<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark One
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
-------------- ---------------
Commission File Number: 0-18279
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WESTWOOD HOMESTEAD FINANCIAL CORPORATION
----------------------------------------
(Exact name of registrant as specified in its charter)
INDIANA 31-1463057
- --------------------------------------------- ----------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
3002 HARRISON AVENUE, CINCINNATI, OHIO 45211-5789
- -------------------------------------- ----------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (513) 661-5735
-----------------
Securities registered pursuant to Section 12(b) of the Act: NONE
--------
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 12, 1997, there were issued and outstanding 2,843,375 shares of
the registrant's common stock.
As of March 12, 1997, the aggregate market value of the voting stock held
by non-affiliates of the registrant, based on the closing sales price of the
registrant's common stock as quoted on the National Association of Securities
Dealers, Inc. Automated Quotation National Market, was $33.4 million ($14.00 per
share). For purposes of this calculation, the shares held by directors and
executive officers of the registrant and by any stockholder beneficially owning
more than 5% of the registrant's outstanding common stock are deemed to be
shares held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1996. (Parts I and II)
2. Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders.
(Part III)
<PAGE> 2
PART I
ITEM 1. BUSINESS
- -----------------
THE COMPANY. Westwood Homestead Financial Corporation (the "Company")
was incorporated under the laws of the State of Indiana in March, 1996 for the
purpose of becoming the holding company of Westwood Homestead Savings Bank
("Westwood Homestead" or the "Bank"). Prior to the acquisition of all of the
outstanding stock of the Bank on September 27, 1996, the Company had no assets
or liabilities and engaged in no business activities. Following its acquisition
of Westwood Homestead, the Company had no significant assets other than the
outstanding capital stock of the Bank and a portion of the net proceeds of the
Bank's stock conversion. The Company is headquartered in Cincinnati, Ohio, and
its business activities are limited to the State of Ohio. At December 31, 1996,
the Company had consolidated total assets of $120.0 million, deposits of $79.1
million, net loans receivable of $84.5 million and stockholders' equity of $40.0
million.
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 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, consumer, multifamily
and non-residential real estate loans.
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 Savings Association Insurance
Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"), up to applicable limits for each depositor. The Bank is a
member of the Federal Home Loan Bank ("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 of
the Ohio Division of Financial Institutions (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.
LENDING AND INVESTMENT 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.
1
<PAGE> 3
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 December 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,
------------------------------------------------------------------
1996 1995 1994
----------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(Dollars in thousands)
TYPE OF LOAN:
- -------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential........... $ 63,386 73.38% $ 55,629 73.55% $52,326 73.07%
Multi-family residential.................. 11,537 13.36 10,989 14.53 9,440 13.18
Construction.............................. 1,799 2.08 525 .69 1,779 2.49
Other residential and non-
residential (1)........................ 9,275 10.74 8,393 11.10 7,942 11.09
Consumer loans............................... 264 .30 95 .13 123 .17
Commercial loans............................. 119 .14 -- -- -- --
-------- ----- -------- ------- ------- ------
Total................................... 86,380 100.00% 75,631 100.00% 71,610 100.00%
====== ====== ======
Less:
Loans in process.......................... 1,018 437 1,198
Loans held for sale....................... 535 1,697 --
Deferred loan fees........................ 136 150 163
Allowance for loan losses................. 166 102 64
-------- -------- -------
Total.................................. $ 84,525 $ 73,245 $70,185
======== ======== =======
<FN>
(1) Includes home equity loans.
</TABLE>
2
<PAGE> 4
LOAN MATURITY SCHEDULE
The following table sets forth certain information at December 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
1 through Due after
Due by 5 years after 5 years after
December 31, December 31, December 31,
1997 1996 1996 TOTAL
------------ ----------- ------------ -------
(In thousands)
<S> <C> <C> <C> <C>
One- to four-family residential $ 12 $ 901 $62,473 $63,386
Multi-family and non-residential 90 1,389 19,333 20,812
Construction ................... 58 720 1,021 1,799
Consumer ....................... 96 156 12 264
Commercial ..................... 113 6 -- 119
------- ------- ------- -------
Total ..................... $ 369 $ 3,172 $82,839 $86,380
======= ======= ======= =======
</TABLE>
The next table sets forth at December 31, 1996, the dollar amount of
all loans due one year or more after December 31, 1996 which have predetermined
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
PREDETERMINED FLOATING OR
RATE ADJUSTABLE RATES
------------- ----------------
(In thousands)
<S> <C> <C>
One- to four-family residential........ $ 47,509 $ 15,865
Multi-family and non-residential....... 7,748 12,974
Construction........................... -- 1,741
Consumer............................... 168 --
Commercial............................. -- 6
--------- ----------
Total............................. $ 55,425 $ 30,586
========= ==========
</TABLE>
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 December 31, 1996, $63.4
million, or 73.4%, 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, three year or
seven year adjustment terms that are indexed to the respective constant maturity
treasury yields on U.S. securities, with a margin ranging from 2.75 to 4
percentage points. All of the Bank's ARMs have minimum rates, which are
currently between 6% and 8%. The Bank's ARM products with six month adjustment
periods are subject to 0.75%
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<PAGE> 5
adjustment caps per six month period with 5% or 6% lifetime adjustment limits.
All other ARM loans are subject to 1% or 2% adjustment caps with 5% or 6%
lifetime adjustment limits. At December 31, 1996, approximately 75% of the
Bank's one- to four-family mortgage loans were fixed rate loans and
approximately 25% 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 December 31, 1996, approximately 10.9% of the Bank's one- to
four-family mortgage loans held loan to value ratios greater than 80%. 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 special loan programs for first-time home buyers and the 100%
loan to value 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 loans 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. 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 December 31, 1996, the Bank had 35 of these
loans outstanding, with an aggregate balance of second mortgages of $632,000.
The retention of ARMs in the portfolio helps reduce Westwood
Homestead's exposure to increases in interest rates. However, there are 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 December 31, 1996, multi-family and
non-residential real estate loans totaled $11.5 million and $9.3 million,
respectively, and represented 13.4% and 10.7%, respectively, of the Bank's gross
loan portfolio. Some of these loans have been participation interests with other
financial institutions on non-residential and multi-family properties located
within the Bank's market area.
Multi-family and non-residential real estate loans are made in amounts
generally 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 generally
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 $1.99 million at
December 31, 1996 and was secured by a 72 unit apartment complex. The Bank's
second largest multi-family real estate loan amounted to $1.39 million at
December 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 December 31, 1996.
4
<PAGE> 6
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 $794,000 at December 31, 1996. The
Bank's second largest non-residential real estate loan amounted to $688,000 at
December 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 December 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.
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 December 31,
1996, the Bank's loan portfolio included $1.8 million of loans secured by
properties under construction. All construction loans are secured by a first
lien on the property under 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.
Management is seeking to expand the Bank's consumer loan portfolio, including
the origination of automobile, home improvement and small unsecured loans, and
has hired a full time loan originator with considerable experience in this area
to assume responsibility for this program. At December 31, 1996, the Bank's
consumer loans
5
<PAGE> 7
totaled $264,000, or .30%, of the Bank's gross loan portfolio. The Bank's
efforts in this area have met with stiff competition. As a result, consumer
loans outstanding to date are slightly less than anticipated.
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, telemarketing, mailings, newspaper advertising, the Internet 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 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.
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.
6
<PAGE> 8
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
One- to four-family........................... $ 18,811 $ 11,026 $ 10,074
Multi-family residential...................... 724 1,184 4,845
Construction.................................. 1,733 525 2,352
Non-residential (1)........................... 4,653 818 1,635
----------- ----------- ------------
Total loans originated..................... $ 25,921 $ 13,553 $ 18,906
=========== =========== ============
Loans sold........................................ $ 2,172 $ 200 $ --
=========== =========== ============
(1) Includes home equity lines of credit of $3,747 during 1996.
</TABLE>
Since November 1995, the Bank has originated fixed rate residential
mortgage loans for sale in the secondary market to the Federal Home Loan
Mortgage Corporation ("FHLMC"). 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.
