead was in compliance with this requirement with investment in FHLB of
Cincinnati stock at March 31, 1996, of $905,000. The FHLB of Cincinnati serves
as a reserve or central bank for its member institutions within its assigned
district. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It offers advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB of Cincinnati. At March 31, 1996, Westwood Homestead had
$136,000 in FHLB advances outstanding.
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, Westwood Homestead must maintain average daily reserves against their
transaction accounts. No reserves are required to be maintained on the first
$4.3 million of transaction accounts, reserves equal to 3% must be maintained on
the next $52.0 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
noninterest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institutions interest-earning assets.
As of March 31, 1996, Westwood Homestead met its reserve requirements.
TRANSACTIONS WITH AFFILIATES. Transactions between savings institutions
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings institution is any company or entity which
controls, is controlled by or is under common control with the savings
institution. In a holding company context, the parent holding company of a
savings institution and any companies which are controlled by such parent
holding company are affiliates of the savings institution. Generally, Sections
23A and 23B (i) limit the extent to which the savings institution or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, and contain
an aggregate limit on all such transactions with all affiliates to an amount
equal to 20% of such capital stock and surplus, and (ii) require that all such
transactions be on terms substantially the same, or at least as favorable, to
the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and similar other types of transactions. In addition to the
restrictions imposed by Sections 23A and 23B, no savings institution may (i)
loan or otherwise extend credit to an affiliate, except for any affiliate which
engages only in activities which are permissible for bank holding companies, or
(ii) purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings institution.
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Savings institutions are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to an
executive officer and to a greater than 10% stockholder of a savings
institution, and certain affiliated entities of either, may not exceed, together
with all other outstanding loans to such person and affiliated entities the
institution's loan to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by certain readily marketable
collateral). Section 22(h) also prohibits loans, above amounts prescribed by
the appropriate federal banking agency, to directors, executive officers and
greater than 10% stockholders of a savings institution, and their respective
affiliates, unless such loan is approved in advance by a majority of the board
of directors of the institution with any "interested" director not participating
in the voting. The Federal Reserve Board has prescribed the loan amount (which
includes all other outstanding loans to such person), as to which such prior
board of director approval if required, as being the greater of $25,000 or 5% of
capital and surplus (up to $500,000). Further, the Federal Reserve Board
pursuant to Section 22(h) requires that loans to directors, executive officers
and principal stockholders be made on terms substantially the same as offered in
comparable transactions to other persons.
Savings institutions are also subject to the requirements and restrictions
of Section 22(g) of the Federal Reserve Act on loans to executive officers and
the restrictions of Section 106(b) of the Bank Holding Company Act Amendments of
1970 on certain tying arrangements and extensions of credit by correspondent
banks. Section 22(g) of the Federal Reserve Act requires that loans to
executive officers of depository institutions not be made on terms more
favorable than those afforded to other borrowers, requires approval for such
extensions of credit by the board of directors of the institution, and imposes
reporting requirements for and additional restrictions on the type, amount and
terms of credits to such officers. Section 106(b) prohibits (i) a depository
institution from extending credit to or offering any other services, or fixing
or varying the consideration for such extension of credit or service, on the
condition that the customer obtain some additional service from the institution
or certain of its affiliates or not obtain services of a competitor of the
institution, subject to certain exceptions, and (ii) extensions of credit to
executive officers, directors, and greater than 10% stockholders of a depository
institution by any other institution which has a correspondent banking
relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
RESTRICTIONS ON CERTAIN ACTIVITIES. Under FDICIA, state-chartered banks
with deposits insured by the FDIC are generally prohibited from acquiring or
retaining any equity investment of a type or in an amount that is not
permissible for a national bank. The foregoing limitation, however, does not
prohibit FDIC-insured state banks from acquiring or retaining an equity
investment in a subsidiary in which the bank is a majority owner. State-
chartered banks are also prohibited from engaging as principal in any type of
activity that is not permissible for a national bank and subsidiaries of state-
chartered, FDIC-insured state banks may not engage as principal in any type of
activity that is not permissible for a subsidiary of a national bank unless in
either case the FDIC determines that the activity would pose no significant risk
to the appropriate deposit insurance fund and the bank is, and continues to be,
in compliance with applicable capital standards.
The FDIC has adopted regulations to clarify the foregoing restrictions on
activities of FDIC-insured state-chartered banks and their subsidiaries. Under
the regulations, the term activity refers to the authorized conduct of business
by an insured state bank and includes acquiring or retaining any investment
other than an equity investment. A bank or subsidiary is considered acting as
principal when conducted other than as an agent for a customer, as trustee, or
in a brokerage, custodial, advisory or administrative capacity. An activity
permissible for a national bank includes any activity expressly authorized for
national banks by statute or recognized as permissible in regulations, official
circulars or bulletins or in any order or written interpretation issued by the
Office of the Comptroller of the Currency ("OCC"). In its regulations, the FDIC
indicates that it will not permit state banks to directly engage in commercial
ventures or directly or indirectly engage in any insurance underwriting activity
other than to the extent such activities are permissible for a national bank or
a national bank subsidiary or except for certain other limited forms of
insurance underwriting permitted under the regulations. Under the regulations,
the FDIC permits state banks that meet applicable minimum capital requirements
to engage as principal in certain activities that are not permissible to
national banks including guaranteeing obligations of others, activities which
the Federal Reserve Board has found by regulation or order to be closely related
to banking and certain securities activities conducted through subsidiaries.
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INTERSTATE BANKING. The BHCA prohibits the acquisition by a bank holding
company of any voting shares of, any interest in, or all or substantially all of
the assets of, a bank located outside of the state in which the operations of
the bank holding company's banking subsidiaries are principally conducted,
unless such an acquisition is specifically authorized by the laws of the state
in which the bank to be acquired is located. Ohio law authorizes the
acquisition of savings banks with their principal place of business in Ohio if
the Superintendent determines that the laws of the other state permit an Ohio
savings bank or Ohio savings bank holding company to charter or otherwise
acquire a savings bank or savings bank holding company having its principal
place of business in the other state on terms that are, on the whole,
substantially no more restrictive than those established under Ohio law.
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency of 1994 (the "Riegle-Neal Act") was enacted to ease restrictions on
interstate banking. Effective September 29, 1995, the Riegle-Neal Act allows
the Federal Reserve Board to approve an application of an adequately capitalized
and adequately managed bank holding company to acquire control of, or acquire
all or substantially all of the assets of, a bank located in a state other than
such holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve Board may not approve
the acquisition of a bank that has not been in existence for the minimum time
period (not exceeding five years) specified by the statutory law of the host
state. The Riegle-Neal Act also prohibits the Federal Reserve Board from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Riegle-Neal
Act does not affect the authority of states to limit the percentage of total
insured deposits in the state which may be held or controlled by a bank or bank
holding company to the extent such limitation does not discriminate against out-
of-state banks or bank holding companies. Individual states may also waive the
30% state-wide concentration limit contained in the Riegle-Neal Act.
Additionally, beginning on June 1, 1997, the federal banking agencies will
be authorized to approve interstate merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks opts out of the Riegle-Neal Act by adopting a law
after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997
which applies equally to all out-of-state banks and expressly prohibits merger
transactions involving out-of-state banks. Interstate acquisitions of branches
will be permitted only if the law of the state in which the branch is located
permits such acquisitions. Interstate mergers and branch acquisitions will also
be subject to the nationwide and statewide insured deposit concentration amounts
described above.
The Riegle-Neal Act authorizes the OCC and FDIC to approve interstate
branching de novo by national and state banks, respectively, only in states
which specifically allow for such branching. The Riegle-Neal Act also requires
the appropriate federal banking agencies to prescribe regulations by June 1,
1997 which prohibit any out-of-state bank from using the interstate branching
authority primarily for the purpose of deposit production. These regulations
must include guidelines to ensure that interstate branches operated by an out-
of-state bank in a host state are reasonably helping to meet the credit needs of
the communities which they serve.
OHIO SAVINGS BANK LAW. The Superintendent is responsible for the
regulation and supervision of Ohio savings banks in accordance with the laws of
the State of Ohio. Ohio law prescribes the permissible investments and
activities of Ohio savings banks, including the types of lending that such banks
may engage in and the investments in real estate, subsidiaries and corporate or
government securities that such banks may make. The ability of Ohio savings
banks to engage in these state-authorized investments generally is subject to
oversight and approval by the FDIC.
MERGER OR ACQUISITION. The Superintendent must approve any mergers
involving, or acquisitions of control of, Ohio savings banks. The
Superintendent may initiate certain supervisory measures or formal enforcement
actions against Ohio savings banks. Ultimately, if the grounds provided by law
exist, the Superintendent may place an Ohio savings bank in conservatorship or
receivership.
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EXAMINATION. The Superintendent conducts regular examinations of Ohio
savings banks approximately once every eighteen months. Such examinations are
usually conducted jointly with the FDIC. The Superintendent imposes assessments
on Ohio savings banks based on the savings bank's asset size to cover the cost
of supervision and examination.
GOVERNING LAW. In addition to being governed by the laws of Ohio
specifically governing Ohio-chartered savings banks, Westwood Homestead is also
governed by Ohio corporate law, to the extent such law does not conflict with
the laws specifically governing savings banks.
ACTIVITIES AND INVESTMENTS. Since the enactment of FIRREA, all state-
chartered institutions have generally been limited to activities and investments
of the type and in the amount authorized for federally chartered institutions,
notwithstanding state law. The FDIC is authorized to permit such associations
to engage in state authorized activities or investments that do not meet this
standard (other than nonsubsidiary equity investments and investments in junk
bonds) for institutions that meet fully phased-in capital requirements if it is
determined that such activities or investments do not pose a significant risk to
the SAIF.
TAXATION
GENERAL
Westwood Homestead files its tax return based on a fiscal year ending
December 31. Following the Conversion, the Company will file a consolidated
federal income tax return on a fiscal year basis. Consolidated returns have the
effect of eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.
FEDERAL INCOME TAXATION
Thrift institutions are subject to the provisions of the Internal Revenue
Code of 1986, as amended (the "Code") in the same general manner as other
corporations. However, institutions such as Westwood Homestead which meet
certain definitional tests and other conditions prescribed by the Code may
benefit from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans are separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and nonqualifying loans, which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans may be based upon actual loss experience (the
"experience method") or a percentage of taxable income determined without regard
to such deduction (the "percentage of taxable income method").
Westwood Homestead has generally elected to use the percentage of taxable
income method. Under the percentage of taxable income method, the bad debt
reserve deduction for qualifying real property loans is computed as a
percentage, which Congress has reduced from as much as 60% in prior years to 8%
of taxable income, with certain adjustments, effective for taxable years
beginning after 1986. The allowable deduction under the percentage of taxable
income method (the "percentage bad debt deduction") for taxable years beginning
before 1987 was scaled downward in the event that less than 82% of the total
dollar amount of the assets of an association were within certain designated
categories. When the percentage method bad debt deduction was lowered to 8%,
the 82% qualifying assets requirement was lowered to 60%. For all taxable
years, there is no deduction in the event that less than 60% of the total dollar
amount of the assets of an association falls within such categories. Moreover,
in such case, Westwood Homestead could be required to recapture, generally over
a period of up to four years, its existing bad debt reserve. As of March 31,
1996, more than the required amount of the Bank's total assets fell within such
categories.
The bad debt deduction under the percentage of taxable income method is
subject to certain limitations. First, the amount added to the reserve for
losses on qualifying real property loans may not exceed the amount
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necessary to increase the balance of such reserve at the close of the taxable
year to 6% of such loans outstanding at the end of the taxable year. Further,
the addition to the reserve for losses on qualifying real property loans cannot
exceed the amount which, when added to that year's addition to the bad debt
reserve for losses on nonqualifying loans, equals the amount by which 12% of
total deposits or withdrawable accounts of depositors at year-end exceeds the
sum of surplus, undivided profits and reserves at the beginning of the year.
Finally, the percentage bad debt deduction under the percentage of taxable
income method is reduced by the deduction for losses on nonqualifying loans.
Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction are not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount is included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Westwood Homestead's federal corporate income tax returns have not been
audited within the past three years.
Under provisions of the Revenue Reconciliation Act of 1993 ("RRA"), enacted
on August 10, 1993, the maximum federal corporate income tax rate was increased
from 34% to 35% for taxable income over $10 million, with a 3% surtax imposed on
taxable income over $15.0 million. Also under provisions of RRA, a separate
depreciation calculation requirement has been eliminated in the determination of
adjusted current earnings for purposes of determining alternative minimum
taxable income, rules relating to payment of estimated corporate income taxes
were revised, and certain acquired intangible assets such as goodwill and
customer-based intangibles were allowed a 15-year amortization period.
Beginning with tax years ending on or after January 1, 1993, RRA also provides
that securities dealers must use mark-to-market accounting and generally reflect
changes in value during the year or upon sale as taxable gains or losses. The
IRS has indicated that financial institutions which originate and sell loans
will be subject to the new rule. Because of the absence of definitive IRS
guidance on the scope and extent of this provision's applicability to financial
institutions, it is unclear what effect, if any, this provision will have on the
Company.
STATE INCOME TAXATION
The Bank is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to Ohio corporate franchise tax on "financial institutions,"
which is imposed annually at a rate of 1.5% of the Bank's book net worth
determined in accordance with GAAP. As a "financial institution," the Bank is
not subject to any tax based upon net income or net profits imposed by the State
of Ohio.
The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.9% of computed Ohio taxable income in excess of $50,000 and
(ii) .582% times taxable net worth.
In computing its tax under the net worth method, the Company may exclude
100% of its investment in the capital stock of the Bank after the Conversion, as
reflected on the balance sheet of the Company, as long as it owns at least 25%
of the issued and outstanding capital stock of the Bank. The calculation of the
exclusion from net worth is based on the ratio of the excludable investment (net
of any appreciation or goodwill included in such investment) to total assets
multiplied by the net value of the stock. As a holding company, the Company may
be entitled to various other deductions in computing taxable net worth that are
not generally available to operating companies.
A special litter tax is also applicable to all corporations, including the
Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .14% times taxable
net worth.
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MANAGEMENT OF THE COMPANY
The Board of Directors of the Company consists of the same individuals who
serve as directors of the Bank. Their biographical information is set forth
under "Management of the Bank -- Directors." The Board of Directors of the
Company is divided into three classes. Directors of the Company will serve for
three year terms or until their successors are elected and qualified, with
approximately one-third of the directors being elected at each annual meeting of
stockholders, beginning with the first annual meeting of stockholders following
Conversion.
The following table sets forth information regarding the executive officers
of the Company and the principal offices held by them.
NAME AGE (1) TITLE
---- ------- -----
Michael P. Brennan 53 President and Chief Executive Officer
John E. Essen, CPA 32 Treasurer
- -------------
(1) At December 31, 1995.
The executive officers of the Company are appointed annually and hold
office until their respective successors have been appointed and qualified or
until death, resignation or removal by the Board of Directors of the Company.
Since the formation of the Company, none of the executive officers,
directors or other personnel have received remuneration from the Company.
Information concerning the principal occupations, employment and compensation of
the directors and officers of the Company during the past five years is set
forth under "Management of the Bank -- Directors" and " -- Executive Officers
Who are Not Directors."
MANAGEMENT OF THE BANK
DIRECTORS
As a mutual savings institution, members of the Bank have elected the Board
of Directors. Upon completion of the Conversion, exclusive voting rights over
the Bank will be vested in the Board of Directors of the Company, which in turn
will be elected by the stockholders of the Company. Listed below is information
about the directors of the Bank.
DIRECTOR TERM TO
NAME AGE(1) POSITION SINCE EXPIRE
- ---- ------ -------- -------- -------
John B. Bennet, Sr. 63 Vice Chairman of the Board 1982 1997
and Director
Robert H. Bockhorst 57 Director 1984 1999
Michael P. Brennan 53 President, Chief Executive
Officer and Director 1995 1998
Raymond J. Brinkman 71 Director 1990 1999
Roger M. Higley 57 Director 1990 1998
Carl H. Heimerdinger 81 Chairman of the Board and Director 1947 1999
Mary Ann Jacobs 38 Director and Secretary 1987 1997
James D. Kemp 42 Director 1989 1997
- -------------
(1) At December 31, 1995.
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Presented below is certain information concerning the directors of the
Company and the Bank. Unless otherwise stated, all directors have held the
positions for at least the past five years.
JOHN B. BENNET, SR. is Vice-Chairman of the Board of Directors of the Bank.
Dr. Bennet was elected to the Board of Directors in 1982 and has served as Vice-
Chairman since February 1985. Dr. Bennet was a self-employed dentist from 1958
until his retirement in December 1995.
ROBERT H. BOCKHORST has served as a Director of the Bank since 1984. Mr.
Bockhorst is an appraiser and a real estate investor. He is currently a member
of the Western Hills Exchange Club and the Cheviot-Westwood Kiwanis.
MICHAEL P. BRENNAN has been President, Chief Executive Officer, and a
member of the Board of Directors of Westwood Homestead since February, 1995.
Prior to joining the Bank, Mr. Brennan was President and Chief Executive Officer
and Director of Deer Park Federal Savings and Loan Association, Cincinnati,
Ohio. His current and past civic activities include serving on the Board of
Directors of the Exchange Club of Fairfield, as Community Advisor for Deer Park
Schools, as Chairman and member of the Tri-State League of Financial
Institutions, and as Director of the Greater Cincinnati Mortgage Counseling
Service. Mr. Brennan has also been active in the St. Aloysius and Sacred Heart
Parishes.
RAYMOND J. BRINKMAN retired from Deloitte & Touche LLP in 1989 as Senior
Manager. He is a member of the Saint Aloysius Orphan Society, the American
Association of Retired Persons and the Green Township Senior Citizens. Mr.
Brinkman is also active in St. Aloysius Gonzaga Parish.
ROGER M. HIGLEY has served as a Director of the bank since 1990. Dr.
Higley also serves as President of Gray's History of Wireless Museum Inc. at
WCET. Dr. Higley has been a self-employed dentist since 1969. He also serves
on the Board of Directors of the Greater Cincinnati Amateur Radio Society Inc.
CARL H. HEIMERDINGER served as President of Westwood Homestead from 1981 to
February 1995, and has served as Chairman of the Board of Westwood Homestead
since February 1995. He was Treasurer of the Cincinnati Public Schools from
1964 until his retirement in 1980. His past professional activities include:
State President in 1972 and charter member of the Ohio Association of School
Business Officials; 1973-74 President of Ohio Council for Education; and 1980-85
Treasurer of Cincinnati School Foundation. Mr. Heimerdinger's current and past
civic activities include serving as past president and member of the Exchange
Club of Cincinnati since 1972 and Treasurer of the Salem Presbyterian Church
where he has been a member since 1940.
MARY ANN JACOBS has served as Secretary and a Director of the bank since
1987. Ms. Jacobs is a Partner of the Law Firm Ritter and Randolph. Her current
and past civic activities include serving as President and Board Member of the
Western Hamilton County Economic Council, Board Member of the Llanfair
Retirement Community, Board of Trustees Member for the Cincinnati Law Library,
Vice President and Trustee for the Alzheimer's Association (Cincinnati Chapter).
She is also an Elder of the Westminster Presbyterian Church and a member of the
Cheviot-Westwood Kiwanis.
JAMES D. KEMP has served as a Director of the Bank since 1989. He is vice
president of sales with the investment firm of Hilliard Lyons. Mr. Kemp has
been a stockbroker with Hilliard Lyons since 1983. Mr. Kemp was employed by
Westwood Homestead from 1976 to 1983, and served in various capacities including
assistant manager, staff appraiser and Treasurer.
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EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following sets forth information with respect to the executive officers
of Westwood Homestead who do not serve on the Board of Directors. Under the
Bank's current Bylaws, officers are elected for a term of one year or until
their successors are elected and qualified. For a description of the terms of
the employment agreements with the President of the Company and the Bank and
severance agreements that will be entered into with two executive officers of
the Bank effective upon consummation of the Conversion, see " -- Certain Benefit
Plans and Agreements -- Employment Agreement" and " -- Change in Control
Severance Agreements."
NAME AGE(1) TITLE
---- ------ -----
John E. Essen, CPA 32 Chief Financial Officer and Treasurer
Gerald T. Mueller 32 Vice President, Director of Lending
- --------------------
(1) At December 31, 1995.
JOHN E. ESSEN, CPA has been Chief Financial Officer and Accountant of
Westwood Homestead since 1991. He is a member of the St. Dominic Mens Society
and the Ohio Society of Certified Public Accountants. He has also been an
instructor for the Institute of Financial Education.
GERALD T. MUELLER has served as Vice President and Director of Lending of
Westwood Homestead since 1987. He has recently been appointed to the Lending
Committee of the Tri-State League of Financial Institutions. Mr. Mueller has
also been a member of the St. Joseph and St. Henry Parishes.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Bank meets regularly twice a month and may
have additional special meetings. During the year ended December 31, 1995, the
Board held 33 regular meetings and two special meetings. No director attended
fewer than 75% of the total number of Board meetings held during the year ended
December 31, 1995 and the total number of meetings held by committees on which
such director served during such fiscal year.
The Executive Committee is composed of directors Heimerdinger, Bennet,
Bockhorst, Jacobs and Brennan, and is empowered to exercise all of the authority
of the Board when the Board is not in session. The Executive Committee meets as
needed, but did not meet in fiscal 1995.
The Bank does not have a Nominating Committee. Under the Bank's charter
documents, a member of the Bank can nominate individuals for election as
directors by filing the names of such candidates in writing with the Secretary
of the Bank at least two weeks prior to the election. For information regarding
the procedure to nominate candidates to the Board of Directors of the Company,
see "Certain Anti-Takeover Provisions in the Articles of Incorporation and
Bylaws -- Procedures for Stockholder Nominations."
The Bank's Audit Committee consists of directors Brinkman (Chairman),
Heimerdinger and Kemp. The Audit Committee is responsible for reviewing the
Bank's auditing program, overseeing the quarterly regulatory reporting process
by annually reviewing the process with the chief financial officer, overseeing
the Bank's internal compliance audits as necessary, receiving and reviewing the
results of each external audit, reviewing managements response to auditors'
recommendations, and reviewing management's reports on cases of financial
misconduct by employees, officers or directors. The Audit Committee met twice
in fiscal 1995.
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The Bank does not have a Compensation Committee. The full Board of
Directors meets to determine the compensation level of the chief executive
officer.
The Bank's Personnel Committee in fiscal 1995 was composed of directors
Jacobs (Chairman), Higley, Bockhorst, and Brennan. The Personnel Committee
assists management, in an advisory capacity, in the establishment of personnel
policies. The Personnel Committee met ten times in fiscal 1995.
The Bank's Asset/Liability Management Committee consists of directors
Brennan (Chairman), Heimerdinger, Bennet, and Kemp, and officers Mueller, Essen
and Bauer. This Committee is responsible for implementing the investment policy
of the Bank, maintaining the liquidity position of the Bank, and establishing
interest rates, terms and fees for loans, savings and other services. The
Asset/Liability Management Committee met 22 times in fiscal 1995.