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 -- 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
7
<PAGE> 9
Bank reviews assets, valuation allowances and all classified assets on a
quarterly basis and at the end of each quarter management 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 established 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 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.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period.................... $ 101,709 $ 63,833 $ 32,520
Loans charged off................................. -- -- (167)
Recoveries - real estate mortgage -
residential..................................... -- -- 700
Provision for loan losses......................... 63,804 37,876 30,780
----------- ----------- ------------
Balance at end of period.......................... $ 165,513 $ 101,709 $ 63,833
=========== =========== ============
Ratio of net charge-offs to average
loans outstanding during the period............ -- % -- % -- %
=========== =========== ============
</TABLE>
8
<PAGE> 10
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.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
<S> <C> <C> <C> <C> <C> <C>
One- to four-family ............................. $ 91,815 73.38% $ 50,102 73.55% $26,172 73.07%
Multi-family and non-residential ................ 66,262 24.10 51,607 25.63 37,661 24.27
Construction .................................... 4,497 2.08 -- .69 -- 2.49
Consumer ........................................ 2,641 .30 -- .13 -- .17
Commercial ...................................... 298 .14 -- -- - --
-------- ------ -------- ------ ------- ------
Total allowance for loan losses ............ $165,513 100.00% $101,709 100.00% $63,833 100.00%
======== ====== ======== ====== ======= ======
</TABLE>
9
<PAGE> 11
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. 114 at the dates indicated. In
addition, the Bank had no real estate acquired as a result of foreclosure loans
accounted for on a nonaccrual basis.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------
1996 1995 1994
------ ------ -----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
<S> <C> <C> <C>
Real estate - Residential......................... $ -- $ -- $ --
Commercial........................................ -- -- --
Consumer.......................................... -- -- --
--------- --------- ---------
Total.......................................... $ -- $ -- $ --
========= ========= =========
Accruing loans which are contractually past due 90 days or more:
Real estate - Residential......................... $ -- $ -- $ 24
Commercial........................................ -- -- --
Consumer.......................................... -- -- --
--------- --------- ---------
Total.......................................... $ -- $ -- $ 24
========= ========= =========
Total nonperforming loans...................... $ -- $ -- $ 24
========= ========= =========
Percentage of total loans............................ --% --% .03%
========= ========= =========
Other non-performing assets.......................... $ -- $ -- $ --
========= ========= =========
Loans modified in troubled debt
restructurings..................................... $ -- $ -- $ --
========= ========= =========
</TABLE>
At December 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.
10
<PAGE> 12
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 activity is conducted by the chief financial officer with approval by
the chief executive officer. Under 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 1996, approximately $1.7 million
of "available for sale" mortgage-backed securities that were purchased with
funds from brokered CDs were sold.
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 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.
11
<PAGE> 13
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 December 31, 1996, these CMOs had a market value of $12.0 million
and amortized cost of $12.6 million representing 10.5% of the Company's total
assets. Although management believes this unrealized loss of $652,000, or 5.16%,
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.
12
<PAGE> 14
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 December 31, 1996, these securities had a
market value of $3.0 million and an amortized cost of $3.0 million, representing
2.8% of the Bank's total assets. See Notes 3 and 4 to the Company's Consolidated
Financial Statements incorporated herein by reference.
The following table sets forth the carrying value of the Bank's
investments at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------
1996 1995 1994
------ ------ -----
(In thousands)
Securities available for sale (1):
<S> <C> <C> <C>
U.S. government and agency securities............. $ 3,969 $ 993 $ 1,886
Collateralized mortgage obligations............... 11,990 13,110 16,806
Mortgage-backed securities........................ 3,044 4,270 15,754
Securities held to maturity (1):
Mortgage-backed securities........................ -- -- 4,375
--------- --------- ---------
Total investment securities.................... 19,003 18,373 38,821
Cash and cash equivalents............................ 13,420 869 748
FHLB stock........................................... 954 890 845
--------- --------- ---------
Total investments.............................. $ 33,377 $ 20,132 $ 40,414
========= ========= =========
<FN>
(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 $2.5
million as of December 31, 1994. For additional information, see Notes
3 and 4 to the Company's Consolidated Financial Statements incorporated
herein by reference.
</TABLE>
13
<PAGE> 15
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Bank's investment securities at
December 31, 1996.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
----------------- ----------------- -----------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities.................. $ 981 5.68% $ 2,988 5.94% $ -- --%
Mortgage-backed securities..... -- -- 156 8.43 815 7.63
Collateralized mortgage
obligations................. -- -- -- -- -- --
------ -------- ------
Total....................... $ 981 $ 3,144 $ 815
====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
More Than Ten Years Total Investment Portfolio
------------------- --------------------------
Carrying Average Carrying Market Average
Value Yield Value Value Yield
------- ------ ------- ----- ------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities.................. -- --% $ 3,969 $ 3,969 5.87%
Mortgage-backed securities..... $ 2,073 7.48 3,044 3,044 7.54
Collateralized mortgage
obligations................. 11,990 6.14 11,990 11,990 6.14
------- ------- -------
Total....................... $14,063 $19,003 19,003
======= ======= =======
</TABLE>
14
<PAGE> 16
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 December 31, 1996 represented 76.4% of total deposits. 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 December 31, 1996, however, most of the FHLB advances have been
repaid and nearly all of the brokered deposits have been withdrawn upon
maturity. At December 31, 1996, out of state deposits totalled $7.2 million, or
9.1% of total deposits. 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. The Bank's Mount Adams branch,
opened in June 1996, had $1.3 million in deposits outstanding as of December 31,
1996. Transaction accounts made up 75% of the deposits which contributed to the
3.74% cost of funds for the branch. Although the branch has not yet reached
breakeven, management believes that loan generation has been positive.
Several years ago, when interest rates were significantly higher than
at present, the Bank initiated a 10 year certificate of deposit program. At
December 31, 1996, such certificates of deposit represented $16.9 million, or
approximately 21.4%, of total deposits. $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.
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 $12.4 million, or 15.7%, of the Bank's total savings
portfolio at December 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.
15
<PAGE> 17
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>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994
------------------- ------------------- --------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings deposits............... $ 6,063 1.91% $ 3,608 1.98% $ 4,071 2.05%
NOW accounts................... 1,996 1.91 1,486 1.93 1,511 1.99
Money market accounts.......... 12,089 3.67 12,737 3.65 15,414 3.06
Certificates of deposit........ 63,474 6.63 67,590 6.51 75,417 5.73
-------- --------- ----------
Total..................... $ 83,622 $ 85,421 5.80 $ 96,413 5.09
======== ========= ==========
</TABLE>
The following table sets forth the amount and maturities of time
deposits at December 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%.................. $ 22,974 $ 7,362 $ 1,372 $ 1,321 $ 33,029
6.00 - 7.99%.................. 5,479 1,421 1,374 5,257 13,531
8.00 - 9.99%.................. 3,041 6,653 2,336 1,881 13,911
--------- ---------- ---------- ---------- ----------
$ 31,494 $ 15,436 $ 5,082 $ 8,459 $ 60,471
========= ========== ========== ========== ==========
</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 December 31,
1996.
<TABLE>
<CAPTION>
CERTIFICATES
MATURITY PERIOD OF DEPOSITS
--------------- -----------
(In thousands)
<S> <C>
Three months or less....................... $ 937
Over three through six months.............. 747
Over six through 12 months................. 3,232
Over 12 months............................. 7,477
----------
Total.................................. $ 12,393
==========
</TABLE>
16
<PAGE> 18
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 December 31, 1996 $127,000 of FHLB advances
were outstanding.
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."
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 DECEMBER 31,
-----------------------------------
1996 1995 1994
------ ------ -----
(In thousands)
<S> <C> <C> <C>
Amounts outstanding at end of period:
Federal funds purchased ............ $ -- $ -- $ 2,200
FHLB advances ...................... 127 139 5,349
Weighted average rate paid on:
Federal funds purchased ............ --% -- 5.14%
FHLB advances ...................... 8.18% 8.17% 6.66%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
------ ------ -----
(In thousands)
<S> <C> <C> <C>
Maximum amount of borrowings
outstanding at any month end:
Federal funds purchased......................... $ 1,600 $ 3,600 $ 2,800
FHLB advances................................... 1,000 7,700 5,350
Approximate average short-term borrowings
outstanding with respect to:
Federal funds purchased......................... $ 1,000 $ 1,600 $ 1,900
FHLB advances................................... 1,000 3,600 3,700
Approximate weighted average rate paid on: (1)
Federal funds purchased ........................ 5.84% 6.20% 4.95%
FHLB advances................................... 5.50% 6.15% 4.85%
<FN>
- -------------
(1) Based on rates and amounts during periods borrowings were outstanding.
</TABLE>
17
<PAGE> 19
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. 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.
Additionally, the Bank may face increased competition due to recent
changes to federal interstate banking law. See "Regulation -- Interstate
Banking.
REGULATION
GENERAL. As an Ohio-chartered stock 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.
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.
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.
18
<PAGE> 20
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."
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
19
<PAGE> 21
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. 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
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<PAGE> 22
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.