The Bank's Community Reinvestment Act ("CRA") Committee, which was formed
on September 11, 1995, consists of directors Brennan and Higley and officer
Mueller (Chairman). The CRA Committee is responsible for monitoring on an on-
going basis all aspects of CRA compliance to assure that the Bank's CRA
objective is attained. This Committee (i) reviews CRA activity reports,
rejected loan applications, and demographics relative to credit needs within the
local community; (ii) performs a monthly self assessment of the Bank's
performance against its goals; (iii) develops outreach programs for the
assessment area targeting special credit and product needs; and (iv) develops
marketing plans directed toward low-to-moderate income borrowers. The Committee
meets quarterly.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash and
noncash compensation for the last fiscal year awarded to or earned by the Chief
Executive Officer and the former Chief Executive Officer. No other executive
officer of the Bank earned salary and bonus in fiscal 1995 exceeding $100,000
for services rendered in all capacities to the Bank.
Annual Compensation
-------------------
Name and Fiscal All Other
Principal Position Year Salary Bonus Compensation
- ------------------ ---- ------ ----- ------------
Michael P. Brennan 1995 $110,000 $20,000 $2,917 (1)
President and Chief
Executive Officer
Carl H. Heimerdinger 1995 25,000 (2) -- 15,300 (3)
Former President and
Chief Executive Officer
- ---------------
(1) Consists of a contribution made by the Bank for the account of Mr. Brennan
pursuant to the Bank's 401(k) Plan.
(2) Mr. Heimerdinger received $25,000 in salary for his service as President of
the Bank during the first two months of 1995 and for serving as Chairman of
the Board for the remainder of the year.
(3) Consists of directors' fees
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DIRECTOR COMPENSATION
The Bank's non-employee directors receive fees of $15,300 per year
regardless of the number of board and committee meetings attended. Employee
directors do not receive board fees. Chairman of the Board Carl Heimerdinger
will receive an additional $20,000, $5,000 and $3,750 for the years 1996, 1997,
and 1998 pursuant to his agreement with the Bank that expires in 1998. In
addition director Brinkman receives an additional $5,000 per year for his
position as internal auditor and compliance officer. During fiscal 1995, the
Bank's directors' fees totaled $122,000.
DIRECTOR RETIREMENT PLAN. The Bank's Board of Directors has, subject to
approval by the stockholders of the Company, adopted the Directors' Plan,
effective January 1, 1995, for its non-employee directors who are members of
the Board on or after the plan's effective date. The Bank adopted the
Directors' Plan in 1995 in response to a request from federal regulators that
the Bank formalize the Emeritus Program, which provided certain benefits to
three board members upon their ceasing to be active members of the Board of
Directors and being appointed to Emeritus status. The Directors' Plan was
adopted by the Board of Directors of the Bank in July 1995 and was approved
by the members of the Bank at its annual meeting on February 12, 1996.
However, as a result of discussions with federal regulators, in June of 1996
the Board of Directors of the Bank voted to reduce the benefits provided for
under the Directors' Plan and to submit the Directors' Plan for approval by
the stockholders of the Company following completion of the Conversion. For
information regarding the recovery of certain expenses associated with the
Directors' Plan as a result of the reduction in benefits to be received by
the directors, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Comparison of Operating Results for
the Years Ended December 31, 1995 and 1994."
Under the Directors' Plan, as amended, a bookkeeping account in each
participant's name is credited, on a quarterly basis, with an amount equal to
the sum of the quarterly accrual attributable to the participant, any
appreciation or depreciation on the balance of the participant's account
during the calendar quarter, and a retirement adjustment if a long-term
director retires or dies unexpectedly. The "quarterly accrual" represents
the Bank's quarterly financial expense to fund a liability to provide
participants with a 50% retirement annuity with a term of the lesser of 10
years or the participant's life, the amount of each annual payment being
equal to the product of the participant's benefit percentage, his or her
vested percentage, and 65% of average fees. Notwithstanding the foregoing,
directors who have served 40 or more years on the Board are entitled to 100%
average fees. Additionally, former director Fritz, who retired from the
Bank's board of directors after over 40 years of service to the Bank, will
receive a 50% joint and survivor retirement annuity with a 15 year term and
an annual payment being equal to 100% of his average fees. The "benefit
percentage" is based on the participant's overall years of service on the
Board, whether before or after the plan's effective date. If the participant
serves less than five years on the Board, the Benefit Percentage equals 0%.
If the participant serves five years, the benefit percentage increases to
25%, and increases in increments of 5% for 6 to 20 years of service. A
participant's "vested percentage" equals 25% if the participant completes
less than a year of service on the Board after the plan's effective date, and
thereafter increases in increments of 25% for each year of future service (up
to 100%). "Average fees" are the average base annual fees received by the
Bank's non-employee directors for service on the Board during the calendar
year preceding the year in which a participant's service on the Board
terminates. Upon termination of service on the Board, a participant's
account will be paid in 10 substantially equal annual installments; however,
with the exception of former director Fritz, no payments will be made
subsequent to a director's death.
The Directors' Plan is subject to approval of the Company's stockholders at
a meeting to be held shortly following the Conversion. It is expected that the
stockholders of the Company on or about the date of the consummation of the
Conversion will be the stockholders entitled to vote at such meeting.
CERTAIN BENEFIT PLANS AND AGREEMENTS
In connection with the Conversion, the Company's and the Bank's Boards of
Directors have approved certain stock incentive plans and employment, severance
and other agreements. In addition, the Bank has an existing defined
contribution plan which will remain in effect after the Conversion.
BASIS FOR AWARDS OF BENEFITS AND COMPENSATION. The Company's and the
Bank's Boards of Directors have evaluated and approved the terms of the
employment agreement, severance agreements, and other benefits
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described below. In its review of the benefits and compensation of the
executive officers and the terms of the employment agreement and severance
agreements, the Boards of Directors considered a number of factors, including
the experience, tenure and ability of the executive officers, their performance
for the Bank during their tenure and the various legal and regulatory
requirements regarding the levels of compensation which may be paid to employees
of savings associations.
1997 STOCK OPTION AND INCENTIVE PLAN (THE "OPTION PLAN"). The Company's
Board of Directors has adopted resolutions expressing an intention to implement
the Option Plan upon its receipt of stockholder approval at an annual or special
meeting of the Company's stockholders held at least six months after the
Conversion.
The purpose of the Option Plan is to provide additional incentive to
directors, officers and employees by facilitating their purchase of a stock or
comparable ownership interest in the Company. The Option Plan will have a term
of ten years from the date of its approval by the Company's stockholders, after
which no awards may be made, unless the plan is earlier terminated by the Board
of Directors of the Company. Pursuant to the Option Plan, a number of shares
equal to 10% of the shares of Common Stock that are issued in the Conversion
would be reserved for future issuance by the Company, in the form of newly
issued or treasury shares or shares held in a grantor trust, upon exercise of
stock options ("Options") or stock appreciation rights ("SARs"). Options and
SARs are collectively referred to herein as "Awards." If Awards should expire,
become unexercisable or be forfeited for any reason without having been
exercised or having become vested in full, the shares of Common Stock subject to
such Awards would, unless the Option Plan shall have been terminated, be
available for the grant of additional Awards under the Option Plan. All Awards
under the Option Plan will be granted at no cost to the recipients thereof.
The Option Plan will be administered by a committee of directors of the
Company, designated by the Board of Directors, who are not full-time employees
of the Bank and who are "disinterested persons" within the meaning of the
federal securities laws (the "Option Committee"). It is expected that the
Option Committee will consist of the Company's non-employee directors who serve
on its Personnel Committee. The Option Committee will select the employees to
whom Awards are to be granted, the number of shares to be subject to such
Awards, and the terms and conditions of such Awards (provided that any
discretion exercised by the Option Committee must be consistent with the terms
of the Option Plan). Non-employee directors will be ineligible to receive
discretionary Awards, but will receive the automatic awards described below. In
accordance with applicable regulations, no employee may receive Awards covering
more than 25% of the shares reserved for issuance under the Option Plan, and
non-employee directors may not receive Awards covering more than 30% of such
shares for all directors or for more than 5% of such shares per director.
It is intended that Options granted under the Option Plan will constitute
both incentive stock options (options that afford favorable tax treatment to
recipients upon compliance with certain restrictions pursuant to Section 422 of
the Code and that do not result in tax deductions to the Company unless
participants fail to comply with Section 422 of the Code) ("ISOs"), and options
that do not so qualify ("Non-ISOs"). The exercise price for Options may not be
less than 100% of the fair market value of the shares on the date of the grant.
The Plan permits the Option Committee to impose transfer restrictions, such as a
right of first refusal, on the Common Stock that optionees may purchase. No
Award is assignable or transferable except by will or the laws of descent and
distribution, or pursuant to the terms of a "qualified domestic relations order"
(within the meaning of Section 414(p) of the Code and the regulations and
rulings thereunder).
No Option shall be exercisable after the expiration of ten years from the
date it is granted; provided, however, that in the case of any employee who owns
more than 10% of the outstanding Common Stock at the time an ISO is granted, the
option price for the ISO shall not be less than 110% of the fair market value of
the shares on the date of the grant, and the ISO shall not be exercisable after
the expiration of five years from the date it is granted. Options granted at
the time of the implementation of the Option Plan are expected to become
exercisable at the rate of 20% per year of their continued service after the
Conversion. An unexpired Option shall, unless otherwise determined by the
Option Committee, cease to be exercisable upon (i) an employee's termination of
employment for just cause, (ii) the date three months after an employee
terminates service for a reason other than
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just cause, death, or disability, (iii) the date one year after an employee
terminates service due to disability, or (iv) the date two years after
termination of such service due to the employee's death. Options granted to
non-employee directors will automatically expire one year after termination of
service on the Board of Directors (two years in the event of death).
An SAR may be granted in tandem with all or any part of any Option or
without any relationship to any Option. Whether or not an SAR is granted in
tandem with an Option, exercise of the SAR will entitle the optionee to receive,
as the Option Committee prescribes in the grant, all or a percentage of the
excess of the then fair market value of the shares of Common Stock subject to
the SAR at the time of its exercise, over the aggregate exercise price of the
shares subject to the SAR at the time the SAR was granted. Payment to the
Optionee may be made in cash or shares of Common Stock, as determined by the
Option Committee.
The Company will receive no monetary consideration for the granting of
Awards under the Option Plan, and will receive no monetary consideration other
than the Option exercise price for each share issued to optionees upon the
exercise of Options. The Option exercise price may be paid in cash or Common
Stock. The exercise of Options and SARs will be subject to such terms and
conditions established by the Option Committee as are set forth in a written
agreement between the Option Committee and the optionee (to be entered into at
the time an Award is granted).
Although directors and officers of the Company generally would be
prohibited under the federal securities laws from profiting from certain
purchases and sales of shares of Common Stock within any six-month period, they
generally will not be prohibited by such laws from exercising options and
immediately selling the shares they receive. As a result, directors and
officers, like the Company's and the Bank's other participating employees,
generally will be permitted to benefit in the event the market price for the
shares exceeds the exercise price of their options, without being subject to
loss in the event the market price falls below the exercise price.
The initial grant of stock options under the Option Plan is expected to
take place on the date of its receipt of stockholder approval, and the Option
exercise price would be the then fair market value of the Common Stock subject
to the Option. It is expected that Options to purchase 25% of shares of Common
Stock reserved for issuance under the Option Plan will be granted at that time
to Michael P. Brennan, and that each of the Company's and the Bank's non-
employee directors will receive Options to purchase a number of shares of Common
Stock equal to the lesser of 5% of the shares reserved under the Option Plan and
the quotient obtained by dividing 30% of the shares reserved under the Option
Plan by the number of non-employee directors entitled to receive an Option on
the plan's effective date. Non-employee directors who join the Board after the
Option Plan's effective date will receive a one-time grant of stock option to
purchase 1% of the shares reserved for issuance under the Option Plan. No SARs
are expected to be granted when the Option Plan becomes effective, and any
Options granted prior to the Option Plan's receipt of regulatory approval would
be contingent thereon.
EMPLOYEE STOCK OWNERSHIP PLAN. The Company's Board of Directors has
adopted an employee stock ownership plan ("ESOP") effective January 1, 1996.
The ESOP will cover all employees of the Company and its subsidiaries who have
attained age 21 and completed one year of service with the Company or its
subsidiaries. The Company will submit an application to the IRS for a letter of
determination as to the tax-qualified status of the ESOP. Although no
assurances can be given, the Company expects the ESOP to receive a favorable
letter of determination from the IRS.
The ESOP is to be funded by contributions made by the Company or the Bank
in cash or shares of Common Stock. The ESOP intends to borrow funds from the
Company in an amount sufficient to purchase 8% of the Common Stock issued in the
Conversion. This loan will be secured by the shares of Common Stock purchased
and earnings thereon. Shares purchased with such loan proceeds will be held in
a suspense account for allocation among participants as the loan is repaid. The
Company expects to contribute sufficient funds to the ESOP to repay such loans,
plus such other amounts as the Company's Board of Directors may determine in its
discretion.
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Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of their annual wages subject
to federal income tax withholding, plus any amounts withheld under a plan
qualified under Sections 125 or 401(k) of the Code and sponsored by the Company
or the Bank. Participants must be employed at least 500 hours in a calendar
year in order to receive an allocation. A participant becomes vested in his or
her right to ESOP benefits at the rate of 20% for each of his or her years of
service, and thereby becomes 100% vested upon his or her completion of five
years of service. For vesting purposes, a year of service means any calendar
year in which an employee completes at least 1,000 hours of service whether
before or after the ESOP's January 1, 1996 effective date. Vesting will be
accelerated to 100% upon a participant's attainment of age 65, death, or
disability. Forfeitures will be reallocated to participants on the same basis
as other contributions. Benefits are payable upon a participant's retirement,
death, disability, or separation from service, and will be paid in a lump sum in
whole shares of Common Stock (with cash paid in lieu of fractional shares).
Benefits paid to a participant in Common Stock that is not publicly traded on an
established securities market will be subject both to a right of first refusal
by the Company, and to a put option by the participant. Dividends paid on
allocated shares are expected to be paid to participants or used to repay the
ESOP loan, and dividends on unallocated shares are expected to be used to repay
the ESOP loan. ESOP benefits will be awarded at no cost to the recipients
thereof.
It is expected that the Company will administer the ESOP, and that
Directors Jacobs, Bockhorst, and Heimerdinger will be appointed as trustees of
the ESOP (the "ESOP Trustees"). The ESOP Trustees must vote all allocated
shares held in the ESOP in accordance with the instructions of the participants.
Unallocated shares and allocated shares for which no timely direction is
received will be voted by the ESOP Trustees in the same proportion as the
participant-directed voting of allocated shares.
MANAGEMENT RECOGNITION PLAN ("MRP"). The Company's Board of Directors has
adopted resolutions expressing an intention to implement the MRP upon its
receipt of stockholder approval at an annual or special meeting of the Company's
stockholders held at least six months after the Conversion. The objective of
the MRP is to enable the Company to retain personnel of experience and ability
in key positions of responsibility. Those eligible to receive benefits under
the MRP will be such employees as are selected by members of a committee
appointed by the Company's Board of Directors (the "MRP Committee"). It is
expected that the MRP Committee will initially consist of its non-employee
directors who serve on its Personnel Committee. These Directors are also
expected to serve as trustees of the trust associated with the MRP (the "MRP
Trust"). The trustees of the MRP Trust (the "MRP Trustees") will have the
responsibility to hold and invest all funds contributed to the MRP Trust.
The Company (or the Bank) will contribute sufficient funds to the MRP Trust
so that the MRP Trust can purchase, from the Company or on the open market, an
aggregate number of shares equal to 4% of the shares of the Common Stock issued
in the Conversion. It is anticipated that approximately 67% of the shares of
Common Stock purchased by the MRP Trust will be granted to eligible directors,
officers and employees pursuant to the terms of the MRP in the first year
following Conversion. Directors who are not full-time employees will be
ineligible to receive discretionary awards, but will receive the automatic
awards described below. All shares granted under the MRP will be in the form of
awards which cannot be sold, pledged or otherwise disposed of by eligible
employees. Vesting will occur at the rate of 20% per year of service following
the award date, but will accelerate to 100% if a participant's employment
terminates due to death or disability. Unvested shares held in the MRP Trust
will be voted by the MRP Trustees in the same proportion as the trustee of the
Company's ESOP trust votes Common Stock held therein, and shall be distributed
as the award vests. Dividends on unvested shares will be held in the MRP trust
for payment as vesting occurs. MRP awards will be granted at no cost to the
recipients thereof.
The Company's Board of Directors can terminate the MRP at any time, and, if
it does so, any shares not allocated will revert to the Company. At the time
the MRP receives stockholder approval, Mr. Michael P. Brennan is expected to
receive MRP awards of 25.0% of the shares reserved for award under the MRP, and
the Company's non-employee directors will receive, in the aggregate, MRP awards
of 30% of such shares (but not more than 5% per non-employee director). Each
non-employee director who joins the Board after the MRP's effective date is
expected to receive an MRP award of 1% of the number of plan shares reserved for
award under the MRP. No awards would be made prior to regulatory and
stockholder approval of the MRP.
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SALARY SAVINGS PLAN. The Bank maintains a defined contribution plan, which
is designed to qualify under Sections 401(a) and 401(k) of the Code (the "Salary
Savings Plan") An employee is eligible to participate in the Salary Savings
Plan on or after having attained age 18. The Salary Savings Plan permits each
participant to make before-tax contributions, through regular salary reductions,
of up to 10% of the participant's annual compensation. The Bank matches
employee contributions to the Salary Savings Plan on a dollar for dollar basis
up to 5% of the employee's annual compensation. The Salary Savings Plan is
intended to comply with all the rights and protection afforded employees
pursuant to the Employee Retirement Income Security Act of 1974, as amended.
Participants become 20% vested in the employer contributions to their
account balances after two years of service, 40% vested after three years of
service, 60% vested after four years of service, 80% vested after five years of
service, and 100% vested after six years of service. Benefits are paid at the
time of a participant's death, retirement, disability or termination of
employment, and, under limited circumstances, may be withdrawn prior to the
participant's termination of service. Account balances are paid upon the
participant's election, in either a lump sum, or in equal annual installments.
Contributions are not taxable to participating employees until such funds are
distributed to them. The earnings attributable to a participant's account
accumulate tax free until they are distributed to the participant or his or her
beneficiary.
The Salary Savings Plan will allow participants to direct that all or part
of their account balances be invested in Common Stock in the Conversion. Voting
rights for such stock, to be held in trust for participants, will be exercisable
by the participants.
EMPLOYMENT AGREEMENT. In February 1995, the Bank entered into an
employment agreement (the "Employment Agreement") with Mr. Michael P. Brennan
who serves as its Chief Executive Officer and President (the "Executive"). The
Employment Agreement has been amended in connection with the Conversion to add
the Company as a party jointly and severally liable for the Bank's obligations,
and to update its definition of a change in control to take into account the
Company's formation. The Executive is responsible for overseeing all operations
of the Bank and for implementing the policies adopted by the Bank's Board of
Directors. The Board believes that the Employment Agreement assures fair
treatment of the Executive in relation to his position with the Bank by assuring
him of some financial security.
The Employment Agreement became effective on February 23, 1995 for a term
of three years, with an annual base salary of $110,000. Commencing on the
second anniversary from the date of commencement of the Employment Agreement and
each year thereafter, the term of the Executive's employment will be extended
for an additional one-year period beyond the then effective expiration date,
upon a determination by the Board that the performance of the Executive has met
the required performance standards and that such Employment Agreement should be
extended. The Employment Agreement provides the Executive with a salary review
by the Board not less often than annually, as well as with inclusion in any
discretionary bonus plans, retirement and medical plans, customary fringe
benefits, vacation and personal leave. The Employment Agreement is terminable
by the Bank for "cause" as defined therein, in which event no severance benefits
are available. If the Bank terminates the Executive for any reason other than
cause, retirement, death, disability, or expiration of the Agreement, the
Executive will be entitled to a continuation of his salary from the last day of
the month following the date of the event of termination through the remaining
term of the Employment Agreement. If the Employment Agreement is terminated
due to the Executive's disability, the Executive will be entitled to a
continuation of his salary for up to 30 days. If the Executive is disabled for
a continuous period exceeding 30 days, the Bank may terminate the Employment
Agreement, in which event the Executive shall be entitled to receive secondary
disability benefits under any group or individual disability benefit program
maintained by the Bank. In the event of the Executive's death during the term
of the Employment Agreement, his estate will be entitled to receive his salary
through the remaining term of the Employment Agreement.
The Employment Agreement contains provisions stating that if the Executive
terminates employment after a change in Control of the Bank or its holding
company, for any reason other than cause, retirement, disability, death,
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expiration of the Agreement, or otherwise a change in the present capacity or
circumstances in which the Executive is employed, or a reduction in compensation
or other benefits provided under this Agreement without the Executive's written
consent, the Executive will be paid, in addition to the continuation of the
Executive's compensation and benefits through the expiration of the Agreement,
an amount equal to 2.99 times the Executive's average annual compensation for
the most recent five taxable years before the change in Control, provided such
payments do not constitute an "excess parachute payment" under Section 280G of
the Internal Revenue Code of 1986, as amended. In the event such payments would
constitute an excess parachute payment, they would be reduced accordingly.
"Control" generally refers to the acquisition, by any person or entity, of the
ownership or power to vote more than 25% of the Bank's or its holding company's
voting stock, the control of the election of a majority of the Bank's or its
holding company's directors, or the exercise of a controlling influence over the
management or policies of the Bank or its holding company. In addition, under
the Employment Agreement, a change in Control occurs when, during any
consecutive two-year period, directors of the Company or the Bank at the
beginning of such period cease to constitute at least a majority of the Board of
the Company or the Bank, provided the election of said directors was approved by
at least a majority of the initial directors then in office.
CHANGE-IN-CONTROL SEVERANCE AGREEMENTS. The Company and the Bank intend to
enter into severance agreements (the "Severance Agreements") with Messrs. John
E. Essen and Gerald T. Mueller (collectively, the "Employees"). The Severance
Agreements will have a term beginning on the date of completion of the
Conversion and ending on the earlier of (a) three years after the date of
completion of the Conversion, and (b) the date on which one of these individuals
terminates employment with the Bank, provided that the Employee's rights under
the Severance Agreement will continue following termination of employment if the
Severance Agreement was in effect at the date of the change in Control. On each
annual anniversary date from the date of commencement of the Severance
Agreements, the term of the Severance Agreements may be extended for additional
one-year periods beyond the then effective expiration date, upon a determination
by the Board of Directors that the performance of these individuals has met the
required performance standards and that such Severance Agreements should be
extended.
Under the Severance Agreements, in the event of an Employee's involuntary
termination of employment in connection with, or within one year after, any
change in Control of the Bank or the Company, other than for "just cause," the
Employee will be paid, within 10 days of such termination, an amount equal to
the difference between (i) 2.99 times his "base amount" as defined in Section
280G(b)(3) of the Internal Revenue Code, and (ii) the sum of any other parachute
payments, as defined under Section 280G(b)(2) of the Internal Revenue Code, that
he receives on account of the change in Control. "Control" has the same meaning
under the Severance Agreements as in the Employment Agreement. Each Severance
Agreement also provides for a similar lump sum payment to be made in the event
of Mr. Essen's or Mr. Mueller's voluntary termination of employment within one
year following a change in Control, upon the occurrence, or within 90 days
thereafter, of certain specified events following the change in Control, which
they have not consented to in writing, including (i) requiring them to perform
their principal executive functions more than 30 miles from their current
primary offices, (ii) reducing their base compensation as then in effect, (iii)
failing to maintain employee benefits, including material fringe benefits, (iv)
assigning material duties and responsibilities to the Employees which are other
than those normally associated with their position with the Bank, (v) failing to
elect or reelect the Employees to the Board, if the Employees are serving on the
Board on the date of the change in Control, (vi) materially diminishing the
Employees' authority and responsibilities, and (vii) a material reduction in the
secretarial or other administrative support of the Employees.