The table below provides information with respect to the Bank's
compliance with its regulatory capital requirements at December 31, 1996.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT ASSETS(1)
------ ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital.................................. $ 28,799 26.63%
Tangible capital requirement...................... 1,622 1.50
-------- -------
Excess.......................................... $ 27,177 25.13%
======== =======
Tier 1/Core capital(2)............................ $ 28,799 26.63%
Tier 1/Core capital requirement................... 3,244 3.00
-------- -------
Excess.......................................... $ 25,555 23.63%
======== =======
Risk-based capital................................ $ 28,965 45.27%
Risk-based capital requirement.................... 5,119 8.00
-------- -------
Excess.......................................... $ 23,846 37.27%
======== =======
- ------------
<FN>
(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.
</TABLE>
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
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<PAGE> 23
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 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.
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<PAGE> 24
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.
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 its insured deposits to the FDIC for insurance of their
deposits by the SAIF. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the SAIF. Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the 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
23
<PAGE> 25
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 for SAIF members had ranged from
0.23% of deposits for well capitalized institutions in Subgroup A to 0.31% of
deposits for undercapitalized institutions in Subgroup C while assessments for
over 90% of members of the Bank Insurance Fund ("BIF") had been the statutory
minimum of $2,000. Recently enacted legislation provided for a one-time
assessment of 65.7 basis points of insured deposits as of March 31, 1995, that
fully capitalized the SAIF and had the effect of reducing future SAIF
assessments. Accordingly, although the special assessment resulted in a one-time
charge to the Bank of approximately $584,000 pre-tax, the recapitalization of
the SAIF had the effect of reducing the Bank's future deposit insurance premiums
to the SAIF. Under the recently enacted legislation, both BIF and SAIF members
will be assessed an amount for the Financing Corporation Bond payments. BIF
members will be assessed approximately 1.3 basis points while the SAIF rate will
be approximately 6.4 basis points until January 1, 2000. At that time, BIF and
SAIF members will begin pro rata sharing of the payment at an expected rate of
2.43 basis points.
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 27.5% of interest-bearing liabilities at December
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 December 31, 1996, the maximum amount Westwood Homestead could lend
to one borrower was approximately $4.3 million, and Westwood Homestead's largest
amount lent to one borrower was $1.99 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 December 31, 1996, of $954,000. 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 December 31, 1996, Westwood Homestead
had $127,000 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
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<PAGE> 26
at a Federal Reserve Bank, the effect of the reserve requirement is to reduce
the amount of the institutions interest-earning assets. As of December 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.
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
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<PAGE> 27
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.
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, federal banking agencies are 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.
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<PAGE> 28
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.
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
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. Through tax years beginning before December 31, 1995,
savings associations such as the Bank which meet certain definitional tests and
other conditions prescribed by the Code benefitted 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 real property, and nonqualifying real property 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"). The Bank generally elected to use the method which
resulted in the greatest deduction for federal income tax purposes in any given
year.
Legislation that is effective for tax years beginning after December
31, 1995 requires institutions to recapture into taxable income over a six
taxable year period the portion of the tax loan reserve that exceeds the pre-
1988 tax loan loss reserve. The Bank will no longer be allowed to use the
reserve method for tax loan loss provisions, but would be allowed to use the
experience method of accounting for bad debts. There will be no future effect on
net income from the recapture because the taxes on these bad debt reserves has
already been accrued as a deferred tax liability.
27
<PAGE> 29
Westwood Homestead's federal corporate income tax returns have not been
audited within the past three years.
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.
PERSONNEL
As of December 31, 1996, Westwood Homestead had 16 full-time employees
and seven part-time employees, none of whom was represented by a collective
bargaining agreement. Westwood Homestead believes that it enjoys good relations
with its personnel.
ITEM 2. PROPERTIES
The following table sets forth the location and certain additional
information regarding the Bank's offices at December 31, 1996.
<TABLE>
<CAPTION>
BOOK VALUE AT DEPOSITS AT
YEAR OWNED OR DECEMBER 31, APPROXIMATE DECEMBER 31,
OPENED LEASED 1996 SQUARE FOOTAGE 1996
------ ------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
3002 Harrison Avenue 1922 Owned $ 445,000 4,000 $77.8 million
Cincinnati, Ohio
1101 St. Gregory Street 1996 Leased N/A 285 1.3 million
Cincinnati, Ohio
</TABLE>
28
<PAGE> 30
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
On December 23, 1996, the Company held a special meeting of
shareholders for the purposes of considering approval of the Westwood Homestead
Savings Bank Amended Directors' Retirement Plan. At such meeting, 2,225,382
votes were cast in favor of the plan, 192,195 votes were cast against and there
were 24,741 abstentions and 120,091 broker non-votes.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
- ------------------------------------------------------------------------------
MATTERS
-------
The information contained in the section captioned "Market Information"
in the Company's 1997 Annual Report to Stockholders (the "Annual Report") is
hereby incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information contained in the section captioned "Selected
Consolidated Financial and Other Data" in the Annual Report is hereby
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements contained in the Annual Report which are
listed in Item 14 herein are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Corporation's definitive proxy statement for the
Corporation's 1997 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
29
<PAGE> 31
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors - Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
1
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Owners
The information required by this item is incorporated herein by
reference to the sections captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors" of the Proxy
Statement.
(c) Changes in Control
Management of the Corporation knows of no arrangements, including any
pledge by any person of securities of the Corporation, the operation of which
may at a subsequent date result in a change in control of the registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" of the
Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a)1. Report of Independent Auditors*
Westwood Homestead Financial Corporation*
(a) Consolidated Statements of Financial Condition at
December 31, 1996 and 1995
(b) Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994
(c) Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1996, 1995
and 1994
(d) Consolidated Statements of Cash Flow for the Years
Ended December 31, 1996, 1995 and 1994
(e) Notes to Consolidated Financial Statements
------------
* Incorporated by reference to the Annual Report.
2. All schedules have been omitted as the required information is
either inapplicable or included in the Notes to Consolidated
Financial Statements.
3. Exhibits
3.1 Articles of Incorporation of Westwood Homestead
Financial Corporation*
30
<PAGE> 32
3.2 Bylaws of Westwood Homestead Financial Corporation *
10.1 First Amendment to Employment Agreement between
Michael P. Brennan and The Westwood Homestead
Savings Bank *
10.2 Employment Agreement between Michael P. Brennan and
The Westwood Homestead Savings Bank *
10.3 Severance Agreements between Messrs. John E. Essen
and Gerald T. Mueller, The Westwood Homestead
Savings Bank, and Westwood Homestead Financial
Corporation*
10.4 The Westwood Homestead Savings Bank Directors'
Retirement Plan, as amended *
13 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant.
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the last quarter
of the fiscal year covered by this report.
(c) The exhibits required by Item 601 of Regulation S-K are either
filed as part of this Annual Report on Form 10-K or
incorporated by reference herein.
(d) There are no other financial statements and financial
statement schedules which were excluded from the Annual Report
pursuant to Rule 14a-3(b)(1) which are required to be included
herein.
------------
* Incorporated by reference to the registrant's Form S-1
Registration Statement No. 333-2298.
31
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTWOOD HOMESTEAD FINANCIAL
CORPORATION
Date: March 25, 1997 By: /S/ MICHAEL P. BRENNAN
-----------------------
Michael P. Brennan
President and Chief Executive
Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /S/ Michael P. Brennan By: /S/ Robert H. Bockhorst
-------------------------- ------------------------------
Michael P. Brennan Robert H. Bockhorst
(Director and Chief Executive Director
Officer
Date: March 25, 1997 Date: March 25, 1997
By: /S/ John E. Essen By: /S/ Raymond J. Brinkman
-------------------------- ------------------------------
John E. Essen Raymond J. Brinkman
(Chief Financial and Accounting Director
Officer and Treasurer)
Date: March 25, 1997 Date: March 25, 1997
By: /S/ Carl H. Heimerdinger By: /S/ Roger M. Higley
-------------------------- ------------------------------
Carl H. Heimerdinger Roger M. Higley
Chairman of the Board Director
Date: March 25, 1997 Date: March 25, 1997
By: /S/ John B. Bennet, Sr. By: /S/ Mary Ann Jacobs
-------------------------- ------------------------------
John B. Bennet, Sr. Mary Ann Jacobs
Vice Chairman of The Board Director
Date: March 25, 1997 Date: March 25, 1997
By: /S/ James D. Kemp
--------------------------
James D. Kemp
Director
Date: March 25, 1997
<PAGE> 34
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Articles of Incorporation of Westwood Homestead Financial
Corporation*
3.2 Bylaws of Westwood Homestead Financial Corporation *
10.1 First Amendment to Employment Agreement between Michael P.
Brennan and The Westwood Homestead Savings Bank *
10.2 Employment Agreement between Michael P. Brennan and The
Westwood Homestead Savings Bank *
10.3 Severance Agreements between Messrs. John E. Essen and
Gerald T. Mueller, The Westwood Homestead Savings Bank, and
Westwood Homestead Financial Corporation *
10.4 The Westwood Homestead Savings Bank Directors' Retirement
Plan, as amended*
13 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant.
27 Financial Data Schedule
- ------------
* Incorporated by reference to the registrant's Form S-1 Registration
Statement No. 333-2298.
<PAGE> 1
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
[WESTWOOD HOMESTEAD LOGO]
1996 ANNUAL REPORT TO STOCKHOLDERS
<PAGE> 2
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Westwood Homestead Financial Corporation (the "Company") is an Indiana
corporation formed in March 1996 at the direction of The Westwood Homestead
Savings Bank ("Westwood Homestead" or the "Bank") for the purpose of becoming a
holding company for the Bank as part of the Bank's Conversion from mutual to
stock form. Effective September 27, 1996, the Company issued 2,843,375 shares of
common stock for net proceeds of $27.7 million. The Company is headquartered in
Cincinnati, Ohio. The Company's primary assets consist of the outstanding
capital stock of the Bank, approximately 50% of the net proceeds of the
Conversion, and a note receivable from the ESOP.
Westwood Homestead is an Ohio mutual savings bank headquartered in Cincinnati,
Ohio, that traces its origin back to 1883. The Bank has occupied its main office
since 1922. 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. In June 1996, the Bank opened a branch
office in the Mt. Adams section of Cincinnati. The Bank is a member of the
Federal Home Loan Bank ("FHLB") System and its deposits are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF"),
administered by the Federal Deposit Insurance Corporation ("FDIC").
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. To a lesser
extent, the Bank originates multi-family residential loans, commercial property
loans, non-residential real estate loans, residential construction, consumer and
business loans.
MARKET INFORMATION
- --------------------------------------------------------------------------------
STOCK LISTING INFORMATION
The Company's common stock is traded on the NASDAQ National Market under the
symbol "WEHO".
STOCK PRICE INFORMATION
The following sets forth the high and low bid prices for the first full quarter
of trading. The price does not represent actual transactions and does not
include retail markups, markdowns or commissions.
Quarter Ended High Low
------------- ---- ---
December 31, 1996 12.25 10.25
As of December 31, 1996, there were approximately 495 shareholders of record,
not including those shares held in either nominee or street name through various
brokerage firms or banks.
<PAGE> 3
PRESIDENT'S LETTER TO STOCKHOLDERS
- --------------------------------------------------------------------------------
Our conversion to stock was an overwhelming success. The Initial Public Offering
was completed on September 27, 1996. Westwood Homestead Financial Corporation is
now the holding company for The Westwood Homestead Savings Bank. Over $28
million in capital was raised in the IPO. Combining the new dollars with the
existing capital produced stockholders' equity in excess of $39 million as of
December 31, 1996.
A YEAR OF GROWTH
Our lending department turned in a solid performance with an increase of $10.1
million in net loans outstanding for a 13.5% gain over the previous year. Loan
sales to the Federal Home Loan Mortgage Corporation during 1996, our first full
year as a seller-servicer, were $2.3 million. Our 100% Mortgage Loan Program
continued to produce well. At year-end we had 35 loans with over $632,000
outstanding in fixed rate seconds produced from this Program for a weighted
average of 12.4%. Even with this aggressive lending posture, we are very pleased
to report that at year-end there were no non-performing assets.
In 1996 we moved slowly into two additional new lending programs. We established
a Consumer Loan Department. At year-end consumer loan outstandings were in
excess of $250,000 which had an average yield of 10.5%. In addition, we
originated three business lines of credit for $220,000 at an average rate 9.4%.
On the liability side, we saw robust growth during 1996 in our checking account
programs. Checking account balances increased by 72% to end the year at $3.3
million. Part of that growth is attributed to the opening in June of Westwood
Homestead's first branch office: Mt. Adams Branch. At year-end the deposit
account activity outstandings in that office exceeded $1.3 million. Our Mt.
Adams Branch has provided us an opportunity to expand into merchant credit card
services and business checking accounts.
Total assets at December 31, 1996 amounted to $120.0 million compared to $96.6
million at December 31, 1995. This increase of $23.4 million, or 24%, was the
result of proceeds from the mutual to stock conversion and an increase in loans
receivable.
2
<PAGE> 4
EARNINGS
Net income for the year ended December 31, 1996, was $359,000, an increase of
$582,000 over the previous year. Substantial impact on our earnings for 1996 can
be attributed to the one time after-tax charge of $385,000 for the Federal
Deposit Insurance Corporation's special assessment of thrifts to recapitalize
the Savings Association Insurance Fund.
Executing our Strategic Business Plan has increased our operating costs because
of the introduction of new product offerings, increased costs related to our
operation as a public company, additional staffing, and increased cost
associated with the Employee Stock Ownership Plan.
LOOKING FORWARD TO 1997
Through deployment of our Strategic Business Plan, we will take steps to
leverage the capital position of our company by implementing a strategy of
managed asset growth as well as by considering prudent acquisitions. An
important part of our successful future will be the evaluation of technological
solutions in the areas of customer service, transaction processing, financial
management and financial information communications (primarily check and
statement imaging, voice response, home and commercial banking by computer and
Internet connectivity). It is our intent to purchase, install and operate
systems designed to improve the convenience, accessibility and speed of
financial knowledge to our customers and improve our internal operations to
achieve greater efficiency and at a lower cost.
Our shareholder goals for 1997 are quite focused: Increase return on equity and
earnings per share and improve our efficiency ratio.
Respectfully,
/s/ Michael P. Brennan
Michael P. Brennan
President/CEO
3
<PAGE> 5
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
Financial Condition Data: At December 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------------------
Amount of: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets $ 119,951 $ 96,638 $ 112,978 $ 114,344 $ 102,569
Loans held for sale 527 1,697 -- -- --
Loans receivable, net 84,525 73,245 70,185 63,205 58,684
Cash and cash equivalents 13,420 869 748 2,608 1,886
Investment securities 3,969 993 1,886 2,003 2,017
Mortgage backed securities 15,034 17,380 36,935 44,600 38,080
Deposits 79,083 81,748 92,526 99,895 88,771
FHLB advances 127 139 5,349 -- --
Federal funds purchased -- -- 2,200 -- --
Stockholders' equity (Retained
income prior to 1996) 39,982 14,190 12,279 13,980 13,007
Number of:
Loans outstanding 1,391 1,140 1,070 1,045 1,054
Deposit accounts 6,732 7,841 7,655 7,554 7,265
Offices open 2 1 1 1 1
</TABLE>
<TABLE>
<CAPTION>
Operating Data: Year ended December 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income $ 7,875 $ 7,756 $ 7,653 $ 7,749 $ 7,965
Interest expense 4,834 5,262 5,047 5,010 5,216
----- ----- ----- ----- -----
Net interest income 3,041 2,494 2,606 2,739 2,749
Provision for loan losses 64 38 30 12 12
----- ----- ----- ----- -----
Net interest income after provision 2,977 2,456 2,576 2,727 2,737
Non-interest income (loss) 132 (737) 79 72 61
Non-interest expense (1) 2,585 2,056 1,494 1,326 1,196
----- ----- ----- ----- -----
Income (loss) before income tax 524 (337) 1,161 1,473 1,602
Federal income tax expense (benefit) 165 (114) 400 500 571
----- ----- ----- ----- -----
Net income (loss) $ 359 (223) 761 973 1,031
===== ===== ===== ===== =====
Key Ratio Data:
Return on average assets 0.34% -0.21% 0.66% 0.88% 1.05%
Return on average equity 1.71 -1.59 5.39 7.19 8.22
Net interest margin 2.93 2.44 2.32 2.53 2.84
Non interest expense to average assets 2.45 1.97 1.31 1.20 1.22
Allowance for loan loss to total loans .20 .14 .09 .05 .03
Non performing loans to total loans -- -- .03 .17 .07
<FN>
(1) Includes $584,000 in 1996 for SAIF special assessment.
</TABLE>
4
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The Westwood Homestead Savings Bank (the "Bank") converted from a state
chartered mutual savings bank to a state chartered stock savings bank on
September 27, 1996. In the conversion, 2,843,375 shares of common stock of
Westwood Homestead Financial Corporation (the "Company") were sold, generating
net proceeds after conversion expenses of $27.7 million. Of this amount, $13.9
million was used to purchase 100% of the common stock of the Bank and $2.4
million to fund the stock purchase made by the Employee Stock Ownership Plan.
The remainder was retained by the Company.
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, nonresidential and construction real estate loans.