The Severance Agreements, as well as the Employment Agreement, provide that
within five business days of a change in Control, the Bank will fund, or cause
to be funded, a trust in the amount of 2.99 times the base amount that will be
used to pay amounts owed to the Employees upon termination, other than for just
cause, within one year of the change in Control. The amount to be paid to an
Employee from this trust upon his termination is determined according to the
procedures outlined in the Severance Agreements with the Bank, and any money not
paid to the Employee is returned to the Bank. The Severance Agreements between
the Bank and the Employees also include a provision under which the Employees'
severance benefits will be adjusted upward or downward in the event the amounts
paid are later determined to have been incorrectly calculated.
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The aggregate payments that would be made to Messrs. Brennan, Essen, and
Mueller, assuming termination of employment under the foregoing circumstances at
January 31, 1996, would have been approximately $388,700, $109,552, and
$150,906, respectively. These provisions may have an anti-takeover effect by
making it more expensive for a potential acquiror to obtain control of the
Company. For more information, see "Certain Anti-Takeover Provisions in the
Charter and Bylaws -- Additional Anti-Takeover Provisions." In the event that
one of these individuals prevails over the Company and the Bank in a legal
dispute as to the Severance Agreement, he will be reimbursed for his legal and
other expenses.
POST-CONVERSION COMPENSATION. The following table summarizes the
compensation and other benefits that the Bank's executive officers and directors
are expected to receive in connection with the Conversion as compared to what
they currently receive. The table does not include benefits, such as those to
be available under the ESOP, which are generally available to full-time
employees.
<TABLE>
<CAPTION>
Individual Items Unaffected by the Conversion New Benefits (1)
-------------------------------------------- ------------------------
Salary and/or Bonus Directors'
Fees for 1995 for 1995 Retirement Plan MRP Award Stock Options
- --------------------- -------------- -------- --------------- --------- -------------
<S> <C> <C> <C> <C> <C>
John B. Bennet, Sr. $17,800 (2)(3) -- (4) 3,685 9,214
Robert H. Bockhorst $15,300 (2) -- (4) 3,685 9,214
Michael P. Brennan $110,000 $20,000 -- 21,500 53,750
Raymond J. Brinkman $20,300 (2)(5) -- (4) 3,685 9,214
Roger M. Higley $15,300 (2) -- (4) 3,685 9,214
Carl H. Heimerdinger $40,300 (2)(6) -- (4) 3,685 9,214
Mary Ann Jacobs $20,300 (2)(7) -- (4) 3,685 9,214
James D. Kemp $15,300 (2) -- (4) 3,685 9,214
Gerald T. Mueller $64,000 (8) $1,000 -- 3,655 9,138
John E. Essen $45,200 (8) -- -- 3,333 8,331
</TABLE>
- --------------------
(1) Assumes approval of the MRP and the Option Plan by the FDIC and the
Superintendent and by the stockholders of the Company at a meeting to be
held no earlier than six months following the Conversion. Also assumes the
issuance of 2,150,000 shares of Common Stock in the Conversion (the
midpoint of the Current Valuation Range). If the Option Plan and the MRP
are implemented, awards under such plans would vest at a rate of 20% per
year of service following the award date. See " -- Certain Benefit Plans
and Agreements -- Management Recognition Plan" and " -- Stock Option Plan."
(2) Each non-employee director receives $15,300 per year in directors' fees.
For additional information, see "Management of the Bank -- Director
Compensation."
(3) Includes $2,500 in compensation for serving as Vice President for the first
two months of 1995 and serving as Vice Chairman for the remainder of the
year.
(4) Benefits are paid to participants upon their termination of service with
the Board in accordance with a formula specified in the Directors' Plan.
See "--Director Compensation--Director Retirement Plan."
(5) Includes $5,000 received by Mr. Brinkman for serving as internal auditor
and compliance officer of the Bank during the year.
(6) Mr. Heimerdinger received $25,000 in salary for his service as President of
the Bank during the first two months of 1995 and for serving as Chairman of
the Board for the remainder of the year.
(7) Includes $5,000 in compensation for serving as Secretary during the year.
(8) Mr. Mueller and Mr. Essen received additional compensation from a lump sum
payment of previous years' accrued vacation and personal time.
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TRANSACTIONS WITH MANAGEMENT
In accordance with current law, the Bank has a policy of offering loans to
officers and directors in the ordinary course of business, on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and all loans outstanding at
December 31, 1995 to directors and executive officers satisfied such conditions.
Further, these loans do not involve more than the normal risk of collectibility
or present other unfavorable features. At March 31, 1996, the aggregate amount
of loans outstanding to executive officers and directors (including loans to
affiliated companies of which the executive officer or director is a principal
owner and loans to members of the executive officer's or director's immediate
family) was $841,000, or 5.8% of capital. All such loans were performing
according to their terms at that date.
Ms. Jacobs is an attorney and partner in the law firm of Ritter & Randolph,
Cincinnati, Ohio, which performs real estate closings, title examinations and
represents the Bank in general corporate matters and litigation. During the
fiscal year ended December 31, 1995, the Bank paid $78,469 to the firm of Ritter
& Randolph for legal services rendered to the Bank.
THE CONVERSION
THE SUPERINTENDENT HAS GIVEN APPROVAL TO THE PLAN AND THE FDIC HAS PROVIDED
WRITTEN NOTICE OF NON-OBJECTION TO THE PLAN, SUBJECT TO THE PLAN'S APPROVAL BY
THE MEMBERS OF THE BANK ENTITLED TO VOTE ON THE MATTER AND SUBJECT TO THE
SATISFACTION OF CERTAIN OTHER CONDITIONS IMPOSED BY THE SUPERINTENDENT AND THE
FDIC. APPROVAL BY THE SUPERINTENDENT AND WRITTEN NOTICE OF NON-OBJECTION BY THE
FDIC, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN.
GENERAL
On January 11, 1996, the Board of Directors of the Bank adopted, and on
March 11, 1996 amended, subject to approval by the Superintendent, the FDIC and
the members of the Bank, the Plan, pursuant to which the Bank will be converted
from an Ohio chartered mutual savings bank to an Ohio chartered stock savings
bank as a wholly owned subsidiary of the Company. The Superintendent has
approved the Plan, and the FDIC has provided written notice of non-objection of
the Plan, subject to its approval by the members of the Bank at a special
meeting (the "Special Meeting") called for that purpose to be held on __________
___, 1996. The discussion in this section includes a summary of all significant
provisions of the Plan and is qualified in its entirety by the Plan, which is
attached as Exhibit A to the Bank's Proxy Statement which accompanies this
Prospectus, or which can be obtained upon request from the Bank.
The Conversion will be accomplished through the amendment of the Bank's
existing Ohio Mutual Articles of Incorporation, Constitution and Bylaws to read
in the form of proposed Ohio Stock Articles of Incorporation, Constitution and
Bylaws to authorize the issuance of capital stock by the Bank. Under the Plan,
the Company is offering shares of the Common Stock first to the Bank's Eligible
Account Holders, second to the ESOP, third to Supplemental Eligible Account
Holders, and fourth to Other Members.
The Company is also concurrently offering the Common Stock to members of
the general public in a Community Offering with preference given to natural
persons and trusts of natural persons permanently residing in the Local
Community. Subscriptions for the Common Stock received from members of the
general public will be subject to availability of shares of Common Stock for
purchase after satisfaction of all subscriptions in the Subscription Offering,
to the maximum and minimum purchase limitations set forth in the Plan, and to
the right of the Company to reject any such subscriptions, in whole or in part.
Upon completion of the Conversion, the Bank will issue all of its newly issued
shares of capital stock (100,000 shares) to the Company in exchange for up to
50% of the aggregate net proceeds from the sale of the Common Stock.
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Stock offering materials may be obtained at the Bank's office, where
officers of the Bank are available to answer questions (but only to the extent
such information is derived from this Prospectus) and to receive completed Order
Forms for the Common Stock.
State of Ohio and Federal regulations require, with certain exceptions,
that at least the minimum number of shares offered in the Conversion must be
sold in order for the Conversion to become effective. All shares of the Common
Stock not sold in the Subscription Offering are expected to be sold in the
Community Offering. State and Federal regulations further require that the
Community Offering be completed within 45 days after completion of the
Subscription Offering period unless such period is extended by the Bank with the
approval of the regulatory authorities. If the Community Offering is determined
not to be feasible, an occurrence that is not currently anticipated, the Board
of Directors of the Bank will consult with the regulatory authorities to
determine an appropriate alternative method of selling all unsubscribed shares
of Common Stock offered in the Conversion. The Plan provides that the
Conversion must be completed within 24 months after the date of the approval of
the Plan by the members of the Bank and within 12 months of the date on which
the Superintendent approves the Plan, unless extended.
No sales of the Common Stock may be completed, either in the Subscription
Offering or the Community Offering, unless the Plan is approved by the members
of the Bank.
The Community Offering is being commenced concurrently with the
Subscription Offering. The completion of the Subscription Offering and
Community Offering, however, is subject to market conditions and other factors
beyond the Bank's control. No assurance can be given as to the length of time
after approval of the Plan at the Special Meeting that will be required to
complete the Community Offering or other sale of the Common Stock to be offered
in the Conversion. If delays are experienced, significant changes may occur in
the estimated pro forma market value of the Bank upon Conversion together with
corresponding changes in the offering price and the net proceeds realized by the
Bank from the sale of the Common Stock. The Bank would also incur substantial
additional printing, legal and accounting expenses in completing the Conversion.
In the event the Conversion is terminated, the Bank would be required to charge
all Conversion expenses against current income.
BUSINESS PURPOSES
Westwood Homestead, as a mutual savings bank, does not have stockholders
and has no authority to issue capital stock. By converting to the stock form of
organization, the Bank will be structured in the form used by commercial banks,
most business entities and a growing number of savings institutions. The
Conversion will be important to the future growth and performance of the Bank by
providing a larger capital base on which the Bank may operate, enhanced future
access to capital markets and ability to attract and retain qualified management
through stock options, enhanced ability to diversify into other financial
services related activities, and enhanced ability to render services to the
public.
The Board of Directors and management of Westwood Homestead believe that
the stock form of organization is a preferred form (as opposed to the mutual
form) of organization for a financial institution as evidenced in part by the
decline in the number of mutual thrifts in existence.
The Bank's Board of Directors has determined that the Conversion will be
beneficial to the communities within its primary market area and persons
residing within those communities. The Conversion will provide those persons
with an opportunity to be an equity owner of the Bank through ownership in the
Company. Westwood Homestead believes that by combining quality service and
products with a local ownership base its customers and community members who
become stockholders will be more inclined to do business with the Westwood
Homestead. This is consistent with the Bank's objective of being a locally
owned financial institution servicing local needs. Equity ownership will enable
local stockholders to participate in the Bank's success and profitability
through possible capital appreciation and dividends.
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The Bank's Board of Directors has formed the Company to serve as a holding
company with the Bank as its subsidiary. The net proceeds from the sale of the
Common Stock in the Conversion will substantially increase the Bank's capital
position, which will in turn increase the amount of funds available for lending
and investment and provide greater resources to support both current operations
and for future expansion by the Bank. The holding company structure will
provide greater flexibility than the Bank alone would have for diversification
of business activities and geographic operations. Management believes that this
increased capital and operating flexibility will enable the Bank to compete more
effectively with other types of financial services organizations. In addition,
the Conversion will also enhance the future access of the Company and the Bank
to the capital markets.
The Board of Directors also considered and determined that it is in the
best interest of the Company and the Bank to implement the MRP and Option Plan
in connection with the Conversion to recognize the contributions of the
Company's and the Bank's management, Board and staff to the growth, success, and
profitability of the Company, and to encourage through various stock related
incentives the continued contributions of such persons to the Company and its
business objectives.
EFFECT OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE BANK
CONTINUITY. During the Conversion process, the normal business of Westwood
Homestead of accepting deposits and making loans will continue without
interruption. The Bank will continue to be subject to regulation by the
Superintendent and the FDIC, and its FDIC insurance will continue without
interruption. After the Conversion, the Bank will continue to provide services
for depositors and borrowers under current policies and by its present
management and staff.
The directors serving the Bank at the time of the Conversion will serve as
directors of the Bank after the Conversion. The directors of the Company will
consist of the individuals currently serving on the Board of Directors of the
Bank. All officers of the Bank at the time of the Conversion will retain their
positions with the Bank after the Conversion.
VOTING RIGHTS. Upon the completion of the Conversion, depositor and
borrower members as such will have no voting rights in the Bank or the Company
and will therefore not be able to elect directors of the Bank or the Company or
to control their affairs. Currently, these rights are accorded to members of
the Bank. Subsequent to the Conversion, voting rights will be vested
exclusively in the stockholders of the Company which, in turn will own all of
the stock of the Bank. Each holder of Common Stock shall be entitled to vote on
any matter to be considered by the stockholders of the Company.
DEPOSIT ACCOUNTS AND LOANS. THE BANK'S DEPOSIT ACCOUNTS, THE BALANCES OF
THE INDIVIDUAL ACCOUNTS AND THE EXISTING FEDERAL DEPOSIT INSURANCE COVERAGE WILL
NOT BE AFFECTED BY THE CONVERSION. Furthermore, the Conversion will not affect
the loan accounts, the balances of these accounts, and the obligations of the
borrowers under their individual contractual arrangements with the Bank.
TAX EFFECTS. Westwood Homestead has received an opinion from its special
counsel, Housley Kantarian & Bronstein, P.C., Washington, D.C., as to the
material federal income tax consequences of the Conversion, including that the
Conversion will constitute a reorganization under Section 368(a)(1)(F) of the
Code. Among other things, the opinion also provides that, for federal income
tax purposes: (i) no gain or loss will be recognized by the Bank in its mutual
or stock form by reason of the Conversion; (ii) no gain or loss will be
recognized by its account holders upon the issuance to them of accounts in the
Bank in stock form immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Bank immediately
prior to the Conversion; (iii) the tax basis of each account holder's interest
in the liquidation account received in the Conversion will be equal to the
value, if any, of that interest; (iv) the tax basis of the Common Stock
purchased in the Conversion will be equal to the amount paid therefor increased,
in the case of Common Stock acquired pursuant to the exercise of subscription
rights, by the fair market value, if any, of such subscription rights exercised;
(v) the holding period of the Common Stock purchased pursuant to the exercise of
subscription rights will commence upon the exercise of such holder's
subscription rights and otherwise on the day following the date of such
purchase; and
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(vi) gain or loss will be recognized to account holders upon the receipt of
liquidation rights and the receipt of subscription rights in the Conversion, to
the extent such liquidation rights and subscription rights are deemed to have
value, as discussed below.
The opinion of Housley Kantarian & Bronstein, P.C. is based in part upon,
and subject to the continuing validity in all material respects through the date
of the Conversion of, various representations of the Bank and upon certain
assumptions and qualifications, including that the Conversion is consummated in
the manner and according to the terms provided in the Plan. Such opinion is
also based upon the Code, regulations now in effect or proposed thereunder,
current administrative rulings and practice and judicial authority, all of which
are subject to change and such change may be made with retroactive effect.
Unlike private letter rulings received from the IRS, an opinion of counsel is
not binding upon the IRS and there can be no assurance that the IRS will not
take a position contrary to the positions reflected in such opinion, or that
such opinion will be upheld by the courts if challenged by the IRS.
Housley Kantarian & Bronstein, P.C. has advised the Bank that an interest
in a liquidation account has been treated by the IRS, in a series of private
letter rulings which do not constitute formal precedent, as having nominal, if
any, fair market value and therefore it is likely that the interests in the
liquidation account established by the Bank as part of the Conversion will
similarly be treated as having nominal, if any, fair market value. Accordingly,
it is likely that such depositors of the Bank who receive an interest in such
liquidation account established by the Bank pursuant to the Conversion will not
recognize any gain or loss upon such receipt.
Housley Kantarian & Bronstein, P.C. has further advised the Bank that the
federal income tax treatment of the receipt of subscription rights pursuant to
the Conversion is uncertain, and recent private letter rulings issued by the IRS
have been in conflict. For instance, the IRS adopted the position in one
private ruling that subscription rights will be deemed to have been received to
the extent of the minimum pro rata distribution of such rights, together with
the rights actually exercised in excess of such pro rata distribution, and with
gain recognized to the extent of the combined fair market value of the pro rata
distribution of subscription rights plus the subscription rights actually
exercised. Persons who do not exercise their subscription rights under this
analysis would recognize gain upon receipt of rights equal to the fair market
value of such rights, regardless of exercise, and would recognize a
corresponding loss upon the expiration of unexercised rights that may be
available to offset the previously recognized gain. Under another IRS private
ruling, subscription rights were deemed to have been received only to the extent
actually exercised. This private ruling required that gain be recognized only
if the holder of such rights exercised such rights, and that no loss be
recognized if such rights were allowed to expire unexercised. There is no
authority that clearly resolves this conflict among these private rulings, which
may not be relied upon for precedential effect. However, based upon express
provisions of the Code and in the absence of contrary authoritative guidance,
Housley Kantarian & Bronstein, P.C. has provided in its opinion that gain will
be recognized upon the receipt rather than the exercise of subscription rights.
Further, also based upon a published IRS ruling and consistent with recognition
of gain upon receipt rather than exercise of the subscription rights, Housley
Kantarian & Bronstein, P.C. has provided in its opinion that the subsequent
exercise of the subscription rights will not give rise to gain or loss.
Regardless of the position eventually adopted by the IRS to resolve these
private rulings, the tax consequences of the receipt of the subscription rights
will depend, in part, upon their valuation for federal income tax purposes.
If the subscription rights are deemed to have a fair market value, the
receipt of such rights will be taxable to Eligible Account Holders, Supplemental
Eligible Account Holders and other eligible members who exercise their
subscription rights, even though such persons would have received no cash from
which to pay taxes on such taxable income. The Bank could also recognize a gain
on the distribution of such subscription rights in an amount equal to their
aggregate fair market value. In the opinion of RP Financial, a financial
consulting firm retained by the Company, whose opinion is not binding upon the
IRS, the subscription rights do not have any value, based on the fact that such
rights are acquired by the recipients without cost, are non-transferable and of
short duration, and afford the recipients the right only to purchase shares of
the Common Stock at a price equal to its estimated fair market value, which will
be the same price as the price paid by purchasers in the Community Offering for
unsubscribed shares of Common Stock. Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members are encouraged to consult with their
own tax advisors as to the tax consequences in the event that the subscription
rights are deemed to have a fair market value. Because the fair market value,
if any, of the subscription rights issued
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in the Conversion depends primarily upon the existence of those facts noted by
RP Financial in its opinion rather than the resolution of legal issues, Housley
Kantarian & Bronstein, P.C., has neither adopted the opinion of RP Financial as
its own nor incorporated the opinion of RP Financial in its tax opinion issued
in connection with the Conversion.
The Bank has also received the opinion of KPMG Peat Marwick LLP that no
gain or loss will be recognized as a result of the Conversion for purposes of
Ohio income tax law.
THE FEDERAL AND OHIO INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT PURPORT
TO CONSIDER ALL ASPECTS OF FEDERAL AND OHIO INCOME TAXATION WHICH MAY BE
RELEVANT TO EACH ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER
AND OTHER MEMBER ENTITLED TO SPECIAL TREATMENT UNDER THE CODE OR OHIO LAW,
RESPECTIVELY, SUCH AS TRUSTS, INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE
BENEFIT PLANS, INSURANCE COMPANIES, ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL
ELIGIBLE ACCOUNT HOLDERS AND OTHER MEMBERS WHO ARE NOT CITIZENS OR RESIDENTS OF
THE UNITED STATES. IN ADDITION TO CAREFULLY REVIEWING THE FOREGOING DISCUSSION,
EACH ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER AND OTHER
MEMBER SHOULD ALSO CONSULT HIS OR HER OWN TAX AND FINANCIAL ADVISOR AS TO HIS OR
HER OWN PARTICULAR FACTS AND CIRCUMSTANCES, INCLUDING THE RECEIPT AND EXERCISE
OF SUBSCRIPTION RIGHTS, AND ALSO AS TO ANY LOCAL, FOREIGN OR OTHER FEDERAL OR
STATE TAX CONSEQUENCES ARISING OUT OF THE CONVERSION.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each holder of a deposit account in the
Bank would receive his pro rata share of any assets of the Bank remaining after
payment of claims of all creditors (including the claims of all depositors to
the withdrawal value of their accounts). His pro rata share of such remaining
assets would be the same proportion of such assets as the value of his deposit
account was to the total of the value of all deposit accounts in the Bank at the
time of liquidation.
After the Conversion, each deposit account holder on a complete liquidation
would have a claim of the same general priority as the claims of all other
general creditors of the Bank. Therefore, except as described below, his claim
would be solely in the amount of the balance in his deposit account plus accrued
interest. He would have no interest in the value of the Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the net worth of the Bank as of the date of its latest statement of financial
condition contained in the final prospectus. The liquidation account will be
established as a memorandum account, (I.E., an account not appearing on the
Bank's statements of financial condition). The liquidation account is not an
escrow account and is established to provide a limited priority claim to the
assets of the Bank after the Conversion. Each Eligible Account Holder and
Supplemental Eligible Account Holder would be entitled, on a complete
liquidation of the Bank after Conversion, to an interest in the liquidation
account. Each Eligible Account Holder and Supplemental Eligible Account Holder
would have an initial interest in the liquidation account determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of the qualifying deposit in the related
deposit account and the denominator is the total amount of the qualifying
deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders in the Bank. However, if the amount in the qualifying deposit account
on any annual closing date of the Bank (December 31) is less than the amount in
such account on the relevant eligibility date, or any subsequent closing date,
then the Eligible Account Holder's or Supplemental Eligible Account Holder's
interest in the liquidation account would be reduced from time to time by an
amount proportionate to any such reduction. If any such qualified deposit
account is closed, the interest in the liquidation account will be reduced to
zero.
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Any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders were satisfied would be
distributed to the entity or persons holding the Bank's capital stock at that
time.
SUBSCRIPTION RIGHTS
Nontransferable subscription rights to purchase stock have been issued to
all persons entitled to purchase stock in the Subscription Offering at no cost
to such persons. The amount of stock which these parties may purchase will be
determined, in part, by the total stock to be issued, and the availability of
stock for purchase under the categories set forth in the Plan. If the Community
Offering, as described below, extends beyond 45 days following the expiration of
the Subscription Offering, subscribers will have the opportunity to increase,
decrease or rescind their orders to purchase stock submitted in the Subscription
Offering. Preference categories have been established for the allocation of
stock to the extent that said stock is available. These categories are as
follows:
SUBSCRIPTION CATEGORY NO. 1 is reserved for the Bank's Eligible Account
Holders (I.E., depositors in the Bank on September 30, 1994) who will each
receive nontransferable subscription rights to purchase up to $250,000 of Common
Stock, when aggregated with purchases by an associate of such person or a group
of persons acting in concert. Subscription rights received by officers and
directors in this category based on their increased deposits in the Bank in the
one-year period preceding September 30, 1994 the Eligibility Record Date are
subordinated to the subscription rights of other Eligible Account Holders. In
the event of an oversubscription, the available shares will be allocated among
the subscribing Eligible Account Holders so that each such Eligible Account
Holder, to the extent possible, will be allowed to purchase a number of shares
sufficient to make his total allocation (including the number of shares of
Common Stock, if any, allocated in accordance with Subscription Category No. 1)
equal to 100 shares or the total amount of his subscription, whichever is less.
Any shares not so allocated shall be allocated among the subscribing Eligible
Account Holders on an equitable basis, related to their respective qualifying
deposits, as compared to the total deposits of all subscribing Eligible Account
Holders.
TO ENSURE PROPER ALLOCATION OF STOCK, EACH ELIGIBLE ACCOUNT HOLDER IS
REQUESTED TO LIST ON HIS OR HER ORDER FORM ALL ACCOUNTS AT THE BANK IN WHICH HE
OR SHE HAS AN OWNERSHIP INTEREST. FAILURE TO LIST AN ACCOUNT COULD RESULT IN
LESS SHARES BEING ALLOCATED THAN IF ALL ACCOUNTS HAD BEEN DISCLOSED.
SUBSCRIPTION CATEGORY NO. 2 is reserved for the ESOP, which is expected to
purchase 8% of the Common Stock. Subscriptions in this category will be filled
only to the extent that there are sufficient shares of Common Stock remaining
after satisfaction of subscriptions by Eligible Account Holders.
SUBSCRIPTION CATEGORY NO. 3 is reserved for the Bank's Supplemental
Eligible Account Holders (I.E., holders of a qualifying deposit account on
__________ ___, 1996 who are not Eligible Account Holders) who will each receive
nontransferable subscription rights to purchase up to $250,000 of Common Stock,
when aggregated with purchases by an associate of such person or group of
persons acting in concert to the extent available following subscriptions by
Eligible Account Holders and the ESOP. Any subscription rights to purchase
shares received by an Eligible Account Holder and the ESOP in accordance with a
prior subscription category will reduce to the extent thereof the subscription
rights to be distributed pursuant to this category. In the event of an
oversubscription, the available shares will be allocated among the subscribing
Supplemental Eligible Account Holders so that each such Supplemental Eligible
Account Holder, to the extent possible, will be allowed to purchase a number of
shares sufficient to make his total allocation (including the number of shares
of Common Stock, if any, allocated in accordance with Subscription Category No.
1) equal to 100 shares or the total amount of his subscription, whichever is
less. Any shares not so allocated shall be allocated among the subscribing
Supplemental Eligible Account Holders on an equitable basis, related to their
respective qualifying deposits, as compared to the total deposits of all
subscribing Supplemental Eligible Account Holders.
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SUBSCRIPTION CATEGORY NO. 4 is reserved for Other Members (I.E., depositors
as of __________ ___, 1996) who receive nontransferable subscription rights to
purchase the Common Stock in an amount equal to $250,000 of Common Stock, when
aggregated with purchases by an associate of such person or a group of persons
acting in concert. In the event of an oversubscription, the available shares
will be allocated among subscribing Other Members whose subscriptions remain
unsatisfied so as to permit each subscribing Other Member, to the extent
possible, to purchase a number of shares sufficient to make his or her total
allocation equal to the lesser of 100 shares or the number of shares subscribed
for by the Other Member. The shares remaining thereafter will be allocated
among subscribing Other Members whose subscriptions remain unsatisfied on an
equitable basis as determined by the Board of Directors.
In addition to the purchase limitations described above, purchases by
persons in the Conversion, when aggregated with purchases by their associates
and groups acting in concert may not exceed $250,000 of the Common Stock issued
in the Conversion except that the ESOP may purchase up to 10% of the total
shares of Common Stock issued in the Conversion and shares purchased by the ESOP
and attributable to any participant thereunder shall not be aggregated with
shares purchased by such participation on any other purchaser. For more
information, see "-- Limitations on Purchases of Shares."
The Company will make reasonable efforts to comply with the securities laws
of all states in the United States in which persons entitled to subscribe for
the Common Stock pursuant to the Plan reside. However, no person will be
offered or allowed to purchase any Common Stock under the Plan if he resides in
a foreign country or in a state of the United States with respect to which all
of the following apply: (i) a small number of persons otherwise eligible to
subscribe for shares under the Plan reside in such state; (ii) the granting of
subscription rights or offer or sale of shares of the Common Stock to such
persons would require the Company or the Bank or their employees to register
under the securities laws of such state as a broker or dealer or to register or
otherwise qualify its securities for sale in such state; and (iii) such
registration or qualification would be impracticable for reasons of cost or
otherwise. No payments will be made in lieu of the granting of subscription
rights to any such person.
SUBSCRIPTION OFFERING
EXPIRATION DATE OF SUBSCRIPTION OFFERING. The Subscription Offering will
expire at __:__ _.m., Eastern Time, on __________ ___, 1996 unless extended by
the Board of Directors of the Bank or the Company for up to an additional ___
days, to no later than __________, 1996. Such date and time are referred to
herein as the "Expiration Date." Subscription rights not exercised prior to the
Expiration Date will be void.
Orders will not be executed by the Company until at least the minimum
number of shares of Common Stock offered hereby have been subscribed for or
sold. If all shares of the Common Stock have not been subscribed for or sold
within 45 days of the end of the Subscription Offering (unless such period is
extended with consent of the FDIC and the Superintendent), all funds delivered
to the Company pursuant to the Subscription Offering will be promptly returned
to the subscribers with interest and all charges to savings accounts will be
rescinded.
USE OF ORDER FORMS AND CERTIFICATION FORMS. Rights to subscribe may only
be exercised by completion of Order Forms. Any person receiving an Order Form
who desires to subscribe for shares of stock must do so prior to the Expiration
Date by delivering (by mail or in person) to the office of Westwood Homestead a
properly executed and completed Order Form, together with full payment for all
shares for which the subscription is made. All checks or money orders must be
made payable to "Westwood Homestead Financial Corporation." The Order Form must
be received by the Expiration Date. All subscription rights under the Plan will
expire on the Expiration Date, whether or not the Company has been able to
locate each person entitled to such subscription rights. ONCE TENDERED,
SUBSCRIPTION ORDERS CANNOT BE REVOKED.
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Each subscription right may be exercised only by the person to whom it is
issued and only for his or her own account. THE SUBSCRIPTION RIGHTS GRANTED
UNDER THE PLAN ARE NONTRANSFERABLE; PERSONS WHO ATTEMPT TO TRANSFER THEIR
SUBSCRIPTION RIGHTS MAY LOSE THE RIGHT TO PURCHASE COMMON STOCK IN THE
CONVERSION AND MAY BE SUBJECT TO OTHER SANCTIONS AND PENALTIES IMPOSED BY THE
SUPERINTENDENT AND THE FDIC. Each person subscribing for shares is required to
represent to the Company that he or she is purchasing such shares for his or her
own account and that he or she has no agreement or understanding with any other
person for the sale or transfer of such shares.
In the event Order Forms (i) are not delivered and are returned to the
Company by the United States Postal Service or the Company is unable to locate
the addressee, or (ii) are not returned or are received after the Expiration
Date, or (iii) are defectively completed or executed, or (iv) are not
accompanied by the full required payment for the shares subscribed for
(including instances where a savings account or certificate balance from which
withdrawal is authorized is insufficient to fund the amount of such required
payment), the subscription rights of the person to whom such rights have been
granted will lapse as though such person failed to return the completed Order
Form within the time period specified. However, the Company or the Bank may,
but will not be required to, waive any irregularity on any Order Form or require
the submission of corrected Order Forms or the remittance of full payment for
subscribed shares by such date as the Company or the Bank may specify. The
interpretation by the Company and the Bank of the terms and conditions of the
Plan and of the Order Form will be final.
PAYMENT FOR SHARES. Payment for all subscribed shares of Common Stock will
be required to accompany all completed Order Forms for subscriptions to be
valid. Payment for subscribed shares may be made (i) in cash, if delivered in
person, (ii) by check or money order, or (iii) by authorization of withdrawal
from deposit accounts maintained with the Bank. Appropriate means by which such
withdrawals may be authorized are provided in the order forms. Once such a
withdrawal has been authorized, none of the designated withdrawal amount may be
used by a subscriber for any purpose other than to purchase stock for which
subscription has been made while the Plan remains in effect. In the case of
payments authorized to be made through withdrawal from deposit accounts, all
sums authorized for withdrawal will continue to earn interest at the contract
rate until the date of consummation of the sale. In the case of payments made
in cash or by check or money order, such funds will be placed in a segregated
savings account at the Bank and interest will be paid at the Bank's passbook
yield (currently 2%) from the date payment is received until the Conversion is
completed or terminated. Interest penalties for early withdrawal applicable to
certificate accounts will not apply to withdrawals authorized for the purchase
of shares; however, if a partial withdrawal results in a certificate account
with a balance less than the applicable minimum balance requirement, the
certificate evidencing the remaining balance will earn interest at the Bank's
passbook yield (currently 2%) subsequent to the withdrawal. An executed Order
Form, once received by the Company, may not be modified, amended or rescinded
without the consent of the Company, unless the Conversion is not completed
within 45 days of the termination of the Subscription Offering. If an extension
of the period of time to complete the Conversion is approved by the
Superintendent and the FDIC, subscribers will be resolicited and must
affirmatively reconfirm their orders prior to the expiration of the
resolicitation offering, or their subscription funds will be promptly refunded.
Subscribers may also modify or cancel their subscriptions. Interest will be
paid on such funds at the Bank's passbook yield (currently 2% per annum) during
the 45-day period and any approved extension period.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of Common Stock in the Subscription and Community Offerings, provided
that such IRAs are not maintained at Westwood Homestead. Persons with IRAs
maintained at Westwood Homestead must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of Common Stock in the
Subscription and Community Offerings. Depositors interested in using funds in a
Westwood Homestead IRA to purchase Common Stock should contact Westwood
Homestead's Stock Information Center at (___) ___-____ as soon as possible so
that the necessary forms may be forwarded for execution and returned prior to
the Expiration Date of the Subscription Offering.
SHARES PURCHASED. Certificates representing shares of the Common Stock
will be delivered to subscribers as soon as practicable after closing of the
Conversion.
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COMMUNITY OFFERING
Concurrently with the Subscription Offering, the Company is offering shares
of the Common Stock in a Community Offering. Orders for the Common Stock in the
Community Offering will be filled to the extent such shares remain available
after satisfaction of all orders received in the Subscription Offering. THE
COMMUNITY OFFERING IS EXPECTED TO TERMINATE ON __________ ___, 1996 BUT MAY
TERMINATE AS LATE AS __________ ___, 1996. THE RIGHT OF ANY PERSON TO PURCHASE
SHARES IN THE COMMUNITY OFFERING IS SUBJECT TO THE ABSOLUTE RIGHT OF THE COMPANY
AND THE BANK TO ACCEPT OR REJECT SUCH PURCHASES IN WHOLE OR IN PART. THE
COMPANY PRESENTLY INTENDS TO TERMINATE THE COMMUNITY OFFERING AS SOON AS IT HAS
RECEIVED ORDERS FOR ALL SHARES AVAILABLE FOR PURCHASE IN THE CONVERSION.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Community
Offering and all funds submitted pursuant to the Community Offering will be
promptly refunded with interest. In the event an insufficient number of shares
are available to fill orders in the Community Offering, the available shares
will be allocated by the Company in its discretion that a preference shall be
given to natural persons and trusts of natural persons who are permanent
residents of the Local Community. Orders received in the Community Offering
shall first be filled up to a maximum of 2% of the stock being offered and
thereafter remaining shares will be allocated on an equal number of shares per
order until all orders have been filled. If the Community Offering extends
beyond 45 days following the expiration of the Subscription Offering,
subscribers will have the right to increase, decrease or rescind subscriptions
for stock previously submitted. Purchasers in the Community Offering, together
with their associates and groups acting in concert, are each eligible to
purchase up to $250,000 of the Common Stock issued in the Conversion.
Except as noted below, cash and checks received in the Community Offering
will be placed in a segregated savings account at the Bank established
specifically for this purpose. Interest will be paid on orders made by check,
in cash or by money order at the Bank's passbook yield (currently 2%), from the
date the payment is received by the Company until the consummation of the
Conversion. In the event that the Conversion is not consummated for any reason,
all funds submitted pursuant to the Community Offering will be promptly refunded
with interest as described above.
SYNDICATED COMMUNITY OFFERING
As part of the Community Offering, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, may be offered for sale to the general public in a Syndicated
Community Offering through selected dealers to be formed and managed by the
Agents. The Syndicated Community Offering, if any, will be conducted to achieve
the widest distribution of Common Stock subject to the Company and the Bank
having the right to reject orders in whole or in part in their sole discretion
in the Syndicated Community Offering. Neither the Agents nor any registered
broker-dealer shall have any obligation to take or purchase any shares of the
Common Stock in the Syndicated Community Offering.
Common Stock sold in the Syndicated Community Offering will be sold at the
same price as in the Subscription and Community Offerings.
Individual purchasers in the Syndicated Community Offering may purchase up
to $250,000 of the Common Stock with any associate or group of persons acting in
concert. The Bank shall be directly responsible for the payment of selling
commissions to other NASD firms and licensed brokers participating in the
Syndicated Community Offering. Other firms may participate under a selected
dealers arrangement and selected dealers may receive a fee of up to a maximum of
4% of the aggregate purchase price of the Common Stock sold by selected dealers
in the Syndicated Community Offering. In addition, the Agents may receive a fee
of 1.5% of the aggregate purchase price of any Common Stock sold in the
Syndicated Community Offering.
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The Syndicated Community Offering will terminate no more than 45 days
following the completion of the Subscription Offering, unless extended by the
Company with the approval of the Superintendent and the FDIC.
LIMITATIONS ON PURCHASES OF SHARES
The Plan provides for certain additional limitations to be placed upon the
purchase of shares by eligible subscribers and others in the Conversion. Each
subscriber must subscribe for a minimum of 25 shares. Additionally, no person
by himself or herself or with an associate or group of persons acting in concert
(other than tax-qualified employee stock benefit plans of the Bank or the
Company) currently may purchase more than $250,000 of Common Stock in the
Conversion, except that the ESOP may purchase up to 10% of the Common Stock to
be issued in the Conversion, and shares purchased by the ESOP and attributable
to a participant thereunder shall not be aggregated with shares purchased by
such participant or any other purchaser of Common Stock in the Conversion. The
ESOP is currently expected to purchase up to 8% of the shares of Common Stock
issued in the Conversion. Officers and directors and their associates may not
purchase, in the aggregate, more than 34% of the shares to be issued in the
Conversion. For purposes of the Plan, the directors of the Company and the Bank
are not deemed to be associates or a group acting in concert solely by reason of
their Board membership.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the members of
the Bank, purchase limitations may be increased or decreased at the sole
discretion of the Company and the Bank at any time. If such amount is increased
after commencement of the Subscription and Community Offerings, subscribers for
the maximum amount will be given the opportunity to increase their subscriptions
up to the then applicable limit, subject to the rights and preferences of any
person who has priority subscription rights. In the event that the purchase
limitation is decreased after commencement of the Subscription and Community
Offerings, the orders of any person who subscribed for the maximum number of
shares of Common Stock shall be decreased by the minimum amount necessary so
that such person shall be compliance with the then maximum number of shares
permitted to be subscribed for by such person.
The term "associate" of a person is defined to mean: (i) any corporation or
other organization (other than the Bank, the Company or a majority-owned
subsidiary of the Bank or the Company) of which such person is an officer or
partner or is, directly or indirectly, the beneficial owner of 10% or more of
any equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, provided, however, such term shall not include
a tax-qualified employee benefit plan; and (iii) any relative or spouse of such
person, or any relative of such spouse, who either has the same home as such
person or who is a director or officer of the Bank or the Company any of its
parents or subsidiaries. Directors are not treated as associates solely because
of their Board membership.
Each person purchasing Common Stock in the Conversion shall be deemed to
confirm that such purchase does not conflict with the purchase limitations under
the Plan of Conversion or otherwise imposed by law, rule or regulation. In the
event that such purchase limitations are violated by any person (including any
associate or group of persons affiliated or otherwise acting in concert with
such person), the Company shall have the right to purchase from such person at
the aggregate purchase price all shares acquired by such person in excess of
such purchase limitations or, if such excess shares have been sold by such
person, to receive the difference between the aggregate purchase price paid for
such excess shares and the price at which such excess shares were sold by such
person. This right of the Company to purchase such excess shares shall be
assignable by the Company. IN ADDITION, PERSONS WHO VIOLATE THE PURCHASE
LIMITATIONS MAY BE SUBJECT TO SANCTIONS AND PENALTIES IMPOSED BY THE
SUPERINTENDENT AND THE FDIC.
Stock purchased pursuant to the Conversion will be freely transferable,
except for shares purchased by directors and officers of the Bank and the
Company. See " -- Limitations on Resales by Management."
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In addition, under guidelines of the NASD, members of the NASD and their
associates are subject to certain restrictions on the transfer of securities
purchased in accordance with subscription rights and to certain reporting
requirements upon purchase of such securities.
PLAN OF DISTRIBUTION AND MARKETING AGENT
Offering materials for the Subscription and Community Offering initially
will be distributed to Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members by mail, with additional copies available by request
at the stock information center located at the Bank's main office facility
("Stock Information Center"). In the Subscription Offering, officers and
directors of the Bank will be available to answer questions about the Offerings
and may also hold informational meetings for interested persons. Such officers
and directors will not be permitted to make statements about the Bank unless
such information is also set forth in the Prospectus, nor may they render
investment advice. All subscribers for or purchasers of the shares to be offered
will be instructed to send payment directly to the Bank, when such funds will be
held in a segregated account and not released until all shares are sold or the
Offerings are terminated.
No officer, director or employee of Westwood Homestead or the Company will
be compensated, directly or indirectly, for any activities in connection with
the offer or sale of securities issued in the Conversion.
The Bank has retained the Agents to consult with and advise the Bank and,
to assist the Bank and the Company, on a best efforts basis, in the distribution
of shares in the Offerings. The Agents are broker-dealers registered with the
SEC and members of the NASD. The Agents will assist the Bank in the Conversion
as follows: (i) by participating in the preparation of this Prospectus and the
Proxy Statement, (ii) by training and educating the Bank's employees regarding
the mechanics and the regulatory requirements of the Conversion process; (iii)
by conducting informational meetings for subscribers, (iv) by organizing the
sale efforts in the Bank's local communities, and (v) by keeping records of all
stock subscriptions.
If the shares of Common Stock are not sold through the Subscription and
Community Offering, then the Company expects to offer the remaining shares in a
Syndicated Community Offering which would occur as soon as practicable following
the close of the Subscription and Direct Community Offering but may commence
during the Subscription and Direct Community Offering, subject to the prior
rights of subscribers. All shares of Common Stock will be sold at the same
price per share in the Syndicated Community Offering as in the Subscription and
Direct Community Offering. In the event of a Syndicated Community Offering,
selected dealers may receive a fee of up to a maximum of 4% of the aggregate
purchase price of the Common Stock sold by such selected dealers in the
Syndicated Community Offering. In addition, the Agents may receive a fee of
1.5% of the aggregate Purchase Price of the Common Stock sold in the Syndicated
Community Offering.
Based upon negotiations between the Agents on the one hand and the Company
and the Bank on the other hand concerning fee structure, the Agents will receive
a management fee of $25,000. Further, the Agents shall receive a fee of
$225,000 upon consummation of the Conversion; however, this fee will be reduced
dollar for dollar by any commissions paid to the Agents in a Syndicated
Community Offering, if any. Fees and commissions paid to the Agents and to any
other selected dealers may be deemed to be underwriting fees, and the Agents and
such selected dealers may be deemed to be underwriters. The Agents will also be
reimbursed for their reasonable out-of-pocket expenses, including legal fees,
not to exceed $30,000 in the aggregate.
The Company and the Bank have also agreed to indemnify Webb against
liabilities and expenses (including legal fees) incurred in connection with
certain claims or litigation arising out of or based upon untrue statements or
omissions contained in the offering material for the Common Stock or with regard
to allocations of shares (in the event of oversubscription) or determinations of
eligibility to purchase shares.
In the event the Bank is unable to find purchasers from the general public
for all unsubscribed shares, other purchase arrangements will be made by the
Board of Directors of the Bank, if feasible. Such other arrangements
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will be subject to the approval of the FDIC and the Superintendent. The FDIC
and the Superintendent may grant one or more extensions of the offering period,
provided that (1) no single extension exceeds 90 days, (2) subscribers are given
the right to increase, decrease or rescind their subscriptions during the
extension period, and (3) the extensions do not go more than two years beyond
the date on which the members approved the Plan. If the Conversion is not
completed by ______________________ (or, if the Subscription, Direct Community
and Syndicated Community Offerings are fully extended, by
_____________________), either all funds received will be returned with interest
(and withdrawal authorizations canceled) or, if the FDIC and the Superintendent
have granted an extension of such period, all subscribers will be given the
right to increase, decrease or rescind their subscriptions at any time prior to
20 days before the end of the extension period. If an extension of time is
obtained, all subscribers will be notified of such extension and of their rights
to modify their orders. If an affirmative response to any resolicitation is not
received by the Company from a subscriber, the subscriber's order will be
rescinded and all funds received will be promptly returned with interest (or
withdrawal authorizations will be canceled). No single extension can exceed 90
days.
DESCRIPTION OF SALES ACTIVITIES
The Common Stock will be offered in the Subscription and Community Offering
principally by the distribution of this Prospectus and through activities
conducted at the Stock Information Center. The Stock Information Center is
expected to operate during normal business hours throughout the Subscription and
Community Offering. It is expected that at any particular time, one or more of
the Agent's employees will be working at the Stock Information Center. Such
employees of the Agents will be responsible for mailing materials relating to
the Subscription and Community Offering, responding to questions regarding the
Conversion and the Subscription and Community Offering and processing stock
orders.
The Stock Information center will be located at the main office of the
Bank. A conspicuous legend that the Common Stock is not a federally-insured or
guaranteed deposit or account appears on the Common Stock certificate and on all
offering documents used in connection with the Conversion. Any person
purchasing the Common Stock from the Bank's main office will be required to sign
a certification form that the Common Stock is not a federally-insured or
guaranteed instrument and that the purchaser has received a Prospectus and
understands the investment risks involved.
Sales of Common Stock will be made by registered representatives affiliated
with the Agents or by the selected dealers managed by the Agents. The
management and employees of the Bank may participate in the Offerings in
clerical capacities, providing administrative support in effecting sales
transactions or answering questions of a mechanical nature relating to the
proper execution of the Order Form. Management of the Bank may answer questions
regarding the business of the Bank. Other questions of prospective purchasers,
including questions as to the advisability or nature of the investment, will be
directed to registered representatives. The management and employees of the
Bank have been instructed not to solicit offers to purchase Common Stock or
provide advice regarding the purchase of Common Stock.