During 1996, the Bank developed a consumer loan department and originated its
first commercial loan.
The Bank's net income is dependent primarily on its net interest income, which
is the difference between interest income earned on its loans and investments
and interest paid on interest bearing liabilities. 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 level of personal income
and savings in the Bank's market area.
RESULTS OF OPERATIONS
Westwood Homestead Financial Corporation reported net income of $359,000 in 1996
which includes the special assessment of $385,000 net of tax to recapitalize the
Savings Association Insurance Fund (SAIF). The resolution of the deposit
insurance premium disparity will enable the Bank to be more competitive in
attracting deposit accounts. Although the Company had no non-performing loans at
December 31, 1996, or chargeoffs during the year, the Company increased its
allowance for loan loss by $64,000 due to the inherent risk associated with the
introduction of new loan products such as non-conforming (to secondary market
guidelines) and 100% loans, and an aggressive first time homebuyer campaign. Net
income (loss) decreased $984,000 to a net loss of $223,000 in 1995 from net
income of $761,000 in 1994. This reduction was primarily due to the loss on sale
of securities of $814,000 and a charge of $375,000 to adopt the Directors'
Retirement Plan.
NET INTEREST INCOME
Net interest income increased $547,000, or 21.9%, during the year 1996 to
$3,041,000 due primarily to the investment of conversion proceeds during the
fourth quarter. Net interest income decreased $112,000, or 4.3%, during the year
1995 to $2,494,000 due to $369,000 less in net interest earning assets and an
increase in short term borrowing costs. Net interest margin was 2.93%, 2.44% and
2.32% for the years 1996, 1995 and 1994 respectively.
Interest income increased $119,000 during 1996 due to an increase in loans
receivable interest income of $610,000 which was partially offset by a decrease
of $491,000 in securities and other interest. The average balance of loans
receivable increased $7.6 million, or 10.6%, while the average yield remained
unchanged at 8.06%. During 1995 interest income increased $103,000 despite a
decrease of $10.4 million in interest earning assets due to the sale of $21.4
million in securities. The average yield on interest earning assets increased
from 6.81% in 1994 to 7.60% in 1995.
5
<PAGE> 7
Interest expense decreased $428,000 during 1996 primarily due to a decrease of
$5.7 million in average interest bearing liabilities. Stock conversion proceeds
were used to pay off short term borrowings while deposit withdrawals to fund
stock purchases accounted for the decrease in deposit balances. The average cost
of interest bearing liabilities decreased to 5.75% during 1996 from 5.86% in
1995. Interest expense increased $215,000 primarily due to an increase of 80
basis points in the cost of interest bearing liabilities partially offset by a
decrease of $10.0 million in the average balances during 1995.
The following table sets forth certain information relating to the Company's
average interest earning assets, interest bearing liabilities and net interest
income.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------------------------------------
(Dollars in thousands) Average Average Average Average Average Average
Balance Interest Yield Balance Interest Yield Balance Interest Yield
-------------------------------------------------------------------------------------------------------
Interest earning assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable, net $ 78,975 6,362 8.06% 71,395 5,752 8.06% 67,266 5,322 7.91%
Investment securities 1,961 107 5.43% 1,842 95 5.16% 1,943 110 5.67%
Mortgage backed securities 16,168 1,044 6.46% 27,765 1,837 6.62% 42,079 2,158 5.13%
Other interest earning 6,640 363 5.47% 1,089 72 6.61% 1,168 63 5.38%
assets -------------------------------------------------------------------------------------------------------
Total interest earning 103,744 7,876 7.59% 102,091 7,756 7.60% 112,456 7,653 6.81%
assets
Non interest earing assets 1,820 2,105 1,951
----------- ----------- -----------
Total assets $ 105,564 104,196 114,407
----------- ----------- -----------
Interest bearing liabilities
Deposits $ 83,622 4,805 5.75% 85,421 4,967 5.81% 96,413 4,894 5.08%
Federal funds and FHLB
advances 447 30 6.62% 4,318 295 6.84% 3,322 152 4.58%
-------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 84,069 4,835 5.75% 89,739 5,262 5.86% 99,735 5,046 5.06%
---------------------- --------------------- ----------------------
Non interest bearing
liabilities 512 385 567
----------- ----------- -----------
Total liabilities 84,581 90,124 100,302
Equity 20,983 14,072 14,105
----------- ----------- -----------
Total liabilities and
equity $ 105,564 104,196 114,407
----------- ----------- -----------
Net interest earning
assets $ 19,675 12,352 12,721
=========== =========== ===========
Net interest income 3,041 1.84% 2,494 1.74% 2,607 1.75%
========== =========== ========= =========== ========== ===========
Net interest margin 2.93% 2.44% 2.32%
=========== =========== ===========
</TABLE>
6
<PAGE> 8
RATE/VOLUME ANALYSIS
The effect on net interest income as a result of changes in interest rates and
in the amount of earning assets and interest bearing liabilities is shown in the
following table. Information is provided on changes attributable to (1) changes
in volume (changes in average balance multiplied by prior period yield), (2)
changes in rate (changes in yield multiplied by prior period average balance)
and (3) the combined effect of changes in interest rates and volume (changes in
yield multiplied by changes in average balances).
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
--------------------------------------- ---------------------------------------
Changes due to Increases (Decreases) Changes due to Increases (Decreases)
--------------------------------------- ---------------------------------------
(in thousands) Rate/ Rate/
Interest Income Volume Rate Volume Total Volume Rate Volume Total
---------- -------- ---------- -------- ---------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $611 (1) 0 610 326 97 6 429
Investment securities 6 5 0 11 (6) (10) 1 (15)
Mortgage backed securities (767) (44) 19 (792) (734) 626 (213) (321)
Other interest earning assets 370 (13) (67) 290 (4) 15 (1) 10
---------- -------- ---------- -------- ---------- ------- ----------- --------
Total interest earning assets 220 (53) (48) 119 (418) 728 (207) 103
Interest expense
Deposits (105) (58) 1 (162) (558) 711 (81) 72
Borrowings (265) (10) 9 (266) 46 75 23 144
---------- -------- ---------- -------- ---------- ------- ----------- --------
Total interest bearing liabilities (370) (68) 10 (428) (512) 786 (58) 216
---------- -------- ---------- -------- ---------- ------- ----------- --------
Change in net interest income $590 15 (58) 547 94 (58) (149) (113)
========== ======== ========== ======== ========== ======= =========== ========
</TABLE>
NON-INTEREST INCOME
Non-interest income consists of service charges and fees on deposit accounts and
net gains or losses from the sale of mortgage loans and securities. Non-interest
income increased to $132,000 during 1996 from a loss of $738,000 during 1995.
Security sales resulted in gains of $4,000 in 1996 as compared to a loss of
$814,000 in 1995. These losses were a result of the balance sheet restructuring
in 1995 to reduce the concentration of out of state deposits and to fund loan
growth. Loan sales of $2.3 million resulted in gains of $50,000 in 1996. Service
charges and fees remained at comparable levels during 1996 despite unusually
high early withdrawal penalties in 1995. There were no security or loan sales
during 1994 and service charges totaled $79,000.
NON-INTEREST EXPENSE
In 1996 non-interest expense increased $529,000 from $2,056,000 during 1996.
This increase was due primarily to the SAIF special assessment of $584,000 in
1996. The Bank has been notified by the FDIC that for the first six months of
1997, the Bank will be assessed at a semi-annual amount of $25,000. Compensation
and benefits decreased $186,000 during 1996. In 1995 a charge of $375,000 was
recognized to fund the Directors Retirement Plan. In 1996 Plan contributions of
$40,000 were offset by an $80,000 recovery that was recorded to reflect certain
provisions of the amendment to the Plan approved by the stockholders on December
23, 1996. The Bank estimates future annual contributions of $20,000 annually to
the Plan. Legal and accounting fees increased $71,000, or 100%, due to
activities relating to being a public company. Management anticipates investing
in technology in order to efficiently and effectively
7
<PAGE> 9
deliver products and services to its customers. In addition, the Company's
operating expenses may increase in future periods as a result of (a) the
expenses associated with the reporting obligations of a public company; (b) the
compensation expenses resulting from the implementation of certain stock related
benefit plans and (c) expenses that may result from the implementation of the
Company's growth strategy.
ASSET LIABILITY MANAGEMENT
The Bank's objective in its Asset/Liability management program is to manage
liquidity and interest rate risk, so as to maximize net interest income and
return on equity in a changing interest rate environment. The Bank's Asset
Liability Committee ("ALCO") primarily utilizes "GAP" analysis to measure risk.
A GAP is considered positive when the amount of interest rate sensitive assets
exceed the amount of interest rate sensitive liabilities. A GAP is considered
negative when interest rate sensitive liabilities exceed interest rate sensitive
assets. During a year of falling interest rates a negative one year GAP position
would tend to increase income because there are more liabilities than assets
adjusting down during the year, accordingly the decrease in the cost of
liabilities exceeds the decrease in the yield on assets. Conversely, in a period
of rising rates a negative GAP would tend to decrease income. Companies in a
positive GAP position would face the opposite situation. There are limitations
to GAP analysis, however, as rates on different assets and liabilities may not
move to the same extent in any given time period. Competition may affect the
ability of the Bank to change rates on a particular deposit or loan product.
The following table displays the distribution of the Company's interest earning
assets and interest bearing liabilities maturing or repricing over various time
periods as of December 31, 1996. The amount of assets and liabilities in each
time period was determined by the contractual terms of the assets and
liabilities. The table does not reflect prepayment of fixed rate loans or
mortgage backed securities prior to maturity. Based upon experience, prepayments
will tend to be slower during periods of rising rates and accelerate as rates
fall. Any prepayments would decrease the negative one year GAP position. Loans
held for sale are included based on their contractual maturity/repricing date.
Transaction accounts are included in the zero to six month repricing category
based on their contractual terms, although these accounts have not been
sensitive to changes in market interest rates over the past several years.
<TABLE>
<CAPTION>
(In thousands) 0-6 6-12 1-3 3-5 Over 5
Months Month Years Years Years Total
---------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C>
1-4 Residential $ 3,230 2,414 9,105 1,265 47,851 63,865
Multifamily and non residential 5,084 5,100 3,702 818 6,410 21,114
Other loans 243 3 53 72 12 383
Securities 14,354 981 2,988 156 525 19,004
Other investments 13,857 -- -- -- -- 13,857
---------------------------------------------------------------------
Total $ 36,768 8,498 15,848 2,311 54,798 118,223
---------------------------------------------------------------------
Transaction accounts $ 18,612 -- -- -- -- 18,612
Time deposits 14,278 17,210 20,618 5,052 3,313 60,471
Borrowings -- -- -- 127 -- 127
---------------------------------------------------------------------
Total $ 32,890 17,210 20,618 5,179 3,313 79,210
---------------------------------------------------------------------
Interest sensitivity GAP $ 3,878 (8,712) (4,770) (2,868) 51,485
Cumulative GAP 3,878 (4,834) (9,604) (12,472) 39,013
Ratio of interest earning assets
to interest bearing liabilities 111.8% 49.4% 76.9% 44.6% 1654.0%
Ratio of cumulative
GAP to total assets 3.2% -4.0% -8.0% -10.4% 32.5%
</TABLE>
8
<PAGE> 10
Management also measures the Bank's interest rate risk by computing estimated
changes in net interest income ("NII") and market value of portfolio equity
("MVPE") of its cash flows from assets and liabilities 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 MVPE of sudden and sustained 1% to
4% increases and decreases in market interest rates. The following table
presents the Bank's projected change in net interest income and MVPE for various
rate shock levels at December 31, 1996.
<TABLE>
<CAPTION>
Change MVPE NII
in Rates ----------------- ---------------
% Change % Change
-------- --------
<S> <C> <C>
+400 bps -14.8% -8.7%
+200 bps -7.6% -3.0%
-200 bps 7.5% 1.3%
-400 bps 21.1% .8%
</TABLE>
BALANCE SHEET ANALYSIS
Total assets increased $23.4 million, or 24.2%, to $120.0 million at December
31, 1996 from $96.6 million at December 31, 1995. The following paragraphs
discuss the significant changes in the major balance sheet categories during
these periods.
LOANS
Loans, net of allowance for loan losses and including loans held for sale,
increased $10.2 million, or 13.6%, in 1996 to $85.1 million from $74.9 million
the previous year. At December 31, 1996, the loan portfolio consisted of 34.2%
adjustable rate loans as compared to 28.4% at December 31, 1995. These increases
reflect management's intention to build the loan portfolio while improving the
Bank's GAP position. Loan originations were $15.8 million in 1996 compared to
$13.6 million in 1995.
During 1996 real estate loans secured by one to four family units increased $7.8
million, of which $7.0 million were adjustable in rate. Construction loans have
increased $1.3 million to $1.8 million at December 31, 1996 due primarily to
more aggressive marketing.
In the first full year of activity, real estate loans sold in the secondary
market totaled $2.3 million. Currently the Bank's policy is to sell all 30 year
fixed rate loans below 8% and all 15 year fixed rate below 7%. The ALCO reviews
this policy periodically as part of its overall asset/liability management
strategy. Total loans serviced for the secondary market at December 31, 1996
totaled $2.4 million. At December 31, 1996, the Bank had $527,000 of loans held
for sale in the secondary market, compared to $1,697,000 at year end 1995. These
loans are carried at the lower of cost or market which is based upon current
investor yield requirements. At December 31, 1996, the market value of these
loans was approximately $8,000 less than the book value. Changes in interest
rates may affect the market value of loans held for sale and may impact future
earnings.
9
<PAGE> 11
SECURITIES
Total securities increased $630,000 to $19.0 million at December 31, 1996 from
$18.4 million the prior year. Approximately $4.0 million of conversion proceeds
were invested in short term investment securities partially offset by $2.7
million in mortgage backed security sales and other maturities. The market value
of $12.0 million of adjustable rate Collateralized Mortgage Obligations ("CMO")
has being adversely affected by the interest rate environment experienced the
last several years. Management believes these investments provide an acceptable
yield and the Company has the ability to hold them to maturity. At December 31,
1996 total securities represented 15.8% of total assets compared to 19.0% for
1995.
DEPOSITS
Deposits decreased $2.6 million in 1996 to $79.1 million from $81.7 million at
December 31, 1995. A decrease of $3.0 million in CD balances due primarily to
withdrawals to purchase stock in the Conversion was partially offset by an
increase of $375,000 in transaction accounts. During 1996 checking account
balances increased $1.4 million, or 71.8%, to $3.3 million at December 31, 1996.
These increases represent the continuing efforts of the Bank to attract
additional activity from existing account relationships as well as ongoing
promotions to obtain new depositors.
BORROWED FUNDS
The primary financing activities of the Bank are the attraction of local savings
deposits although advances from The Federal Home Loan Bank have been utilized to
compensate for seasonal outflows of deposits and loan demand. At December 31,
1996 approximately $127,000 in FHLB mortgage matched advances were outstanding.
Management anticipates loan demand to be greater than deposit inflows during the
first quarter in 1997, and as such, advances will likely increase during that
period.
NON-PERFORMING ASSETS
The Bank had no non-performing assets at December 31, 1996 and 1995. 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. Also the Bank had no impaired loans under SFAS 114/118.
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. Although the Company had no non-performing loans at
December 31, 1996, or chargeoffs during the year, the Company increased its
allowance for loan loss by $64,000 due to the inherent risk associated with the
introduction of new loan products such as non-conforming (to secondary market
guidelines) and 100% loans, and an aggressive first time homebuyer campaign. The
allowance for loan losses at December 31, 1996 was $166,000 and represented .19%
of total loans as compared to .14% at December 31, 1995.
10
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the measure of a company's ability to generate sufficient cash flow
to meet present and future funding obligations. The Bank's sources of liquidity
are customer deposits, amortization and prepayments of loans, advances from the
Federal Home Loan Bank, sale of loans in the secondary market, and maturities
and sales of securities. Beginning in fourth quarter 1997 and continuing until
1999, $11.9 million of long term high rate certificates will start to mature.
The disposition of these deposits may adversely affect the Bank's liquidity.
Firm commitments to grant loans at December 31, 1996 totaled $5.3 million,
unused lines of credit equaled $3.0 million and unadvanced portion of
construction loans equaled $1.0 million. The Bank believes that it has adequate
resources of liquidity to fund such commitments.
The Bank is an FDIC insured institution subject to the FDIC regulatory capital
requirements. The table below provides information with respect to the Bank's
compliance with its regulatory capital requirements at December 31, 1996.
<TABLE>
<CAPTION>
Percent of
Amount Average Assets
----------------- ------------------
(In thousands)
<S> <C> <C>
Tangible Capital $ 28,799 26.63%
Tangible capital requirement 1,622 1.50%
----------------- ------------------
Excess $ 27,177 25.13%
================= ==================
Tier 1 Capital $ 28,799 26.63%
Tier 1 Capital requirement 3,244 3.00%
----------------- ------------------
Excess $ 25,555 23.63%
================= ==================
Risk-based Capital $ 28,965 45.27%
Risk-based Capital Requirement 5,119 8.00%
----------------- ------------------
Excess $ 23,846 37.27%
================= ==================
</TABLE>
IMPACT OF NEW ACCOUNTING STANDARDS
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement is effective for transactions
occurring after December 31, 1996, and shall be applied prospectively. Earlier
or retroactive application of this Statement is not permitted. This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. Those standards are based
on consistent application of a financial components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. The Company intends to adopt
SFAS No. 125 in 1997. Management does not expect the adoption of SFAS No. 125 to
have a material effect on the Company's consolidated financial condition or
results of operations.