None of the Bank's employees or directors who participate in the
Subscription and Community Offering, either in the Stock Information Center or
otherwise, will receive any special compensation or other remuneration for such
activities.
None of the Bank's personnel participating in the Subscription and
Community Offering are registered or licensed as a broker or dealer or an agent
of a broker or dealer. The Bank's personnel will assist in the above-described
sales activities pursuant to an exemption from registration as a broker or
dealer provided by Rule 3a4-1 promulgated under the Exchange Act. Rule 3a4-1
generally provides that an "associated person of an issuer" of securities shall
not be deemed a broker solely by reason of participation in the sale of
securities of such issuer if the associated person meets certain conditions.
Such conditions include, but are not limited to, that the associated person
participating in the sale of an issuer's securities not be compensated in
connection therewith at the time of participation, that such person not be
associated with a broker or dealer and that such person observe certain
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limitations on his participation in the sale of securities. For purposes of
this exemption, "associated person of an issuer" is defined to include any
person who is a director, officer or employee of the issuer or a company that
controls, is controlled by or is under common control with the issuer.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
RP Financial, which is experienced in the evaluation and appraisal of
savings institutions involved in the conversion process, has been retained by
the Bank to prepare an appraisal of the estimated pro forma market value of the
Common Stock to be sold pursuant to the Conversion. RP Financial will receive a
fixed fee of $22,500 for its appraisal services. The Bank has also agreed to
pay RP Financial a fee of $17,500 to assist the Bank in the preparation of a
business plan. The Bank has further agreed to reimburse RP Financial for its
out-of-pocket expenses incurred in connection with the preparation of the
appraisal and the business plan up to a maximum of $5,000 and to indemnify RP
Financial under certain circumstances against any losses, damages, expenses or
liability arising out of the Bank's engagement of RP Financial for the
appraisal.
RP Financial has determined as of March 1, 1996 and updated as of June 14,
1996, that the estimated pro forma market value of the stock to be issued by the
Company in the Conversion was $21.5 million. In determining the reasonableness
and adequacy of the appraisal submitted by RP Financial, the Board of Directors
of the Bank and the Company reviewed with RP Financial the methodology and the
appropriateness of assumptions used by RP Financial in preparing the appraisal.
The Company, in consultation with Charles Webb & Company, has determined to
offer the shares in the Conversion at a price of $10.00 per share. The price
per share was determined based on a number of factors, including the market
price per share of the stock of other financial institutions. Regulations
administered by the Superintendent and the FDIC require, however, that the
appraiser establish a range of value for the stock of approximately 15% on
either side of the estimated value to allow for fluctuations in the aggregate
value of the stock due to changes in the market and other factors from the time
of commencement of the Subscription Offering until completion of the Community
Offering. Accordingly, RP Financial has established a range of value of from
$18.28 million to $24.73 million for the Conversion. RP Financial will either
confirm the continuing validity of its appraisal or provide an updated appraisal
immediately prior to the completion of the Conversion.
Should it be determined at the close of the offering that the aggregate pro
forma market value of the Common Stock is higher or lower than $21.0 million,
but is nonetheless within the Current Valuation Range or within 15% of the
maximum of such range, the Company will make an appropriate adjustment by
raising or lowering by no more than 15% the total number of shares being offered
(within a range from 1,827,500 shares to 2,472,500 shares). Unless permitted by
the Company or otherwise required by the Superintendent or the FDIC, no
resolicitation of subscribers and other purchasers will be made because of any
such change in the number of shares to be issued unless the aggregate purchase
price of the Common Stock sold in the Conversion is below the minimum of the
Current Valuation Range or is more than $28.43 million, or 2,843,375 shares
(I.E., 15% above the maximum of the Current Valuation Range). If the aggregate
purchase price falls outside the range of from $18.28 million to $28.43 million,
subscribers and other purchasers will be resolicited and given the opportunity
to continue their orders, in which case they will need to affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation, or
their subscription funds will be promptly refunded with interest at the Bank's
passbook yield (currently 2%). Subscribers will also be given the opportunity
to increase, decrease or rescind their orders. Any change in the Current
Valuation Range must be approved by the Superintendent and the FDIC. THE
ESTABLISHMENT OF ANY NEW PRICE RANGE MAY BE EFFECTED WITHOUT A RESOLICITATION OF
VOTES FROM THE BANK'S MEMBERS TO APPROVE THE CONVERSION FROM MUTUAL TO STOCK
FORM.
THE APPRAISAL IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING THE COMMON
STOCK. IN PREPARING THE VALUATION, RP FINANCIAL HAS RELIED UPON AND ASSUMED THE
ACCURACY AND COMPLETENESS OF FINANCIAL AND STATISTICAL INFORMATION PROVIDED BY
THE BANK AND THE COMPANY. RP FINANCIAL DID NOT INDEPENDENTLY VERIFY THE
FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED
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BY THE BANK AND THE COMPANY, NOR DID RP FINANCIAL VALUE INDEPENDENTLY THE ASSETS
AND LIABILITIES OF THE BANK AND THE COMPANY. THE VALUATION CONSIDERS THE BANK
AND THE COMPANY ONLY AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN
INDICATION OF THE LIQUIDATION VALUE OF THE BANK AND THE COMPANY. MOREOVER,
BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A
NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO
ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING THE COMMON STOCK WILL THEREAFTER
BE ABLE TO SELL SUCH SHARES AT PRICES EQUAL TO OR ABOVE THE PRICE OR PRICES PAID
FOR IT. COPIES OF THE APPRAISAL REPORT OF RP FINANCIAL SETTING FORTH THE METHOD
AND ASSUMPTIONS FOR SUCH APPRAISAL ARE ON FILE AND AVAILABLE FOR INSPECTION AT
THE OFFICES SET FORTH IN "ADDITIONAL INFORMATION" AND AT THE MAIN OFFICE OF THE
BANK. FURTHER, ANY SUBSEQUENT UPDATED APPRAISAL ALSO WILL BE FILED WITH THE SEC
AND WILL BE AVAILABLE FOR INSPECTION.
REGULATORY RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK
With certain exceptions, the BHCA prohibits a bank holding company from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of a company that is not a bank or a bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve Board regulation or order, have been
identified as activities closely related to the business of banking. The
activities of the Company are subject to these legal and regulatory limitations
under the BHCA and the related Federal Reserve Board regulations.
Notwithstanding the Federal Reserve Board's prior approval of specific
nonbanking activities, the Federal Reserve Board has the power to order a
holding company or its subsidiaries to terminate any activity, or to terminate
its ownership or control of any subsidiary, when it has reasonable cause to
believe that the continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or stability of
any bank subsidiary of that holding company.
Under the BHCA, a bank holding company must obtain the prior approval of
the Federal Reserve Board before (1) acquiring direct or indirect ownership or
control of any voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company. Satisfactory financial
condition, particularly with regard to capital adequacy, and satisfactory
Community Reinvestment Act ("CRA") ratings generally are prerequisites to
obtaining federal regulatory approval to make acquisitions.
The BHCA prohibits the Federal Reserve Board from approving an application
by a bank holding company to acquire voting shares of a bank located outside the
state in which the operations of the holding company's bank subsidiaries are
principally conducted, unless such an acquisition is specifically authorized by
state law. See " -- Interstate Banking." The BHCA does not place territorial
restrictions on the activities of non-bank subsidiaries of bank holding
companies.
Under the BHCA, any company must obtain approval of the Federal Reserve
Board prior to acquiring control of the Company or the Bank. For purposes of
the BHCA, "control" is defined as ownership of more than 25% of any class of
voting securities of the Company or the Bank, the ability to control the
election of a majority of the directors, or the exercise of a controlling
influence over management or policies of the Company or the Bank. In addition,
the Change in Bank Control Act and the related regulations of the Federal
Reserve Board require any person or persons acting in concert (except for
companies required to make application under the BHCA), to file a written notice
with the Federal Reserve Board before such person or persons may acquire control
of the Company or the Bank. The Change in Bank Control Act defines "control" as
the power, directly or indirectly, to vote 25% or more of any voting securities
or to direct the management or policies of a bank holding company or an insured
bank.
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RESTRICTIONS ON REPURCHASE OF STOCK
As a bank holding company, the Company will be required to give the Federal
Reserve Board prior written notice of any purchase or redemption of its
outstanding equity securities if the gross consideration for the purchase or
redemption, when combined with the net consideration paid for all such purchases
or redemptions during the preceding 12 months, is equal to 10% or more of the
Company's consolidated net worth. The Federal Reserve Board may disapprove such
a purchase or redemption if it determines that the proposal would violate any
law, regulation, Federal Reserve Board order, directive, or any condition
imposed by, or written agreement with, the Federal Reserve Board. This
requirement does not apply to bank holding companies that are "well-
capitalized," received one of the two highest examination ratings at their last
examination and are not the subject of any unresolved supervisory issues.
LIMITATIONS ON RESALES BY MANAGEMENT
Shares of the Common Stock purchased by directors or officers of the
Company and the Bank in the Conversion will be subject to the restriction that
such shares may not be sold for a period of one year following completion of the
Conversion, except in the event of the death of the original purchaser or in any
exchange of such shares in connection with a merger or acquisition of the
Company. Accordingly, shares of the Common Stock issued by the Company to
directors and officers shall bear a legend giving appropriate notice of the
restriction imposed upon it and, in addition, the Company will give appropriate
instructions to the transfer agent for the Common Stock with respect to the
applicable restriction for transfer of any restricted stock. Any shares issued
to directors and officers as a stock dividend, stock split or otherwise with
respect to restricted stock shall be subject to the same restrictions. Shares
acquired otherwise than in the Conversion, such as through the exercise of
options granted under the Option Plan, would not be subject to such
restrictions. To the extent directors and officers are deemed affiliates of the
Company, all shares of the Common Stock acquired by such directors and officers
will be subject to certain resale restrictions and may be resold pursuant to
Rule 144 under the Securities Act.
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the Bank
will be final. The Plan provides that, if deemed necessary or desirable by the
Board of Directors, the Plan may be substantively amended by the Board of
Directors at any time prior to submission of the Plan and proxy materials to the
Bank's members. After submission of the Plan and proxy materials to the
members, the Plan may be amended by the Board of Directors at any time prior to
the Special Meeting and at any time following the Special Meeting with the
concurrence of the Superintendent and the FDIC. In its discretion, the Board of
Directors may modify or terminate the Plan upon the order of the regulatory
authorities without a resolicitation of proxies or another Special Meeting.
The Plan further provides that in the event that mandatory new regulations
pertaining to conversions are adopted prior to completion of the Conversion, the
Plan will be amended to conform to such regulations without a resolicitation of
proxies or another Special Meeting. In the event that new conversion regulations
adopted by the Superintendent or the FDIC or any successor agency prior to
completion of the Conversion contain optional provisions, the Plan may be
amended to utilize such optional provisions at the discretion of the Board of
Directors without a resolicitation of proxies or another Special Meeting. By
adoption of the Plan, the Bank's members will be deemed to have authorized
amendment of the Plan under the circumstances described above.
Should amendment of the Plan significantly affect the terms of the
offering, the Company will conduct an affirmative resolicitation of the persons
subscribing for the Common Stock in the offering, to the extent required by law.
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CONDITIONS AND TERMINATION
Completion of the Conversion requires the approval of the Plan by the
affirmative vote of not less than three-fifths of the total number of votes of
the members of Westwood Homestead eligible to be cast at the Special Meeting and
the sale of at least the minimum number of shares offered in the Conversion
within 24 months following approval of the Plan by the members and within 12
months of the date on which the Superintendent approves the Plan, unless
extended. If these conditions are not satisfied, the Plan will be terminated
and Westwood Homestead will continue its business in the mutual form of
organization. The Plan may be terminated by the Board of Directors at any time
prior to the Special Meeting and, with the approval of the Superintendent and
the FDIC, by the Board of Directors at any time thereafter.
CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
FEDERAL LIMITATIONS
The Change in Bank Control Act provides that no "person," acting directly
or indirectly, or through or in concert with one or more persons, other than a
company, may acquire control of a bank holding company unless at least 60 days
prior written notice is given to the FRB and the FRB has not objected to the
proposed acquisition.
The BHCA prohibits any "company," directly or indirectly or acting in
concert with one or more other persons, or through one or more subsidiaries or
transactions, from acquiring control of an insured institution without the prior
approval of the FRB. In addition, any company that acquires such control
becomes a "bank holding company" subject to registration, examination and
regulation of a bank holding company by the FRB.
The term "control" for purposes of the Change in Bank Control Act and the
BHCA includes the power, directly or indirectly, to vote more than 25% of any
class of voting stock of the savings bank or to control, in any manner, the
election of a majority of the directors of the savings bank. It also includes a
determination by the FRB that such company or person has the power, directly or
indirectly, to exercise a controlling influence over or to direct the management
or policies of the savings bank.
FRB regulations also set forth certain "rebuttable control determinations"
which arise upon (a) the acquisition of any voting securities of a bank holding
company if, after the transaction, the acquiring person (or persons acting in
concert) owns, controls, or holds with power to vote 25 percent or more of any
class of voting securities of the institution; or (b) the acquisition of any
voting securities of a bank holding company if, after the transaction, the
acquiring person (or persons acting in concert) owns, controls, or holds with
power to vote 10 percent or more (but less than 25 percent) of any class of
voting securities of the institution, and if (i) the institution has registered
securities under Section 12 of the Exchange Act or (ii) no other person will own
a greater percentage of that class of voting securities immediately after the
transaction.
The regulations also specify the criteria which the FRB uses to evaluate
control applications. The FRB is empowered to disapprove an acquisition of
control if it finds, among other things, that (i) the acquisition would
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the institution or its depositors, or (iii) the
competency, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors, the institution, or the public
to permit the acquisition of control by such person.
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INDIANA BUSINESS CORPORATION LAW
The IBCL contains a statute designed to provide Indiana corporations with
additional protection against hostile takeovers. The takeover statute, which is
codified in Chapter 43 of the IBCL, among other things, prohibits the Company
from engaging in certain business combinations (including a merger) with a
person who is the beneficial owner of 10% or more of the Company's outstanding
voting stock (an Interested Stockholder) during the five-year period following
the date such person became an Interested Stockholder. This restriction does
not apply if (1) before such person became an Interested Stockholder, the Board
of Directors approved the transaction in which the Interested Stockholder
becomes an Interested Stockholder or approved the business combination; or (2)
upon consummation of the transaction which resulted in the stockholder's
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the Company outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding, those shares owned by (i) persons who are directors and also
officers and (ii) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (3) on or subsequent to
such date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least two-thirds of the outstanding
voting stock which is not owned by the Interested Stockholder. The Company may
exempt itself from the requirements of the statute by adopting an amendment to
its Articles of Incorporation. At the present time, the Board of Directors does
not intend to propose any such amendment.
In addition, the Indiana Control Share Acquisitions Statute provides that
if shares are acquired equal to or greater than certain thresholds of voting
power (that is, 20%, 33 1/3% and 50% of all voting shares), the shares will not
be entitled to any voting rights unless specifically granted by the adoption of
a resolution by the holders of at least a majority of the shares entitled to
vote. In addition, in the event a control share acquisition of a majority of
the outstanding shares of stock is made and voting rights are approved for these
shares, the remaining stockholders will be entitled to have their shares
redeemed at fair value by the corporation.
CERTAIN ANTI-TAKEOVER PROVISIONS
IN THE ARTICLES OF INCORPORATION AND BYLAWS
While the Boards of Directors of Westwood Homestead and the Company are not
aware of any effort that might be made to obtain control of the Company after
Conversion, the Board of Directors, as discussed below, believes that it is
appropriate to include certain provisions as part of the Company's Articles of
Incorporation to protect the interests of the Company and its stockholders from
hostile takeovers which the Board of Directors might conclude are not in the
best interests of the Bank, the Company or the Company's stockholders. These
provisions may have the effect of discouraging a future takeover attempt which
is not approved by the Board of Directors but which individual stockholders may
deem to be in their best interests or in which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current Board of Directors or management of the Company more difficult.
The following discussion is a general summary of the material provisions of
the Articles of Incorporation and Bylaws of the Company which may be deemed to
have such an "anti-takeover" effect. The description of these provisions is
necessarily general and reference should be made in each case to the Articles of
Incorporation and Bylaws of the Company. For information regarding how to
obtain a copy of these documents without charge, see "Additional Information."
100
<PAGE>
BOARD OF DIRECTORS
Certain provisions of the Company's Articles of Incorporation and Bylaws
will impede changes in control of the Board of Directors of the Company. The
Articles of Incorporation provide that the Board of Directors is to be divided
into three classes, as nearly equal in number as possible, which shall be
elected for staggered three-year terms.
The Company's Articles of Incorporation provide that a director may be
removed only for cause by the affirmative vote of the holders of at least two-
thirds of the directors then in office. The Articles of Incorporation further
provide that any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, shall be filled for
the remainder of the unexpired term by a two-thirds vote of the directors then
in office.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
STOCKHOLDERS
The Company's Articles of Incorporation require the approval of the holders
of (i) at least 80% of the Company's outstanding shares of voting stock, and
(ii) at least a majority of the Company's outstanding shares of voting stock,
not including shares held by a "Related Person," to approve certain "Business
Combinations" as defined therein, and related transactions. Under the IBCL,
absent this provision, Business Combinations, including mergers, consolidations
and sales of substantially all of the assets of the Company must, subject to
certain exceptions, be approved by the vote of the holders of a majority of the
outstanding shares of the Common Stock. For a discussion of an exception to the
majority approval requirement under Indiana law, see "Certain Restrictions on
Acquisition of the Company and the Bank -- Indiana Business Corporation Law."
The increased voting requirements in the Company's Articles of Incorporation
apply in connection with business combinations involving a "Related Person,"
except in cases where the proposed transaction has been approved in advance by a
majority of those members of the Company's Board of Directors who are
unaffiliated with the Related Person and who were directors prior to the time
when the Related Person became a Related Person (the "Continuing Directors").
The term "Related Person" is defined to include any individual, corporation,
partnership or other entity which owns beneficially or controls, directly or
indirectly, 10% or more of the outstanding shares of common stock of the
Company. A "Business Combination" is defined to include (i) any merger or
consolidation of the Company with or into any Related Person; (ii) any sale,
lease, exchange, mortgage, transfer, or other disposition of all or a
substantial part of the assets of the Company or of a subsidiary to any Related
Person (the term "substantial part" is defined to include more than 25% of the
Company's total assets); (iii) any merger or consolidation of a Related Person
with or into the Company or a subsidiary of the Company; (iv) any sale, lease,
exchange, transfer or other disposition of all or any substantial part of the
assets of a Related Person to the Company or a subsidiary of the Company; (v)
the issuance of any securities of the Company or a subsidiary of the Company to
a Related Person; (vi) the acquisition by the Company of any securities of the
Related Person; (vii) any reclassification of the Common Stock, or any
recapitalization involving the Common Stock; and (viii) any agreement, contract
or other arrangement providing for any of the above transactions.
LIMITATIONS ON CALL OF MEETINGS OF STOCKHOLDERS
The Company's Articles of Incorporation provide that special meetings of
stockholders may only be called by the Company's Board of Directors, an
appropriate committee appointed by the Board of Directors, the Chairman of the
Board of Directors, or by the President of the Company. Stockholders are not
authorized to call a special meeting, and stockholder action may be taken only
at a special or annual meeting of stockholders or without a meeting only if such
action is taken by all the stockholders entitled to vote on the action and the
action is evidenced by one or more written consents describing the action taken
and signed by all the stockholders entitled to vote on the action.
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<PAGE>
ABSENCE OF CUMULATIVE VOTING
The Company's Articles of Incorporation provide that there shall not be
cumulative voting by stockholders for the election of the Company's directors.
The absence of cumulative voting rights effectively means that the holders of a
majority of the shares voted at a meeting of stockholders may, if they so
choose, elect all directors of the Company to be selected at that meeting, thus
precluding minority stockholder representation on the Company's Board of
Directors.
RESTRICTIONS ON ACQUISITIONS OF SECURITIES
The Articles of Incorporation provide that for a period of five years from
the effective date of the Conversion, no person may acquire or offer to acquire,
directly or indirectly, the beneficial ownership of more than 10% of any class
of equity security of the Company, unless such offer or acquisition shall have
been approved in advance by a two-thirds vote of the Company's Continuing
Directors. This provision does not apply to any employee stock benefit plan of
the Company. In addition, during such five-year period, no shares beneficially
owned in violation of the foregoing percentage limitation, as determined by the
Company's Board of Directors, shall be entitled to vote in connection with any
matter submitted to stockholders for a vote. Under the Company's Articles of
Incorporation, the restriction on voting shares beneficially owned in violation
of the foregoing limitations is imposed automatically. In order to prevent the
imposition of such restrictions, the Board of Directors must take affirmative
action approving in advance a particular offer to acquire or acquisition.
Unless the Board took such affirmative action, the provision would operate to
restrict the voting by beneficial owners of more than 10% of the Company's
Common Stock in a proxy contest.
BOARD CONSIDERATION OF CERTAIN NONMONETARY FACTORS IN THE EVENT OF AN OFFER BY
ANOTHER PARTY
The Articles of Incorporation of the Company require the Board of
Directors, in evaluating a Business Combination or a tender or exchange offer,
to consider, in addition to the adequacy of the amount to be paid in connection
with any such transaction, certain specified factors and any other factors the
Board deems relevant, including (i) the social and economic effects of the
transaction on the Company and its subsidiaries, employees, depositors, loan and
other customers, creditors and other elements of the communities in which the
Company and its subsidiaries operate or are located; (ii) the business and
financial condition and earnings prospects of the acquiring person or entity;
and (iii) the competence, experience and integrity of the acquiring person or
entity and its or their management. By having the standards in the Articles of
Incorporation of the Company, the Board of Directors may be in a stronger
position to oppose any proposed business combination, tender or exchange offer
if the Board concludes that the transaction would not be in the best interest of
the Company, even if the price offered is significantly greater than the then
market price of any equity security of the Company.
AUTHORIZATION OF PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of up to
1,000,000 shares of preferred stock, which conceivably would represent an
additional class of stock required to approve any proposed acquisition. The
Company is authorized to issue preferred stock from time to time in one or more
series subject to applicable provisions of law, and the Board of Directors is
authorized to fix the designations, powers, preferences and relative
participating, optional and other special rights of such shares, including
voting rights (which could be multiple or as a separate class) and conversion
rights. Issuance of the preferred stock could adversely affect the relative
voting rights of holders of the Common Stock. In the event of a proposed
merger, tender offer or other attempt to gain control of the Company that the
Board of Directors does not approve, it might be possible for the Board of
Directors to authorize the issuance of a series of preferred stock with rights
and preferences that would impede the completion of such a transaction. An
effect of the possible issuance of preferred stock, therefore, may be to deter a
future takeover attempt. The Board of Directors has no present plans or
understandings for the issuance of any preferred stock and does not intend to
issue any preferred stock except on terms which the Board of Directors deems to
be in the best interests of the Company and its stockholders. This preferred
stock, none of which has been issued by
102
<PAGE>
the Company, together with authorized but unissued shares of Common Stock (the
Articles of Incorporation authorizes the issuance of up to 15,000,000 shares of
Common Stock), also could represent additional capital required to be purchased
by the acquiror.
PROCEDURES FOR STOCKHOLDER NOMINATIONS
The Company's Articles of Incorporation provide that any stockholder
desiring to make a nomination for the election of directors or a proposal for
new business at a meeting of stockholders must submit written notice to the
Secretary of the Company not less than 30 or more than 60 days in advance of the
meeting. "New business" within the meaning of this provision will be
interpreted by the Company to exclude shareholder proposals which must be
included in the Company's proxy solicitation materials pursuant to Rule 14a-8
under the Exchange Act.
AMENDMENT OF BYLAWS
The Company's Articles of Incorporation provide that the Company's Bylaws
may be amended only by the Company's Board of Directors. The Bylaws cannot be
made, repealed, amended or rescinded by the stockholders of the Corporation.
The Company's Bylaws contain numerous provisions concerning the Company's
governance, such as fixing the number of directors and determining the number of
directors constituting a quorum. By reducing the ability of a potential
corporate raider to make changes in the Company's Bylaws and to reduce the
authority of the Board of Directors or impede its ability to manage the Company,
this provision could have the effect of discouraging a tender offer or other
takeover attempt where the ability to make fundamental changes through bylaw
amendments is an important element of the takeover strategy of the acquiror.
AMENDMENT OF ARTICLES OF INCORPORATION
The Company's Articles of Incorporation provide that specified provisions
contained in the Articles of Incorporation may not be repealed or amended except
upon the affirmative vote of not less than 80% of the outstanding shares of the
Company's stock entitled to vote generally in the election of directors, after
giving effect to any limits on voting rights. This requirement exceeds the
majority vote of the outstanding stock that would otherwise be required by
Indiana law for the repeal or amendment of a certificate provision. The
specific provisions are those (i) governing the calling of special meetings, the
absence of cumulative voting rights and the requirement that stockholder action
be taken only at annual or special meetings, (ii) requiring written notice to
the Company of nominations for the election of directors and new business
proposals, (iii) governing the number of the Company's Board of Directors, the
filling of vacancies on the Board of Directors and classification of the Board
of Directors, (iv) providing the mechanism for removing directors, (v) limiting
the acquisition of more than 10% of the capital stock of the Company or the Bank
(except, with the prior approval of the Continuing Directors of the Company),
(vi) governing the requirement for the approval of certain Business Combinations
involving a "Related Person," (vii) regarding the consideration of certain
nonmonetary factors in the event of an offer by another party, (viii) providing
for the indemnification of directors, officers, employees and agents of the
Company, (ix) pertaining to the elimination of the liability of the directors to
the Company and its stockholders for monetary damages, with certain exceptions,
for breach of fiduciary duty, and (x) governing the required stockholder vote
for amending the Articles of Incorporation or Bylaws of the Company. This
provision is intended to prevent the holders of less than 80% of the outstanding
stock of the Company from circumventing any of the foregoing provisions by
amending the Articles of Incorporation to delete or modify one of such
provisions. This provision would enable the holders of more than 20% of the
Company's voting stock to prevent amendments to the Company's Articles of
Incorporation or Bylaws, even if such amendments were favored by the holders of
a majority of the voting stock.
BENEFIT PLANS
In addition to the provisions of the Company's Articles of Incorporation
and Bylaws described above, certain benefit plans of the Company and Westwood
Homestead adopted in connection with the Conversion contain provisions which
also may discourage hostile takeover attempts which the Boards of Directors of
the Company and
103
<PAGE>
the Bank might conclude are not in the best interests of the Company, the Bank
or the Company's stockholders. For a description of the benefit plans and the
provisions of such plans relating to changes in control of the Company or the
Bank, see "Management of the Bank -- Certain Benefit Plans and Agreements."
THE PURPOSE OF AND ANTI-TAKEOVER EFFECT OF THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS
The Boards of Directors of the Company and Westwood Homestead believe that
the provisions described above reduce the Company's vulnerability to takeover
attempts and certain other transactions which have not been negotiated with and
approved by its Board of Directors. These provisions will also assist the
Company and the Bank in the orderly deployment of the net proceeds of the
Conversion into productive assets during the initial period after the
Conversion. The Boards of Directors of the Company and the Bank believe these
provisions are in the best interests of the Bank and of the Company and its
stockholders. In the judgment of the Boards of Directors of the Company and the
Bank, the Company's Board is in the best position to consider all relevant
factors and to negotiate for what is in the best interests of the stockholders
and the Company's other constituents. Accordingly, the Boards of Directors of
the Company and the Bank believe that it is in the best interests of the Company
and its stockholders to encourage potential acquirors to negotiate directly with
the Company's Board of Directors and that these provisions will encourage such
negotiations and discourage nonnegotiated takeover attempts. It is also the
view of the Board of Directors that these provisions should not discourage
persons from proposing a merger or other transaction at prices reflective of the
true value of the Company and which is in the best interests of all
stockholders.
Attempts to acquire control of financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which
have not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the Company
and stockholders, with due consideration given to matters such as the management
and business of the acquiring corporation and maximum strategic development of
the Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause great expense. Although a tender offer or
other takeover attempt may be made at a price substantially above then current
market prices, such offers are sometimes made for less than all the outstanding
shares of a target company. As a result, stockholders may be presented with the
alternative of partially liquidating their investment at a time that may be
disadvantageous, or retaining their investment in an enterprise which is under
different management and whose objectives may not be similar to those of the
remaining stockholders.
Despite the belief of Westwood Homestead and the Company as to the benefits
to stockholders of these provisions of the Company's Articles of Incorporation
and Bylaws, these provisions may also have the effect of discouraging a future
takeover attempt which would not be approved by the Company's Board, but
pursuant to which the stockholders may receive a substantial premium for their
shares over then current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have any opportunity to do
so. Such provisions will also render the removal of the Company's Board of
Directors and management more difficult and may tend to stabilize the Company's
stock price, thus limiting gains which might otherwise be reflected in price
increases due to a potential merger or acquisition. The Board of Directors,
however, has concluded that the potential benefits of these provisions outweigh
the possible disadvantages. Pursuant to applicable regulations, at any annual
or special meeting of its stockholders after the Conversion, the Company may
adopt additional Articles of Incorporation provisions regarding the acquisition
of its equity securities that would be permitted to an Indiana corporation. The
Company and the Bank do not presently intend to propose the adoption of further
restrictions on the acquisition of the Company's equity securities.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 15,000,000 shares of the Common Stock
and 1,000,000 shares of serial preferred stock, $0.01 par value per share. The
Company currently expects to issue a maximum of 2,472,500 shares of the common
Stock and no shares of serial preferred stock in the Conversion. The Company
has reserved for future issuance under the Option Plan an amount of newly issued
or treasury shares of the Common Stock equal to 10% of the shares to be issued
in the Conversion and has reserved an amount of newly issued or treasury shares
of the Common Stock equal to 4% of the shares to be issued in the Conversion for
future issuance to the MRP. THE CAPITAL STOCK OF THE COMPANY WILL REPRESENT
NONWITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL
NOT BE INSURED BY THE FDIC.
COMMON STOCK
VOTING RIGHTS. Each share of the Common Stock will have the same relative
rights and will be identical in all respects with every other share of the
Common Stock. The holders of the Common Stock will possess exclusive voting
rights in the Company, except to the extent that shares of serial preferred
stock issued in the future may have voting rights, if any. Each holder of
shares of the Common Stock will be entitled to one vote for each share held of
record on all matters submitted to a vote of holders of shares of the Common
Stock. See "Certain Anti-Takeover Provisions in the Articles of Incorporation
and Bylaws -- Restrictions on Acquisitions of Securities," for a possible
reduction in voting rights.
DIVIDENDS. The Company may, from time to time, declare dividends to the
holders of the Common Stock, who will be entitled to share equally in any such
dividends. For information as to cash dividends, see "Dividends," "Regulation -
- - Regulation of the Bank -- Dividend Restrictions" and "Taxation."
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of all the Bank's capital stock would be
entitled to receive all assets of such institution after payment of all debts
and liabilities of the Bank and after distribution of the balance in the
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders of the Bank. In the event of a liquidation, dissolution or
winding up of the Company, each holder of shares of the Common Stock would be
entitled to receive, after payment of all debts and liabilities of the Company,
a pro rata portion of all assets of the Company available for distribution to
holders of the Common Stock. If any serial preferred stock is issued, the
holders thereof may have a priority in liquidation or dissolution over the
holders of the Common Stock.
RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK. See "Certain Restrictions
on Acquisition of the Company and the Bank," "Certain Anti-Takeover Provisions
in the Articles of Incorporation and Bylaws" and "The Conversion -- Regulatory
Restrictions on Acquisition of the Common Stock" for discussions of the
limitations on acquisition of shares of the Common Stock.
OTHER CHARACTERISTICS. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of the Common Stock
which may be issued. The Common Stock is not subject to call for redemption,
and the outstanding shares of the Common Stock when issued and upon receipt by
the Company of the full purchase price therefor will be fully paid and
nonassessable.
TRANSFER AGENT AND REGISTRAR. Star Bank, Cincinnati, Ohio, will act as
transfer agent and registrar for the Common Stock.
105
<PAGE>
SERIAL PREFERRED STOCK
None of the 1,000,000 authorized shares of serial preferred stock of the
Company will be issued in the Conversion. After the Conversion is completed,
the Board of Directors of the Company will be authorized to issue serial
preferred stock and to fix and state voting powers, designations, preferences or
other special rights of such shares and the qualifications, limitations and
restrictions thereof. The serial preferred stock may rank prior to the Common
Stock as to dividend rights, liquidation preferences, or both, and may have full
or limited voting rights. If the Company were to issue serial preferred stock,
it is possible that the interests of existing stockholders would be diluted.
The Board of Directors of the Company has no present intention to issue any of
the serial preferred stock.
REGISTRATION REQUIREMENTS
The Company will register its Common Stock with the SEC pursuant to the
Exchange Act upon the completion of the Conversion and will not deregister said
shares for a period of at least three years following the completion of the
Conversion. Upon such registration, the proxy and tender offer rules, insider
trading reporting and restrictions, annual and periodic reporting and other
requirements of the Exchange Act will be applicable. The Company intends to
have a fiscal year end of December 31.
LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Company by Housley Kantarian &
Bronstein, P.C., Washington, D.C. The Ohio income tax consequences of the
Conversion have been opined upon by KPMG Peat Marwick LLP. Housley Kantarian &
Bronstein, P.C. has consented to the references herein to their opinions.
Certain legal matters will be passed upon for the Agents by Keating, Muething &
Klekamp, Cincinnati, Ohio. Certain members of that firm may subscribe for
shares of Common Stock in the Conversion to the extent they are eligible to do
so under the Plan.
EXPERTS
The financial statements of Westwood Homestead at December 31, 1995 and
1994 and for each of the years in the three-year period ended December 31, 1995
have been included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. Such report
refers to a change in accounting for investments in debt and equity securities
in 1994.
RP Financial has consented to the publication herein of the summary of its
letter to the Bank setting forth its opinion as to the estimated pro forma
market value of the Common Stock to be issued in the Conversion and the value of
subscription rights to purchase the Common Stock and to the use of its name and
statements with respect to it appearing herein.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-1
(File No. 333-2298) under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the SEC. Such information may be inspected at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. Copies may be obtained at prescribed rates
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
The SEC also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC, including the Company. The address for the
SEC's Web site is "http://www.sec.gov".
106
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The Bank has filed with the FDIC a Notice of Intent of Convert to Stock
Form (the "Notice"). This document omits certain information contained in such
Notice. The Notice can be inspected, without charge, at the offices of the
FDIC, 1776 F Street, N.W., Washington, D.C. 20006 and at the office of the FDIC,
Chicago Regional Office, 500 West Monroe, Chicago, Illinois 60661.
The Bank has filed an Application for Approval of Conversion (the
"Application") with the Superintendent. This document omits certain information
contained in the Application. The Application, the exhibits and the financial
statements that are a part thereof may be inspected at the offices of the Ohio
Department of Commerce, Division of Financial Institutions, 77 High Street, 21st
Floor, Columbus, Ohio 43266-0512.
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THE WESTWOOD HOMESTEAD SAVINGS BANK
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Statements of Financial Condition as of March 31, 1996
(unaudited), and December 31, 1995 and 1994 F-3
Statements of Operations for the three months ended
March 31, 1996 and 1995 (unaudited), and for the
years ended December 31, 1995, 1994 and 1993 20
Statements of Changes in Retained Income for the three
months ended March 31, 1996 (unaudited), and
for the years ended December 31, 1995, 1994 and 1993 F-4
Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 (unaudited), and for the
years ended December 31, 1995, 1994 and 1993 F-5
Notes to Financial Statements F-6
Schedules - All schedules are omitted since the required information is not
applicable or is presented in the Financial Statements or related notes.
All financial statements of the Company have been omitted because the
Company has not yet issued any stock, has no assets and no liabilities and has
not conducted any business other than of an organizational nature.
F - 1
<PAGE>
[LOGO]
1600 PNC Center
201 East Fifth Street
Cincinnati, OH 45202
Dayton, OH
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Westwood Homestead Savings Bank
Cincinnati, Ohio:
We have audited the accompanying statements of financial condition of The
Westwood Homestead Savings Bank (formerly The Westwood Homestead Savings and
Loan Association) as of December 31, 1995 and 1994, and the related statements
of operations, changes in retained income, and cash flows for each of the years
in the three-year period ended December 31, 1995. These financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Westwood Homestead Savings
Bank as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1995 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Bank adopted the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES, IN 1994.
KPMG Peat Marwick LLP
Cincinnati, Ohio
January 31, 1996
F - 2
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Statements of Financial Condition
March 31, 1996 (unaudited) and December 31, 1995 and 1994
<TABLE>
<CAPTION>
March 31, December 31,
----------------- --------------------------------
ASSETS 1996 1995 1994
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Cash and cash equivalents:
Cash on hand and in banks $ 783,037 855,546 650,520
Interest-bearing deposits with banks 8,313 13,578 97,284
Federal funds sold 1,700,000 - -
-------------- ---------- -----------
Total cash and cash equivalents 2,491,350 869,124 747,804
-------------- ---------- -----------
Securities available for sale (amortized cost of $1,000,000 at
March 31, 1996 and December 31, 1995 and $2,001,146
at December 31, 1994) (note 2) 988,181 993,460 1,886,375
Mortgage-backed securities available for sale (amortized cost of
$16,655,072 at March 31, 1996; $17,868,984 at December 31,
1995 and $36,174,355 at December 31,1994) (note 3) 16,358,128 17,380,012 32,560,011
Mortgage-backed securities held to maturity (market value of
$4,277,633 at December 31, 1994) (note 3) - - 4,374,500
Loans held for sale (net of unrealized losses of $7,628 at
March 31, 1996; market value of $1,728,064
at December 31, 1995) 936,071 1,697,114 -
Loans receivable (net of allowance for loan losses of $116,796
at March 31, 1996; $101,709 at December 31, 1995
and $63,833 at December 31, 1994) (notes 4 and 9) 74,398,162 73,245,098 70,184,981
Stock in the Federal Home Loan Bank of Cincinnati,
at cost (note 5) 905,300 889,900 845,200
Accrued interest receivable (note 6) 495,922 507,714 569,415
Premises and equipment, at cost, less accumulated depreciation
(note 7) 591,206 590,871 546,978
Income taxes (note 10):
Deferred 123,010 189,489 1,242,484
Prepaid 153,175 175,489 6,215
Prepaid expenses and other assets 451,710 99,740 13,639
-------------- ---------- -----------
Total assets $ 97,892,215 96,638,011 112,977,602
-------------- ---------- -----------
-------------- ---------- -----------
LIABILITIES AND RETAINED INCOME
Liabilities:
Deposits (note 8) $ 83,003,759 81,748,061 92,526,289
Federal funds purchased - - 2,200,000
Federal Home Loan Bank of Cincinnati advances (note 9) 135,918 138,604 5,348,820
Advances from borrowers for taxes and insurance 263,297 501,491 547,285
Accrued expenses and other liabilities 72,198 59,833 76,296
-------------- ---------- -----------
Total liabilities 83,475,172 82,447,989 100,698,690
Commitments and contingencies (note 12)
Retained income:
Retained income - substantially restricted (note 10) 14,620,769 14,517,003 14,740,128
Net unrealized losses on securities available for sale
(notes 2 and 3) (203,726) (326,981) (2,461,216)
-------------- ---------- -----------
Total retained income 14,417,043 14,190,022 12,278,912
-------------- ---------- -----------
Total liabilities and retained income $ 97,892,215 96,638,011 112,977,602
-------------- ---------- -----------
-------------- ---------- -----------
</TABLE>
See accompanying notes to financial statements.
F - 3
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Statements of Changes in Retained Income
Three months ended March 31, 1996 (unaudited) and
years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Unrealized
gain (loss)
on securities
Retained available
income for sale Total
------------ ------------ ----------
<S> <C> <C> <C>
Balances at December 31, 1992 $ 13,006,937 - 13,006,937
Net income 972,620 - 972,620
------------ ------------ ----------
Balances at December 31, 1993 13,979,557 - 13,979,557
Adoption of change in accounting for certain
investments in debt and equity securities
effective January 1, 1994, net of tax - (173,360) (173,360)
Net income 760,571 - 760,571
Unrealized loss on securities available for sale,
net of tax - (2,287,856) (2,287,856)
------------ ------------ ----------
Balances at December 31, 1994 14,740,128 (2,461,216) 12,278,912
Net loss (223,125) - (223,125)
Unrealized gain on securities available for sale,
net of tax - 2,134,235 2,134,235
------------ ------------ ----------
Balances at December 31, 1995 14,517,003 (326,981) 14,190,022
Net income (unaudited) 103,766 - 103,766
Unrealized gain on securities available for sale,
net of tax (unaudited) - 123,255 123,255
------------ ------------ ----------
Balances at March 31, 1996 (unaudited) $ 14,620,769 (203,726) 14,417,043
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
See accompanying notes to financial statements.
F - 4
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Statements of Cash Flows
Three months ended March 31, 1996 and 1995 (unaudited) and
years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Three months ended
March 31, Years ended December 31,
------------------------------- -----------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 103,766 176,320 (223,125) 760,571 972,620
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Net amortization of premiums and discounts on
investment and mortgage-backed securities 4,400 10,571 22,073 128,043 87,255
Depreciation of premises and equipment 14,267 13,651 56,413 57,934 43,806
Federal Home Loan Bank of Cincinnati stock dividend (15,400) (13,700) (58,100) (46,400) (35,300)
Deferred income tax expense 2,986 (11,600) (46,373) 13,000 9,500
Accretion of net loan fees deferred (2,742) (4,875) (16,370) (19,877) (41,425)
Provision for loan losses 15,087 - 37,876 30,780 12,000
Loss on securities sales 2,813 - 814,178 - -
Gain on loan sales (35,172) - (466) - -
Net loans originated held for sale (447,082) - (1,897,114) - -
Proceeds from sale of loans held for sale 1,243,297 - 200,466 - -
Change in:
Accrued interest receivable 11,792 (2,672) 61,701 8,972 26,268
Prepaid expenses and other assets (351,970) (164,465) (86,101) 3,481 3,159
Accrued expenses and other liabilities (15,835) (38,795) (16,463) (6,816) (264,077)
Income taxes 50,514 55,282 (169,331) 33,000 (182,805)
---------- --------- ---------- -------- ---------
Net cash provided by (used in) operating activities 580,721 19,717 (1,320,736) 962,688 631,001
---------- --------- ---------- -------- ---------
Cash flows from investing activities:
Proceeds from sales of mortgage-backed securities
available for sale 997,188 - 20,394,270 - -
Proceeds from sales of securities available for sale - - 1,002,471 - -
Principal payments on mortgage-backed securities 209,510 650,061 1,448,082 6,961,945 25,791,629
Proceeds from maturing securities held to maturity - - - 1,018,000
Purchase of securities held to maturity - - - - (1,003,438)
Purchase of mortgage - backed securities available for sale - - - (3,037,241) (32,399,077)
Net (increase) decrease in loans receivable (1,165,409) 234,716 (3,081,623) (6,991,247) (4,491,385)
Additions to premises and equipment (14,602) - (100,306) (110,083) (81,534)
Sale of Federal Home Loan Bank of Cincinnati Stock - 13,400 13,400 - 56,900
---------- --------- ---------- -------- ---------
Net cash provided by (used in) investing activities 26,687 898,177 19,676,294 (3,176,626) (11,108,905)
---------- --------- ---------- -------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits 1,255,698 (2,912,655) (10,778,228) (7,368,623) 11,123,918
Increase (decrease) Federal Funds purchased - 1,400,000 (2,200,000) 2,200,000 -
Short-term advances from the Federal Home Loan Bank
of Cincinnati, net - 900,000 (5,200,000) 5,200,000 -
Long-term advances from the Federal Home Loan
Bank of Cincinnati - - - 150,000 -
Long-term advances repayments to the Federal Home Loan
Bank of Cincinnati (2,686) (2,477) (10,216) (1,180) -
Net increase (decrease) in advances from borrowers for
taxes and insurance (238,194) (289,552) (45,794) 172,984 76,956
---------- --------- ---------- -------- ---------
Net cash provided by (used in) financing activities 1,014,818 (904,684) (18,234,238) 353,181 11,200,874
---------- --------- ---------- -------- ---------
Net increase (decrease) in cash and cash equivalents 1,622,226 13,210 121,320 (1,860,757) 722,970
Beginning cash and cash equivalents 869,124 747,804 747,804 2,608,561 1,885,591
---------- --------- ---------- -------- ---------
Ending cash and cash equivalents $ 2,491,350 761,014 869,124 747,804 2,608,561
---------- --------- ---------- -------- ---------
---------- --------- ---------- -------- ---------
</TABLE>
See accompanying notes to financial statements.
F - 5
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements
Three months ended March 31, 1996 and 1995 (unaudited) and
Years ended December 31, 1995, 1994 and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Prior to October 4, 1993, the Bank operated as The Westwood Homestead
Savings and Loan Association, an Ohio chartered, mutual savings and
loan association. Effective October 4, 1993, the Bank converted to an
Ohio Chartered Mutual Savings bank.
The following items comprise the significant accounting policies which the
Bank follows in preparing and presenting its financial statements:
(a) BASIS OF PRESENTATION
As more fully described in Note 14, the Bank plans to convert from a
mutual to capital stock form of ownership. As a stock
institution, the Bank will be subject to the financial reporting
requirements of the Securities Exchange Act of 1934.
The Bank's primary business activities include attracting deposits
from the general public and originating one-to-four family
residential property loans. The Bank also makes construction and
consumer loans. The Bank is subject to competition from other
financial institutions. Deposits at the Bank are insured up to
applicable limits by the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation (FDIC). The Bank is an
Ohio chartered savings bank and is subject to comprehensive
regulation, examination and supervision by the FDIC and the State
of Ohio Division of Financial Institutions.
(b) CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Bank considers all
highly liquid debt instruments with original maturities of three
months or less to be cash equivalents. Cash equivalents consist
of interest bearing deposits with banks.