11
<PAGE> 13
[LOGO] Peat Marwick LLP
1600 PNC Center
201 East Fifth Street
Cincinnati, OH 45202
Dayton, OH
Independent Auditors' Report
----------------------------
The Board of Directors
Westwood Homestead Financial Corporation:
We have audited the accompanying consolidated statements of financial condition
of Westwood Homestead Financial Corporation and subsidiary as of December 31,
1996 and 1995, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company'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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Westwood Homestead
Financial Corporation and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Cincinnati, Ohio
January 31, 1997
12
<PAGE> 14
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash and cash equivalents:
Cash on hand and in banks $ 517,403 855,546
Interest-bearing deposits with banks 11,654,007 13,578
Federal funds sold 1,248,979 -
------------------ -----------------
Total cash and cash equivalents 13,420,389 869,124
------------------ -----------------
Securities available for sale (amortized cost of $3,962,180 at
December 31, 1996 and $1,000,000 at December 31, 1995) (note 3) 3,969,430 993,460
Mortgage-backed securities available for sale (amortized cost of $15,636,001
at December 31, 1996 and $17,868,984 at December 31,1995) (note 4) 15,034,115 17,380,012
Loans held for sale (net of unrealized losses of $7,946 at December 31, 1996;
market value of $1,728,064 at December 31, 1995) (note 5) 527,381 1,697,114
Loans receivable (net of allowance for loan losses of $165,513
at December 31, 1996; $101,709 at December 31, 1995) (notes 5 and 10) 84,525,374 73,245,098
Stock in the Federal Home Loan Bank of Cincinnati, at cost (notes 6 and 10) 953,600 889,900
Accrued interest receivable (note 7) 589,124 507,714
Premises and equipment, at cost, less accumulated depreciation (note 8) 607,339 590,871
Income taxes (note 11):
Deferred 126,475 189,489
Prepaid 83,947 175,489
Prepaid expenses and other assets 114,209 99,740
$ ---------------- -----------------
Total assets $ 119,951,383 96,638,011
=================== =================
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits (note 9) $ 79,082,778 81,748,061
Federal Home Loan Bank of Cincinnati advances (note 10) 127,458 138,604
Advances from borrowers for taxes and insurance 633,857 501,491
Accrued expenses and other liabilities 124,872 59,833
------------------- -----------------
Total liabilities 79,968,965 82,447,989
Commitments and contingencies (note 13) Stockholders' Equity (note 2):
Common stock, $.01 par value; $15,000,000 shares authorized; 28,434 -
2,843,375 shares issued and outstanding in 1996
Additional paid-in capital 27,709,597 -
Retained income - substantially restricted (note 11) 14,876,066 14,517,003
Net unrealized losses on securities available for sale, net of taxes
(notes 3 and 4) (393,293) (326,981)
Employee stock ownership plan (note 12) (2,238,386) -
----------------- -----------------
Total stockholders' equity 39,982,418 14,190,022
----------------- -----------------
Total liabilities and stockholders' equity 119,951,383 96,638,011
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 15
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Interest income:
<S> <C> <C> <C>
Loans receivable $ 6,362,235 5,751,852 5,322,206
Mortgage-backed securities 1,043,999 1,837,236 2,158,025
Interest-bearing deposits with banks, investment
securities and other 469,372 167,259 173,002
--------------------- ------------------ -------------------
Total interest income 7,875,606 7,756,347 7,653,233
--------------------- ------------------ -------------------
Interest expense:
Deposits (note 9) 4,804,846 4,966,676 4,894,548
Borrowings 29,587 295,478 152,123
--------------------- ------------------ -------------------
Total interest expense 4,834,433 5,262,154 5,046,671
--------------------- ------------------ -------------------
Net interest income 3,041,173 2,494,193 2,606,562
Provision for loan losses (note 5) 63,804 37,876 30,780
--------------------- ------------------ -------------------
Net interest income after provision for loan losses 2,977,369 2,456,317 2,575,782
--------------------- ------------------ -------------------
Non-interest income (loss):
Service charges and other fees 76,767 76,106 78,694
Gain on loan sales 50,363 466 -
Gain (loss) on sales of securities (notes 3 and 4) 4,458 (814,178) -
--------------------- ------------------ -------------------
Total non-interest income (loss) 131,588 (737,606) 78,694
--------------------- ------------------ -------------------
Non-interest expenses:
Compensation and benefits (note 12) 998,446 1,184,801 644,293
Occupancy costs 150,020 99,259 99,374
Franchise tax 192,913 160,798 194,996
Federal deposit insurance premiums (note 13) 724,531 207,008 226,175
Data processing 83,528 73,485 71,183
Legal, accounting, and examination fees 142,413 70,967 76,291
Consulting fees 51,798 61,021 -
Advertising 47,913 40,144 53,500
Other 193,332 158,353 128,093
--------------------- ------------------ -------------------
Total non-interest expenses 2,584,894 2,055,836 1,493,905
--------------------- ------------------ -------------------
Income (loss) before income
tax expense (benefit) 524,063 (337,125) 1,160,571
Income tax expense (benefit) (note 11) 165,000 (114,000) 400,000
--------------------- ------------------ -------------------
Net income (loss) $ 359,063 (223,125) 760,571
===================== ================== ===================
Net income per share since conversion (note 1) $ .16 N/A N/A
===================== ================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 16
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized Unallocated
(gain) loss common
Additional on securities stock
Common paid-in Retained available held by
stock capital income for sale ESOP Total
-------- ---------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
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 -- -- 359,063 -- -- 359,063
Net proceeds from 2,843,375 shares of common
stock issued in stock conversion (note 2) 28,434 27,702,272 -- -- -- 27,730,706
Purchase of 227,470 shares of common stock
by employee stock ownership plan (note 12) -- -- -- -- (2,360,001) (2,360,001)
Amortization of employee stock ownership
plan (note 12) -- 7,325 -- -- 121,615 128,940
Unrealized loss on securities available for sale,
net of tax -- -- -- (66,312) -- (66,312)
--------- ---------- ----------- ---------- ---------- -----------
Balances at December 31, 1996 $ 28,434 27,709,597 14,876,066 (393,293) (2,238,386) 39,982,418
========= ========== =========== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 17
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 359,063 (223,125) 760,571
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 (14,119) 22,073 128,043
Depreciation of premises and equipment 81,863 56,413 57,934
Federal Home Loan Bank of Cincinnati stock dividend (63,700) (58,100) (46,400)
Employee stock ownership plan amortization 128,940 -- --
Deferred income tax expense 96,717 (46,373) 13,000
Accretion of net loan fees deferred (9,471) (16,370) (19,877)
Provision for loan losses 63,804 37,876 30,780
(Gain) loss on sales of securities (4,458) 814,178 --
Gain on loan sales (50,363) (466) --
Net loans originated held for sale (1,063,186) (1,897,114) --
Proceeds from sale of loans held for sale 2,283,283 200,466 --
Change in:
Accrued interest receivable (81,410) 61,701 8,972
Prepaid expenses and other assets (14,469) (86,101) 3,481
Accrued expenses and other liabilities 65,039 (16,463) (6,816)
Income taxes 91,542 (169,331) 33,000
------------ ----------- ----------
Net cash provided by (used in) operating activities 1,869,075 (1,320,736) 962,688
------------ ----------- ----------
Cash flows from investing activities:
Proceeds from maturing securities available for sale 1,000,000 -- --
Purchase of securities available for sale (3,937,700) -- --
Proceeds from sales of securities available for sale -- 1,002,471 --
Proceeds from sales of mortgage-backed securities available for sale 1,667,340 20,394,270 --
Principal payments on mortgage-backed securities 558,848 1,448,082 6,961,945
Purchase of mortgage - backed securities available for sale -- -- (3,037,241)
Net (increase) decrease in loans receivable (11,334,609) 3,081,623) (6,991,247)
Additions to premises and equipment (98,331) (100,306) (110,083)
Sale of Federal Home Loan Bank of Cincinnati Stock -- 13,400 --
------------ ----------- ----------
Net cash provided by (used in) investing activities (12,144,452) 19,676,294 (3,176,626)
------------ ----------- ----------
Cash flows from financing activities:
Net decrease in deposits (2,665,283) (10,778,228) (7,368,623)
Proceeds from stock conversion, net of conversion costs 27,730,706 -- --
Purchase of common stock by ESOP (2,360,001) -- --
Increase (decrease) Federal Funds purchased -- (2,200,000) 2,200,000
Short-term advances from the Federal Home Loan Bank of Cincinnati, net -- (5,200,000) 5,200,000
Long-term advances from the Federal Home Loan Bank of Cincinnati -- -- 150,000
Repayments on the Federal Home Loan Bank of Cincinnati advances (11,146) (10,216) (1,180)
Net increase (decrease) in advances from borrowers for
taxes and insurance 132,366 (45,794) 172,984
------------ ----------- ----------
Net cash provided by (used in) financing activities 22,826,642 (18,234,238) 353,181
------------ ----------- ----------
Net increase (decrease) in cash and cash equivalents 12,551,265 121,320 (1,860,757)
Beginning cash and cash equivalents 869,124 747,804 2,608,561
----------- ----------- ----------
Ending cash and cash equivalents $ 13,420,389 869,124 747,804
============ =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 18
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
------------------------------------------
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. A description of the
more significant accounting policies follows:
(a) Basis of Presentation
---------------------
The accompanying consolidated financial statements
include the accounts of Westwood Homestead Financial
Corporation (the "Company") and its wholly-owned
subsidiary, The Westwood Homestead Savings Bank (the
"Bank"). The Company, an Indiana corporation, was
organized to act as the holding company of the Bank.