(c) SECURITIES AND MORTGAGE-BACKED SECURITIES
Effective January 1, 1994, the Bank adopted Statement of Financial
Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, which requires that
debt and equity securities be classified into one of three
categories: held to maturity, available for sale or trading.
Securities held to maturity are limited to debt securities that
the holder has the positive intent and the ability to hold to
maturity; these securities are reported at amortized cost.
Securities held for trading are limited to debt and equity
securities that are held principally with the intention of
recognizing short-term profits; these securities are reported at
fair value, and unrealized gains and losses are reflected in
earnings. Securities held as available for sale consist of
(Continued)
F - 6
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(c) SECURITIES AND MORTGAGE-BACKED SECURITIES, CONTINUED
all other securities; these securities are reported at fair
value, and unrealized gains and losses are not reflected in
earnings but are reflected as a separate component of retained
income, net of income taxes. Under SFAS 115, securities that
could be sold in the future because of changes in interest rates
or other factors may not be classified as held to maturity. The
Bank has no investments classified as trading securities.
Premiums and discounts are amortized using a method that approximates
the level-yield method over the period to maturity.
Gains and losses on the sale of securities and mortgage-backed
securities are determined using the specific identification
method.
(d) LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less net
deferred loan origination fees and allowance for loan losses.
The Bank sells residential fixed-rate loans in the secondary
market. At the date of origination, the loans so designated and
meeting secondary market guidelines are identified as held for
sale and carried at the lower of net cost or market value on an
aggregate basis. Net unrealized losses are recognized through a
valuation allowance by charges to income. Gains or losses on
the sale of loans are based on the carrying amount of the loans
sold under the specific identification method. All such loans
are sold without recourse.
Uncollectible interest on loans that are contractually ninety days or
more past due is charged off, or an allowance is established.
The allowance is established by a charge to interest income equal
to all interest previously accrued, and income is subsequently
recognized only to the extent cash payments are received until,
in management's judgment, the borrower's ability to make periodic
interest and principal payments returns to normal, in which case
the loan is returned to accrual status.
Provisions for losses on loans are estimated periodically and are
charged to operations based on management's evaluation of the
loan portfolio. The allowance for possible loan losses is based
on a periodic analysis of the loan portfolio and reflects an
amount, which in management's judgment is adequate to provide for
possible loan losses in the existing portfolio. In evaluating
the portfolio, management takes into consideration
numerous factors such as the Bank's loan growth, prior loss
experience, present and potential risks of the loan portfolio and
current economic conditions. Loans are charged off against the
allowance for possible loan losses when the collectibility of
loan principal is unlikely. Recoveries of loans previously
charged off are credited to the allowance.
(Continued)
F - 7
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(d) LOANS RECEIVABLE, CONTINUED
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses
on loans, future additions to the allowance may be necessary
based on unanticipated changes in economic conditions,
particularly in the Greater Cincinnati region. In addition, the
FDIC and State of Ohio Division of Financial Institutions as an
integral part of their examination process, periodically review
the Bank's allowance for losses. Such agencies may require the
Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of
their examination.
Loan fees and certain direct loan origination costs are deferred, and
the net fee or cost is recognized in income using the level-yield
method over the contractual lives of the loans. Unamortized net
fees are credited to income when loans pay off prior to scheduled
maturity. Accretion of net loan fees on potential problem loans
is suspended when, in the opinion of management, such suspension
is warranted.
In 1993, the FASB issued SFAS No. 114, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN, as amended by SFAS No. 118, ACCOUNTING BY
CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND
DISCLOSURES. These pronouncements require that the expected loss
of interest income on nonperforming loans be taken into account
when calculating loan loss reserves and that specified impaired
loans be measured based on either the present value of the
expected future cash flows discounted at the loan's effective
interest rate, the loan's observable market price, or at the fair
value of the collateral if the loan is collateral dependent.
During the first quarter of 1996, the Bank adopted SFAS No. 122,
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. SFAS No. 122 requires
the recognition as separate assets the rights to service mortgage
loans for others, however those servicing rights are acquired.
This statement eliminates the accounting distinction between
servicing rights acquired through purchase transactions and those
acquired through loan originations. SFAS No. 122 also requires
the assessment of capitalized mortgage servicing rights for
impairment to be based on the current value of those rights.
During the quarter ended March 31, 1996, approximately $18,800 of
servicing rights were capitalized in connection with the adoption
of SFAS No. 122. The carrying value of mortgage servicing rights
approximated $18,000 at March 31, 1996. Mortgage servicing
rights are amortized in proportion to, and over the period of,
estimated net servicing income over the estimated life of the
servicing portfolio. Amortization expense was less than $1,000
for the quarter ended March 31, 1996. The estimated fair value
of capitalized mortgage servicing rights was approximately
$19,000 at March 31, 1996. Quoted market prices are used, when
available, as the basis of measuring the fair value of servicing
rights.
(Continued)
F - 8
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(d) LOANS RECEIVABLE, CONTINUED
The carrying amount of the servicing rights is measured for impairment
each quarter. The servicing portfolio is first stratified by
original terms of the loans, and then by interest rates within
the original terms of the loans for measuring impairment. If
the carrying value of an individual stratum exceeds its fair
value, a valuation allowance would be established. No valuation
allowance was recorded at March 31, 1996, as the carrying values
of the various stratifications were less than their respective
fair value.
The Bank considers consumer installment loans and one-to-four family
residential mortgage loans, excluding individually significant
mortgage loans, to be smaller, homogeneous loans that are
collectively evaluated for impairment. A loan is considered
impaired when, based on current information and events, it is
probable that the Bank will not collect all amounts due according
to the terms of the loan agreement. A loan is not considered
impaired when there is a minimum delay in loan payments of ninety
days or less.
Loans that are on nonaccrual status are also considered to be
impaired, except for nonaccrual loans that the Bank expects to
collect all amounts due, including interest that would accrue
until the loan is repaid. Interest income on impaired loans is
recognized using the cash basis method. Cash interest received
is recognized as interest income or applied to loan principal if
collection is in doubt. Interest income recognized based on cash
payments is limited to the amount of interest income that would
have accrued at the loan's contractual rate applied to the
recorded loan balance. Because the Bank did not have impaired
loans during the following periods, it did not recognize interest
income on impaired loans in the three months ended March 31, 1996
and fiscal year 1995.
The Bank adopted SFAS No. 118 and 114 in 1995. The adoption of these
standards did not have a material effect on the Bank's financial
statements.
(e) PREMISES AND EQUIPMENT
Depreciation is calculated on a straight-line basis over the estimated
useful lives of the related assets. Estimated lives are 10 to 34
years for buildings and improvements, and 5 years for furniture,
fixtures and equipment.
(f) INCOME TAXES
Effective January 1, 1993, the Bank adopted SFAS 109, ACCOUNTING FOR
INCOME TAXES. Statement 109 requires a change from the deferred
method of accounting for income taxes of Accounting Principles
Board (APB) Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability
method of SFAS 109,
(Continued)
F -9
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(f) INCOME TAXES, CONTINUED
deferred tax assets and liabilities are recognized for the
estimated future consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates in effect
for the year in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes that enactment date. The
impact of adoption was not significant to the Bank.
(g) RECLASSIFICATIONS
Certain 1994 and 1993 amounts have been reclassified to conform with
the 1995 presentation.
(h) USE OF ESTIMATES
Management of the Bank has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
(i) UNAUDITED FINANCIAL INFORMATION
Information at March 31, 1996 and for the three month periods ended
March 31, 1996 and 1995 is unaudited. The unaudited information
reflects all adjustments, which consist solely of normal
recurring accruals, which are in the opinion of management,
necessary to a fair presentation of the financial position at
March 31, 1996 and the results of operations and cash flows for
the three month periods ended March 31, 1996 and 1995. The
results of the three month period are not necessarily indicative
of the results which may be expected for the entire fiscal year
1996.
(Continued)
F - 10
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(2) SECURITIES AVAILABLE FOR SALE
The following summarizes the amortized cost and market value of securities
available for sale, which are comprised entirely of United States
Government and agency obligations:
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---------- ---------- ---------- ---------
March 31, 1996 (unaudited) $1,000,000 - (11,819) 988,181
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
December 31, 1995 $1,000,000 - (6,540) 993,460
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
December 31, 1994 $2,001,146 - (114,771) 1,886,375
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
During the year ended December 31, 1995 the Bank sold a security available
for sale for aggregate proceeds of $1,002,471, resulting in a gross
realized loss of $1,470.
The debt security at March 31, 1996 is scheduled to mature in 1998. Actual
maturity may differ from contractual maturity because the issuer may
have the right to call or prepay the obligation with or without
prepayment penalties.
(Continued)
F - 11
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(3) MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market value of mortgage-backed securities
are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1996 (unaudited)
---------------------------------------------------------------------
Principal Unamortized Unearned Amortized Market
balance premiums discounts cost value
--------- ----------- --------- --------- ------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
GNMA certificates $ 565,633 7,597 (1,242) 571,988 599,418
FHLMC certificates 1,981,474 33,038 (1,786) 2,012,726 2,023,159
FNMA certificates 1,410,850 18,520 (1,174) 1,428,196 1,454,251
Collateralized Mortgage
Obligations 12,638,279 10,800 (6,917) 12,642,162 12,281,300
---------- -------- -------- ---------- ----------
$ 16,596,236 69,955 (11,119) 16,655,072 16,358,128
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
December 31, 1995
---------------------------------------------------------------------
Principal Unamortized Unearned Amortized Market
balance premiums discounts cost value
--------- ----------- --------- --------- ------
AVAILABLE FOR SALE
GNMA certificates $ 597,000 8,328 (1,540) 603,788 642,028
FHLMC certificates 2,149,938 36,609 (1,976) 2,184,571 2,188,962
FNMA certificates 1,420,532 19,095 (1,197) 1,438,430 1,439,399
Collateralized Mortgage
Obligations 13,638,279 10,899 (6,983) 13,642,195 13,109,623
---------- -------- -------- ---------- ----------
$ 17,805,749 74,931 (11,696) 17,868,984 17,380,012
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
December 31, 1994
---------------------------------------------------------------------
Principal Unamortized Unearned Amortized Market
balance premiums discounts cost value
--------- ----------- --------- --------- ------
AVAILABLE FOR SALE
GNMA Certificates $ 5,195,729 - (59,969) 5,135,760 4,675,555
FHLMC Certificates 6,601,839 178,598 - 6,780,437 6,312,120
FNMA Certificates 4,971,377 149,107 - 5,120,484 4,766,441
Collateralized Mortgage
Obligations 19,182,649 22,056 (67,031) 19,137,674 16,805,895
---------- -------- -------- ---------- ----------
$ 35,951,594 349,761 (127,000) 36,174,355 32,560,011
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
HELD TO MATURITY
GNMA certificates $ 534,637 9,710 (1,600) 542,747 543,077
FHLMC certificates 2,602,206 45,130 (2,662) 2,644,674 2,580,142
FNMA certificates 1,173,834 14,493 (1,248) 1,187,079 1,154,414
---------- -------- -------- ---------- ----------
$ 4,310,677 69,333 (5,510) 4,374,500 4,277,633
---------- -------- -------- ---------- ----------
---------- -------- -------- ---------- ----------
</TABLE>
(Continued)
F - 12
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(3) MORTGAGE-BACKED SECURITIES, CONTINUED
The amortized cost and estimated market value of mortgage-backed securities
are as follows:
<TABLE>
<CAPTION>
March 31, 1996 (unaudited)
--------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
GNMA certificates $ 571,988 28,974 (1,544) 599,418
FHLMC certificates 2,012,726 19,392 (8,959) 2,023,159
FNMA certificates 1,428,196 33,059 (7,004) 1,454,251
Collateralized Mortgage
Obligations 12,642,162 65,496 (426,358) 12,281,300
----------- --------- --------- ----------
$ 16,655,072 146,921 (443,865) 16,358,128
----------- --------- --------- ----------
----------- --------- --------- ----------
December 31, 1995
--------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
----------- ---------- ---------- ---------
AVAILABLE FOR SALE
GNMA certificates $ 603,788 38,240 - 642,028
FHLMC certificates 2,184,571 15,980 (11,589) 2,188,962
FNMA certificates 1,438,430 11,635 (10,666) 1,439,399
Collateralized Mortgage
Obligations 13,642,195 34,720 (567,292) 13,109,623
----------- --------- --------- ----------
$ 17,868,984 100,575 (589,547) 17,380,012
----------- --------- --------- ----------
----------- --------- --------- ----------
December 31, 1994
--------------------------------------------------
AVAILABLE FOR SALE
GNMA certificates $ 5,135,760 - (460,205) 4,675,555
FHLMC certificates 6,780,437 - (468,317) 6,312,120
FNMA certificates 5,120,484 - (354,043) 4,766,441
Collateralized Mortgage
Obligations 19,137,674 - (2,331,779) 16,805,895
----------- --------- --------- ----------
$ 36,174,355 - (3,614,344) 32,560,011
----------- --------- --------- ----------
----------- --------- --------- ----------
HELD TO MATURITY
GNMA certificates $ 542,747 3,542 (3,212) 543,077
FHLMC certificates 2,644,674 5,612 (70,144) 2,580,142
FNMA certificates 1,187,079 8,283 (40,948) 1,154,414
----------- --------- --------- ----------
$ 4,374,500 17,437 (114,304) 4,277,633
----------- --------- --------- ----------
----------- --------- --------- ----------
</TABLE>
(Continued)
F - 13
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(3) MORTGAGE-BACKED SECURITIES, CONTINUED
Estimated market values for mortgage-backed securities are based on
published market or security dealers' estimated prices.
During the three months ended March 31, 1996 and for the year ended
December 31, 1995, the Bank sold available-for-sale mortgage-backed
securities for aggregate proceeds of $997,188 and $20,394,270,
respectively, resulting in gross realized losses of $2,813 and
$812,708, respectively.
In December 1995, a one-time reassessment of the Bank's securities held to
maturity was undertaken, as permitted, by the Financial Accounting
Standards Board's special report related to implementation of FASB
Statement No. 115. In connection with that assessment, the Bank
transferred securities held to maturity with an amortized cost of
$3,669,000 to securities available for sale in order to permit more
responsiveness to changes in interest rates and other balance sheet
management factors. At the date of transfer, December 31, 1995, the
securities held to maturity had net unrealized gains of $44,000.
A summary of debt securities based on contractual maturities is shown in
the table below. Actual maturities may differ from contractual
maturities because issuers may have the right to call or prepay
obligations with or without prepayment penalties.
March 31, 1996 (unaudited) December 31, 1995
------------------------ ----------------------
Amortized Market Amortized Market
cost value cost value
----------- ---------- ---------- ----------
Due within one year or less $ - - - -
Due after one year through
five years 15,876 17,798 17,756 19,672
Due after five years through
ten years 957,336 985,367 979,645 990,993
Due after ten years 15,681,860 15,354,963 16,871,583 16,369,347
----------- ---------- ---------- ----------
$16,655,072 16,358,128 17,868,984 17,380,012
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
(Continued)
F - 14
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(4) LOANS RECEIVABLE, NET
Loans receivable are summarized as follows:
March 31, December 31,
-------------- ------------------------
1996 1995 1994
---- ---- ----
(unaudited)
Mortgage loans:
Secured by real estate $71,299,466 70,420,636 67,005,722
Construction loans 1,445,000 525,000 1,778,750
Investment in multi-family mortgage
loans purchased 2,884,867 2,892,899 2,702,408
----------- ---------- ----------
75,629,333 73,838,535 71,486,880
Undisbursed portion of construction
loans (1,111,336) (437,359) (1,197,711)
Deferred loan fees (149,755) (149,814) (163,383)
----------- ---------- ----------
Total mortgage loans 74,368,242 73,251,362 70,125,786
Other loans and contracts 146,716 95,445 123,028
Allowance for loan losses (116,796) (101,709) (63,833)
----------- ---------- ----------
$74,398,162 73,245,098 70,184,981
----------- ---------- ----------
----------- ---------- ----------
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Three months ended March 31, Year ended December 31,
------------------------------- --------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 101,709 63,833 63,833 32,520 19,423
Provision for loan losses 15,087 - 37,876 30,780 12,000
Loan charge-offs - - - (167) -
Recoveries - - - 700 1,097
------------ ---------- --------- --------- ---------
Balance, end of year $ 116,796 63,833 101,709 63,833 32,520
------------ ---------- --------- --------- ---------
------------ ---------- --------- --------- ---------
</TABLE>
The Bank serviced loans for the Federal Home Loan Mortgage Corporation of
approximately $1,416,000 (unaudited) and $199,000 at March 31, 1996
and December 31, 1995, respectively.
The Bank had no nonaccrual loans as of March 31, 1996, December 31, 1995
and 1994, and no impaired loans during the three months ended March
31, 1996 and the year 1995.
Most of the Bank s loan activity is with customers located within Hamilton
County, Ohio and contiguous counties.
(Continued)
F - 15
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(5) INVESTMENTS REQUIRED BY LAW
A minimum of 1% of net home mortgage loans (mortgage loans and contracts
secured by residential property less loans in process on residential
property) is required to be maintained in Federal Home Loan Bank of
Cincinnati (FHLB) common stock. This minimum requirement was $716,200
at December 31, 1995.
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
------------- ------------------------
1996 1995 1994
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Mortgage loans $ 402,991 393,980 332,142
Investment securities - - 30,068
Mortgage-backed securities 92,931 113,734 207,205
---------- -------- --------
$ 495,922 507,714 569,415
---------- -------- --------
---------- -------- --------
</TABLE>
(7) PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
March 31, December 31,
------------- ------------------------
1996 1995 1994
---- ---- ----
(unaudited)
Land $ 15,400 15,400 15,400
Buildings and improvements 695,684 695,184 603,579
Furniture, fixtures and equipment 446,224 432,122 423,421
---------- ---------- ----------
1,157,308 1,142,706 1,042,400
Accumulated depreciation 566,102 551,835 495,422
---------- ---------- ----------
$ 591,206 590,871 546,978
---------- ---------- ----------
---------- ---------- ----------
(Continued)
F - 16
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(8) DEPOSITS
Deposits are comprised of the following:
March 31, 1996 (unaudited)
--------------------------------------
Weighted
average
interest
Amount Percent rate
----------- ---------- ----------
Savings accounts $ 3,783,106 4.6% 2.00%
NOW accounts 1,637,331 1.9 1.72
Money market deposit accounts 12,461,859 15.0 3.72
Certificate accounts, classified
at date of issuance:
6 months or less 4,253,508 5.1 5.30
1 year 17,174,806 20.7 5.79
22 months 2,750,655 3.3 7.11
2 years 10,349,114 12.5 6.06
33 months 6,615,694 8.0 6.85
3 years 3,114,238 3.8 5.37
5 or more years 20,863,448 25.1 8.60
----------- ------ -------
Total certificate accounts 65,121,463 78.5 6.84
----------- ------ -------
Total deposits $ 83,003,759 100.0% 6.05
----------- ------ -------
----------- ------ -------
(Continued)
F - 17
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(8) DEPOSITS, CONTINUED
December 31, 1995
---------------------------------------
Weighted
average
interest
Amount Percent rate
----------- ---------- ---------
Savings accounts $ 3,619,986 4.4% 2.00%
NOW accounts 1,921,347 2.4 1.76
Money market deposit accounts 12,695,676 15.5 3.71
Certificate accounts, classified
at date of issuance:
6 months or less 4,407,130 5.4 5.49
1 year 15,378,024 18.8 5.96
22 months 2,747,290 3.4 7.09
2 years 10,234,331 12.5 5.96
33 months 6,999,813 5.3 7.29
3 years 3,160,459 3.9 5.29
5 or more years 20,584,005 28.4 8.61
----------- ------ -------
Total certificate
accounts 63,511,052 77.7 6.95
----------- ------ -------
Total deposits $ 81,748,061 100.0% 6.10%
----------- ------ -------
----------- ------ -------
December 31, 1994
---------------------------------------
Savings accounts $ 3,683,176 4.0% 2.00%
NOW accounts 1,503,523 1.6 1.85
Money market deposit accounts 13,514,239 14.6 3.18
Certificate accounts, classified
at date of issuance:
6 months or less 4,037,290 4.4 4.90
1 year 15,593,024 16.9 5.03
22 months 482,379 .5 7.00
2 years 25,582,253 27.6 4.87
33 months 5,404,331 .7 7.81
3 years 3,641,793 3.9 5.11
5 or more years 19,084,281 25.8 8.71
----------- ------ -------
Total certificate
accounts 73,825,351 79.8 6.14
----------- ------ -------
Total deposits $ 92,526,289 100.0% 5.49%
----------- ------ -------
----------- ------ -------
(Continued)
F - 18
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(8) DEPOSITS, CONTINUED
Deposits with balances equal to or greater than $100,000 at March 31, 1996
(unaudited), December 31, 1995 and 1994 approximate $16,123,000,
$15,659,000 and $15,541,000, respectively.
Certificate accounts at March 31, 1996 (unaudited) are scheduled to mature
as follows:
In the year ending:
March 31, 1997 $ 33,287,840
March 31, 1998 16,384,262
March 31, 1999 4,803,684
March 31, 2000 3,730,525
March 31, 2001 3,341,643
After March 31, 2001 3,573,509
--------------
$ 65,121,463
--------------
--------------
Certificate accounts at December 31, 1995 are scheduled to mature as
follows:
In the year ending:
December 31, 1996 $ 32,736,103
December 31, 1997 11,224,792
December 31, 1998 9,224,009
December 31, 1999 4,098,165
December 31, 2000 2,103,308
After December 31, 2001 4,124,675
--------------
$ 63,511,052
--------------
--------------
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended December 31,
----------------------------- ----------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Savings accounts $ 17,896 17,434 71,341 84,852 116,873
NOW accounts 6,959 6,340 25,675 29,568 43,357
Money market deposit
accounts 113,734 117,642 464,545 456,595 566,474
Certificate accounts 1,068,916 1,103,840 4,405,115 4,323,533 4,283,471
----------- --------- --------- --------- ---------
Total interest expense $ 1,207,505 1,245,256 4,966,676 4,894,548 5,010,175
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------
</TABLE>
(Continued)
F - 19
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(8) DEPOSITS, CONTINUED
Interest paid (including interest credited) on deposits and borrowings was
approximately $1,210,000, $1,373,000, $5,261,000, $5,047,000 and
$5,014,000 for the three months ended March 31, 1996 and 1995, and for
the years ended December 31, 1995, 1994 and 1993, respectively.
(9) FEDERAL HOME LOAN BANK OF CINCINNATI ADVANCES
Advances from the FHLB of Cincinnati are summarized as follows:
March 31, December 31,
----------- -------------------
Maturity Date Interest rate 1996 1995 1994
------------- ------------- ---- ---- ----
(unaudited)
January 10, 1995 7.00% $ - - 1,200,000
January 20, 1995 7.00% - - 2,000,000
March 2, 1995 6.00% - - 2,000,000
November 1, 2004 8.15% 60,930 62,145 66,320
December 1, 2004 8.20% 74,988 76,459 82,500
--------- ------- ---------
$ 135,918 138,604 5,348,820
--------- ------- ---------
--------- ------- ---------
The advances maturing in November and December 2004 were obtained under the
Mortgage Matched Advances Program. In addition to monthly interest and
principal payments, the Bank has the option of making one annual partial
prepayment of principal on each advance without a prepayment fee. The
prepayable amount is determined based on the level of mortgage prepayments.
First mortgage loans and stock in the FHLB of Cincinnati are pledged as
collateral to the FHLB in the amount of $209,232 at December 31, 1995.
(10) INCOME TAXES
Total income tax (benefit) was allocated as follows:
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended December 31,
--------------------------- ----------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Statements of income $ 53,500 91,600 (114,000) 400,000 500,000
Retained income:
Unrealized gains (losses) on
securities available for sale 63,493 467,075 1,099,425 (1,267,899) -
---------- ------- --------- ---------- -------
Total income tax (benefit) $ 116,993 558,675 985,425 (867,899) 500,000
---------- ------- --------- ---------- -------
---------- ------- --------- ---------- -------
</TABLE>
(Continued)
F - 20
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(10) INCOME TAXES, CONTINUED
Income tax expense (benefit), from operations, is summarized as follows:
Three months ended
March 31, Year ended December 31,
--------------------- ---------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- --------
(unaudited)
Current $ 50,514 103,200 (67,627) 387,000 490,500
Deferred 2,986 (11,600) (46,373) 13,000 9,500
--------- --------- --------- --------- --------
$ 53,500 91,600 (114,000) 400,000 500,000
--------- --------- --------- --------- --------
--------- --------- --------- --------- --------
Actual income tax expense (benefit) for the three months ended March 31,
1996 and 1995, and for the years ended December 31, 1995, 1994 and
1993 does not significantly differ from the "expected" amounts for
those years (computed by applying the statutory U.S. Federal corporate
income tax rate of 34% to income (loss) before Federal income
taxes).
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below:
March 31, December 31,
----------- ---------------------
1996 1995 1994
------- ------- ---------
(unaudited)
Deferred tax assets:
Unrealized loss on securities $ 104,981 168,474 1,267,899
Loan loss reserves 39,710 34,581 21,703
Accrued expenses, principally due to
differences in benefit accruals 143,820 127,500 -
Deferred loan fees - - 55,550
------- ------- ---------
Total gross deferred tax assets 288,511 330,555 1,345,152
Less-valuation allowance - - -
------- ------- ---------
Total net deferred tax assets 288,511 330,555 1,345,152
------- ------- ---------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends 120,733 115,497 100,299
Deferred loan costs 44,768 24,704 -
Premises and equipment, principally due
to differences in depreciation - 865 2,369
------- ------- ---------
Total gross deferred tax liability 165,501 141,066 102,668
------- ------- ---------
Net deferred tax asset $ 123,010 189,489 1,242,484
------- ------- ---------
------- ------- ---------
(Continued)
F - 21
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(10) INCOME TAXES, CONTINUED
No valuation allowance for deferred tax assets was recorded as of March 31,
1996, and December 31, 1995 and 1994 as management believes that the
amounts representing future deferred tax benefits will more likely
than not be recognized since the Bank is expected to have sufficient
taxable income of an appropriate character within the carryback and
carryforward period as permitted by the tax law to allow for
utilization of the future deductible amounts.
If certain provisions are met, the Bank is allowed a special bad debt
deduction for additions to tax bad debt reserves established for the
purpose of absorbing losses. The allowable deduction is 8% of income
subject to tax before such deduction. If the amounts which qualify as
deductions for Federal income tax purposes are later used for purposes
other than to absorb loan losses, they will be subject to Federal
income tax at the then current corporate rate. Tax bad debt
deductions that arose prior to 1988 will require recognition of
deferred tax liabilities only if it becomes apparent that those
temporary differences will reverse in the foreseeable future.
Retained income at March 31, 1996, and December 31, 1995 includes
approximately $2,440,000 tax bad debt reserves for which no deferred
Federal income tax liability has been recognized.
Based on its retained income level, the Bank was not allowed the special
bad debt deduction in the three months ended March 31, 1996 and 1995
and in the years ended December 31, 1995 or 1994.
Income taxes paid were approximately $0, $0, $110,000, $354,000 and
$662,000 for the three months ended March 31, 1996 and 1995
(unaudited), and for the years ended December 31, 1995, 1994 and 1993,
respectively.
(11) BENEFIT PLANS
In August 1995, the Bank adopted the Directors' Retirement Plan (the Plan),
a program designed to provide retirement benefits to members of the
Board of Directors after their retirement from active service on the
board. Any director who has met certain age and length of service
requirements may elect to participate in the Plan. The Bank makes
quarterly contributions to eligible directors' accounts for an amount
equal to his/her most recent twelve months directors base annual fees
for a specified number of years based on length of service, not to
exceed fifteen years. There was one retiree from the board during
the three months ended March 31, 1996 and no retirees from the board
under this plan during the year 1995. Total expense for such
participants, including prior service costs, was $48,000 and $375,000
for the three months ended March 31, 1996 and the year ended December
31, 1995. The Plan has corresponding assets of approximately
$423,000 and $375,000 in a money market account at March 31, 1996 and
December 31, 1995, respectively. (See Note 15 for subsequent change
in the Plan).
(Continued)
F - 22
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(11) BENEFIT PLANS, CONTINUED
Also, the Bank maintains a savings plan under Section 401(k) of the
Internal Revenue Code, covering substantially all full-time employees
after one month of continuous employment. Total savings plan expense
was approximately $3,800, $3,500, $21,000, $19,000 and $18,000 for the
months three months ended March 31, 1996 and 1995 (unaudited), and for
the years ended December 31, 1995, 1994 and 1993, respectively.
(12) COMMITMENTS AND CONTINGENCIES
OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its
customers and to reduce its exposure to fluctuations in interest
rates. These financial instruments involve, to varying degrees,
elements of credit risk that are not recognized in the statement of
financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and
obligations as it does for on-balance sheet instruments. In extending
commitments, the Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since a portion of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.
(Continued)
F - 23
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(12) COMMITMENTS AND CONTINGENCIES, CONTINUED
A summary of financial instruments with off-balance sheet risk follows:
<TABLE>
<CAPTION>
Contract
or notional
amount
March 31, December 31,
------------ -----------------
1996 1995 1994
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Undisbursed construction loans in
process $ 1,111,336 437,359 1,197,711
Undisbursed lines of credit on home
equity loans 1,407,305 1,091,725 656,433
Loan commitments:
Adjustable (6.95% to 9.25%, 7.25%
to 10.75% and 7.25% to 7.625%
at March 31, 1996 and
December 31, 1995 and 1994,
respectively) 743,100 506,200 10,000
</TABLE>
The Bank believes the market risk associated with these commitments is
minimal.
CONTINGENCIES
The Bank is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Bank's financial condition, results of operations or
liquidity.
The Bank's deposits are insured to the extent provided by law, by the
FDIC's Savings Association Insurance Fund (SAIF). On August 8, 1995,
the FDIC approved a significant reduction in the deposit insurance
premiums charged to those financial institutions that are members of
the Bank Insurance Fund (BIF). Under the new rate structure, the
most highly rated BIF members will pay a premium equal to 0.04% of
insured deposits as compared to the current rate of 0.23% of insured
deposits. The weakest institutions will not experience any rate
reduction and will continue to be charged 0.31%. The FDIC has
estimated that approximately 90% of the nearly 11,000 BIF-insured
institutions will be entitled to pay the lowest rate and that the
average assessment rate will be approximately 0.04%. Subsequently,
the FDIC reduced the premium rate for the most highly rated BIF-
insured institutions to 0.0%. This amendment creates a significant
disparity between the deposit insurance premiums paid by BIF and SAIF
members and could place SAIF-insured institutions at a significant
competitive disadvantage to BIF-insured institutions.
(Continued)
F - 24
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(12) COMMITMENTS AND CONTINGENCIES, CONTINUED
CONTINGENCIES, CONTINUED
A number of proposals have been considered to recapitalize the SAIF in
order to eliminate this premium disparity. The United States Senate
and House of Representatives have both, as part of a budget
reconciliation package, approved legislation requiring a one-time
assessment of .90% of insured deposits to be imposed on all SAIF-
insured deposits held as of March 31, 1995. The assessment would
result, on a pro forma basis as of March 31, 1996 and December 31,
1995, in a one-time charge to the Bank of up to approximately $531,000
(assuming such charge would be tax deductible).
A number of other related proposals are also under consideration in
Congress, including those relating to merger of the SAIF and BIF,
elimination of the thrift charter and the federal tax consequences of
thrifts' conversion to national banks. The Bank is unable to
accurately predict whether these proposals will be adopted in their
current form or the impact of such proposals on the Bank.
CONCENTRATION OF CREDIT RISK
The Bank considers its primary market area for lending and savings
activities to be the immediate geographic area of Greater Cincinnati.
Although the Bank has a diversified loan portfolio, a substantial
portion of its debtors ability to honor their contractual obligation
is reliant upon the economic stability of the region.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH EQUIVALENTS
For those short-term investments, the carrying amount is a reasonable
estimate of fair value.
SECURITIES
Estimated market values for securities are based on published market or
securities dealers' estimated prices.
(Continued)
F - 25
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
LOAN RECEIVABLES
For certain homogeneous categories of loans, such as residential mortgages
and other consumer loans, fair value is estimated using the quoted
market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of
loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and certain 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 for deposits of similar remaining
maturities.
FHLB ADVANCES
The fair value of FHLB advances is estimated by discounting the future cash
flows of each advance at rates currently offered to the Bank for
similar advances of comparable maturities by the FHLB.
(Continued)
F - 26
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(Thousands)
(unaudited)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,491 2,491 869 869
Securities 988 988 993 993
Mortgage-backed securities 16,358 16,358 17,380 17,380
Loans held for sale 936 936 1,697 1,728
Loans receivable:
1-4 family adjustable rate
mortgages 9,550 9,486 8,892 8,865
Other adjustable 12,782 12,528 12,440 12,252
1-4 family fixed rate
mortgages 44,740 43,256 44,884 44,544
Other fixed 7,189 7,054 7,038 6,908
Second mortgages 257 277 148 162
Consumer loans 147 147 95 95
Less: allowance for loan losses (117) (117) (102) (102)
deferred loan fees (150) (150) (150) (150)
------ ------ ------ ------
Net loans 74,398 72,481 73,245 72,574
------ ------ ------ ------
------ ------ ------ ------
Financial liabilities:
Deposits:
Certificate accounts 65,122 66,343 63,511 65,137
Money market deposit accounts 12,462 12,462 12,696 12,696
Savings accounts 3,783 3,783 3,620 3,620
Now accounts 1,637 1,637 1,921 1,921
------ ------ ------ ------
Total deposits 83,004 84,225 81,748 83,374
------ ------ ------ ------
------ ------ ------ ------
FHLB advances 136 118 138 131
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
(Continued)
F - 27
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(14) CONVERSION TO STOCK FORM OF OWNERSHIP
On January 11, 1996, the Board of Directors adopted a Plan of Conversion
(the "Plan") whereby the Bank will convert from an Ohio chartered
savings bank to a State stock savings bank (the "Converted Savings
Bank"). The Plan is subject to approval of the appropriate regulatory
authorities and the Bank's members at a special meeting. The stock of
the Bank will be issued to a holding company formed in connection with
the conversion. Pursuant to the Plan, shares of capital stock of the
holding company are expected to be offered initially for subscription
to eligible account holders, tax-qualified employee stock benefit
plans, supplemental eligible account holders (if applicable) and other
members of the Bank pursuant to priorities established by applicable
regulations. The capital stock will be offered at a price to be
determined by the Board of Directors based upon an appraisal to be
made by an independent appraisal firm. The exact number of shares to
be offered will be determined by the Board of Directors in conjunction
with the determination of the price per share. Any stock not
purchased in the subscription offering will be sold in a community
offering to be commenced concurrently with or as soon as practicable
after the completion of the subscription offering.
The Plan provides that when the conversion is completed, a "Liquidation
Account" will be established in an amount equal to the regulatory
capital of the Bank as of the date of the latest statement of
financial condition contained in the final subscription prospectus.
The Liquidation Account is not an escrow account and is established to
provide a limited priority claim to the assets of the Bank after
conversion. In the unlikely event of a complete liquidation of the
Bank, and only in such an event, each Eligible Account Holder would
receive from the Liquidation Account a liquidation distribution based
on the proportionate share of the then total remaining qualifying
deposits.
Current regulations will allow the Bank to pay dividends on its stock after
the conversion if its regulatory capital would not thereby be reduced
below the amount then required of the aforementioned Liquidation
Account or applicable regulatory capital requirements or if such
dividends would not otherwise violate regulatory requirements.
Costs incurred in connection with the conversion will be deferred, and,
upon conversion, such costs and any additional costs will be charged
against the proceeds from the sale of stock. If the conversion is not
completed, these deferred costs will be charged to operations. At
March 31, 1996 and December 31, 1995, approximately $147,000
(unaudited) and $29,000 of these costs, respectively, had been
deferred.
(Continued)
F - 28
<PAGE>
THE WESTWOOD HOMESTEAD SAVINGS BANK
Notes to Financial Statements, Continued
(15) SUBSEQUENT EVENT - DIRECTORS' RETIREMENT PLAN (UNAUDITED)
On June 10, 1996, the Board of Directors voted to reduce the benefits
provided under the Directors' Retirement Plan (the Plan), which is
subject to the approval by the stockholders of the Company after
completion of the Conversion. Provided stockholder approval is
obtained, this reduction in benefits will be recorded as a recovery of
Plan expense during the fiscal quarter in which the Plan is approved.
In the event that the stockholders of the Company do not approve the
Plan, there will be a recovery of most of the Plan expense previously
recorded in association with the Plan.
F - 29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE
SUCH INFORMATION SHALL NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE BANK SINCE ANY OF
THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.............................
Selected Financial and Other Data..............
Recent Developments............................
Risk Factors...................................
Westwood Homestead Financial Corporation.......
The Westwood Homestead Savings Bank............
Use of Proceeds................................
Dividends......................................
Market for the Common Stock....................
Proposed Management Purchases..................
Capitalization.................................
Pro Forma Data.................................
Historical and Pro Forma Regulatory Capital
Compliance....................................
The Westwood Homestead Savings Bank Statements
of Operations.................................
The Westwood Homestead Savings Bank............
Management's Discussion and Analysis of
Financial Condition and Results of
Operations....................................
Business of the Company........................
Business of the Bank...........................
Regulation.....................................
Taxation.......................................
Management of the Company......................
Management of the Bank.........................
The Conversion.................................
Certain Restrictions on Acquisition of the
Company and the Bank..........................
Certain Anti-Takeover Provisions in the
Articles of Incorporation and Bylaws..........
Description of Capital Stock...................
Registration Requirements......................
Legal and Tax Matters..........................
Experts........................................
Additional Information.........................
Index to Financial Statements..................
</TABLE>
------------------------
UNTIL , 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
WESTWOOD HOMESTEAD
FINANCIAL CORPORATION
(HOLDING COMPANY FOR
THE WESTWOOD HOMESTEAD
SAVINGS BANK)
UP TO 2,472,500 SHARES
COMMON STOCK
---------------------
PROSPECTUS
---------------------
CHARLES WEBB & COMPANY
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION *
* Legal Fees and Expenses. . . . . . . . . . . . . $133,000
* Printing, Postage and Mailing. . . . . . . . . . 75,000
* Appraisal and Business Plan Fees and Expenses. . 45,000
* Transfer Agent Fees . . . . . . . . . . . . . . 3,500
* Accounting Fees and Expenses . . . . . . . . . . 70,000
* Blue Sky Filing Fees and Expenses
(including counsel fees). . . . . . . . . . . . 10,000
* Conversion Agent Fees. . . . . . . . . . . . . . 10,000
* Federal Filing Fees (FDIC, Ohio and SEC) . . . . 30,000
* Local Counsel Fees . . . . . . . . . . . . . . . 5,000
* Other Expenses . . . . . . . . . . . . . . . . . 38,500
--------
Total . . . . . . . . . . . . . . . . . . . $420,000**
--------
--------
- -------
* Estimated.
** Does not include $280,000 in estimated underwriting fees and expenses.
In the Offerings, the Agents will receive a $25,000 management fee and
a $225,000 success fee, and up to $30,000 in reimbursable expense
(including $25,000 in expenses of counsel).
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE COMPANY
The following is a summary of the general effect of the indemnification
provisions of the Company's Articles of Incorporation and of the
indemnification provided for under Indiana law. All statements made herein,
which are only intended to summarize the above-referenced provisions, are
qualified in their entirety by reference to the Company's Articles of
Incorporation and the Indiana Business Corporation Law.
ARTICLES OF INCORPORATION. Article XVIII of the Company's Articles of
Incorporation provides for indemnification of the Company's directors and
officers. In the case of a threatened, pending or completed action or suit
by or in the name of the Company, the Company shall indemnify a director or
officer for amounts actually and reasonably incurred by him in connection
with the defense or settlement of the action or suit if the director or
officer: (i) is successful on the merits or otherwise; or (ii) acted in good
faith in the transaction which is the subject of the suit or action, and in a
manner he reasonably believed to be in, or not opposed to, the best interest
of the Company. However, no indemnification shall be made in respect of any
claim, issue or matter as to which such person has been adjudged liable to
the Company, unless the court in which the action is brought determines that
indemnification is proper.
In the case of a threatened, pending or completed action or proceeding
(whether criminal, administrative or investigative) other than a suit by or
in the right of the Company (a "nonderivative suit"), against an officer or
director, the Company shall indemnify the director or officer for amounts
reasonably incurred by him in connection with the defense or settlement of
the nonderivative suit if the director or officer: (i) is successful on the
merits or otherwise; or (ii) acted in good faith in the transaction which is
the subject of the nonderivative suit and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the Company.
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<PAGE>
INDIANA BUSINESS CORPORATION LAW. A corporation may, under
Indiana law, indemnify a director or officer made a party to a proceeding
because such person was a director or officer of the corporation if: (i) the
individual's conduct was in good faith; and (ii) the individual reasonably
believed (A) in the case of conduct in the individual's official capacity
with the corporation, that the individual's conduct was in the corporation's
best interests, and (B) in all other cases, that the individual's conduct was
at least not opposed to the corporation's best interests. An Indiana
corporation may also indemnify an officer or director in a criminal
proceeding if the individual: (i) had reasonable cause to believe that his
conduct was lawful; or (ii) had no reasonable cause to believe that his
conduct was unlawful.
An Indiana corporation must, unless limited by its articles of
incorporation, indemnify any director or officer who was wholly successful,
on the merits or otherwise, in the defense of a proceeding to which the
individual was a party because the individual was a director or officer of
the corporation, against reasonable expenses incurred by the director or
officer in connection with the proceeding. Unless limited by the
corporation's articles of incorporation, an officer or director may apply to
the court conducting the proceeding or another court of competent
jurisdiction for indemnification. The court may order indemnification if it
determines: (i) the director or officer is entitled to mandatory
indemnification under Indiana law; or (ii) the officer or director is fairly
and reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not such director or officer met the standard of
conduct set forth for mandatory indemnification under Indiana law. The
Company's Articles of Incorporation do not contain any limitations on the
ability of the Company to indemnify its directors and officers under Indiana
law.
DIRECTOR AND OFFICER LIABILITY INSURANCE. The Company has purchased
director and officer liability insurance that insures directors and officers
against certain liabilities in connection with the performance of their
duties as directors and officers, including liabilities under the Securities
Act of 1933, as amended, and provides for payment to the Company of costs
incurred by it in indemnifying its directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
The exhibits and financial statement schedules filed as a part
of this registration statement are as follows:
(a) LIST OF EXHIBITS
* 1.1 Engagement Letter with Charles Webb & Company, Inc.
* 1.2 Form of Agency Agreement with Charles Webb & Company, Inc.
and Friedman, Billings, Ramsey & Co., Inc.
* 2 Plan of Conversion, as amended (Exhibit A to Proxy
Statement filed as Exhibit 99.2)
* 3.1 Articles of Incorporation of Westwood Homestead Financial
Corporation
* 3.2 Bylaws of Westwood Homestead Financial Corporation
* 4 Form of Common Stock Certificate of Westwood Homestead
Financial Corporation
* 5 Opinion of Housley Kantarian & Bronstein, P.C. regarding
legality of securities being registered
II-2
<PAGE>
* 8.1 Federal Tax Opinion
* 8.2 State Tax Opinion
* 8.3 Opinion of RP Financial, LC. on value of Subscription
Rights for tax purposes
* 10.1 Proposed 1996 Stock Option and Incentive Plan
* 10.2 Proposed Management Recognition Plan
* 10.3(a) First Amendment to Employment Agreement between
Michael P. Brennan and The Westwood Homestead Savings Bank
* 10.3(b) Employment Agreement between Michael P. Brennan and
The Westwood Homestead Savings Bank
* 10.4 Proposed Severance Agreements between Messrs. John E. Essen
and Gerald T. Mueller, The Westwood Homestead Savings Bank,
and Westwood Homestead Financial Corporation
* 10.5 The Westwood Homestead Savings Bank Directors' Retirement
Plan, as amended
* 23.1 Consent of Housley Kantarian & Bronstein, P.C. (contained
in Exhibit 5)
23.2 Consent of Accountant
* 23.3 Consent of RP Financial, LC.
* 24 Power of attorney
* 99.1 Proposed Order Form and Form of Certification
* 99.2 Proxy Statement for Special Meeting of Members of The
Westwood Homestead Savings Bank; Form of Proxy
* 99.3 Miscellaneous solicitation and marketing materials
* 99.4 Appraisal Agreement with RP Financial, LC.
* 99.5 Appraisal Report of RP Financial, LC.
- -------
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated
financial statements or related notes.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the registration statement.
(iv) To file a post-effective amendment to this
Registration Statement on Form S-1 in the event that there is a
Syndicated Community Offering to reflect in the Prospectus the
results of the Subscription and Community Offerings and other
relevant information relating to such Syndicated Community
Offering.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act, and
is therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amended registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Cincinnati,
Ohio as of July 31, 1996.
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
By: /s/ Michael P. Brennan
-------------------------------------
Michael P. Brennan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed below by the following persons in the
capacities indicated as of July 18, 1996.
Signatures Title Date
---------- ----- ----
/s/ Michael P. Brennan President, Chief Executive Officer July 31, 1996
- -------------------------- and Director
Michael P. Brennan (Principal Executive Officer)
/s/ John E. Essen Chief Financial Officer and Treasurer July 31, 1996
- -------------------------- (Principal Financial and Accounting
John E. Essen Officer)
* Chairman of the Board
- --------------------------
Carl H. Heimerdinger
* Vice Chairman of the Board
- --------------------------
John B. Bennet, Sr.
* Director
- --------------------------
Robert H. Bockhorst
* Director
- --------------------------
Raymond J. Brinkman
* Director
- --------------------------
Roger M. Higley
* Director
- --------------------------
Mary Ann Jacobs
* Director
- --------------------------
James D. Kemp
* By /s/ Michael P. Brennan
----------------------
Michael P. Brennan
Attorney-in-fact
July 31, 1996
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
The Westwood Homestead Savings Bank:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Statements of Operations" and "Experts" in the
Prospectus.
Our report refers to a change in accounting for certain investments in debt
and equity securities in 1994.
KPMG PEAT MARWICK LLP
Cincinnati, Ohio
August 1, 1996