All intercompany accounts and transactions have been
eliminated.
As more fully described in Note 2, the Bank completed
its conversion from mutual to capital stock form of
ownership in 1996. Upon the Bank's conversion, the
Company simultaneously acquired all of the
outstanding stock of the Bank. Prior to 1996, the
financial statements include the accounts of the
Bank only.
The Bank's primary business activities include
attracting deposits from the general public and
originating one-to-four family residential property
loans in its market area. The Bank also makes
construction and consumer loans. The Bank is subject
to competition from other financial institutions.
The Bank's deposits 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 consolidated statements of cash
flows, the Company 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 and
Federal funds sold.
(Continued)
17
<PAGE> 19
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(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 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 stockholders'
equity, net of income taxes. Under SFAS No. 115,
securities that could be sold in the future due to
changes in interest rates or other factors may not
be classified as held to maturity. The Company has
no investments classified as trading securities.
Premiums and discounts are amortized using 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 Company 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.
(Continued)
18
<PAGE> 20
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(d) Loans Receivable, Continued
---------------------------
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 Company'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.
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
Company's allowance for losses. Such agencies may
require the Company 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
non-accrual loans is suspended.
The Company adopted 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, in 1995.
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. The adoption of these
standards did not have a material effect on the
Company's financial statements.
(Continued)
19
<PAGE> 21
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(d) Loans Receivable, Continued
---------------------------
During the first quarter of 1996, the Company 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 1996, approximately $31,000 of servicing rights
were capitalized in connection with the adoption of
SFAS No. 122. The carrying value of mortgage
servicing rights approximated $26,000 at December
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. The estimated fair value of
capitalized mortgage servicing rights was
approximately $34,000 at December 31, 1996. Quoted
market prices are used, when available, as the
basis of measuring the fair value of servicing
rights.
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 December 31, 1996, as the
carrying values of the various stratifications were
less than their respective fair values.
The Company 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
Company 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.
(Continued)
20
<PAGE> 22
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(d) Loans Receivable, Continued
---------------------------
Loans that are on nonaccrual status are also considered
to be impaired, except for nonaccrual loans that
the Company 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. The Company did not have impaired loans
during 1996 and 1995.
(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 3 to 5 years for furniture,
fixtures and equipment.
(f) Income Taxes
------------
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. Under the
asset and liability method of SFAS No. 109, 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 No. 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.
(g) Net Income Per Share
--------------------
Net income per share is computed by dividing net income
by the weighted average number of shares of common
stock outstanding during the period. Net income per
share is not applicable for periods prior to the
completion of the Bank's stock conversion on
September 27, 1996. 1996 net income per share has
been computed based upon net income per share for
the postconversion period from October 1, 1996 to
December 31, 1996. The effect on net income per
share for the postconversion period from September
27, 1996 to September 30, 1996 is not meaningful.
(Continued)
21
<PAGE> 23
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(h) Reclassifications
-----------------
Certain 1995 and 1994 amounts have been reclassified to
conform with the 1996 presentation.
(i) Use of Estimates
----------------
Management of the Company 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.
(2) Conversion to Stock Form of Ownership
-------------------------------------
On January 11, 1996, the Board of Directors adopted a Plan of
Conversion to convert from mutual to stock form. On September
27, 1996, the Bank completed its Conversion and was
simultaneously acquired by the Company. On the date of the
Conversion, the Company issued 2,843,375 shares of common stock
$0.01 par value, at $10 per share. Net proceeds from the
Conversion totaled $27,730,706. In accordance with the Plan of
Conversion, the Company retained approximately $13,865,353 of
the net proceeds and used the remaining proceeds to purchase all
of the outstanding stock of the Bank. The financial position and
results of operations of the Parent Company only as of and for
the period from conversion through December 31, 1996 are
presented in Note 15. Costs related to the Conversion of
$703,044 were charged against the Company's proceeds from the
sale of stock.
At the time of conversion, the Bank established a liquidation
account in an amount equal to the regulatory capital of the Bank
as of the date of the most recent financial statements contained
in the final subscription prospectus. The liquidation account
will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each
anniversary date. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account.
In the event of a complete liquidation, each eligible account
holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current
adjusted qualifying balances for accounts then held.
Current regulations allow the Bank to pay dividends on its stock 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
dividend would not otherwise violate regulatory requirements. At
December 31, 1996, the Bank could make capital distributions of
approximately $13,900,000 without prior regulatory approval.
(Continued)
22
<PAGE> 24
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(3) Securities Available for Sale
-----------------------------
The following summarizes the amortized cost, gross unrealized gains,
gross unrealized losses and market value of securities available for sale, which
are comprised entirely of United States Government agency obligations:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1996 $3,962,180 14,168 (6,918) 3,969,430
========== ====== ====== =========
December 31, 1995 $1,000,000 -- (6,540) 993,460
========== ====== ====== =========
</TABLE>
During the year ended December 31, 1996, a security available for sale was
called at par value. The Company received aggregate proceeds of $1,000,000,
which resulted in no realized gain or loss. During 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.
A summary of debt securities based on contractual maturities is shown below.
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.
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------
Amortized Market
cost value
---------------- ------------
<S> <C> <C>
Due within one year or less $ 983,710 980,933
Due after one year through five years 2,978,470 2,988,497
============= ===========
$ 3,962,180 3,969,430
============= ===========
</TABLE>
(Continued)
23
<PAGE> 25
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Mortgage-Backed Securities
--------------------------
The amortized cost and estimated market value of mortgage-backed
securities are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------------------------
Principal Unamortized Unearned Amortized Market
balance premiums discounts cost value
------------ -------------- ------------ ------------- -----------
Available For Sale
------------------
<S> <C> <C> <C> <C> <C>
GNMA certificates $ 466,458 6,498 (791) 472,165 497,644
FHLMC certificates 1,358,829 28,073 (323) 1,386,579 1,401,752
FNMA certificates 1,121,864 14,061 (728) 1,135,197 1,144,475
Collateralized Mortgage
Obligations 12,638,279 3,781 -- 12,642,060 11,990,244
----------- ------- ----------- ---------- ----------
$15,585,430 52,413 (1,842) 15,636,001 15,034,115
=========== ======= =========== ========== ==========
December 31, 1995
----------------------------------------------------------------------------------
Principal Unamortized Unearned Amortized Market
balance premiums discounts cost value
------------- ------------ ------------- ------------- ----------
Available For Sale
------------------
<S> <C> <C> <C> <C> <C>
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
=========== ======= =========== ========== ==========
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated market value of mortgage-backed securities are as follows:
December 31, 1996
------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
--------------- ------------- ------------- ------------
Available For Sale
------------------
<S> <C> <C> <C> <C>
GNMA certificates $ 472,165 25,595 (116) 497,644
FHLMC certificates 1,386,579 18,110 (2,937) 1,401,752
FNMA certificates 1,135,197 15,877 (6,599) 1,144,475
Collateralized Mortgage
Obligations 12,642,060 -- (651,816) 11,990,244
----------- -------- ----------- ----------
$15,636,001 59,582 (661,468) 15,034,115
=========== ======== =========== ==========
</TABLE>
(Continued)
24
<PAGE> 26
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Mortgage-Backed Securities, Continued
-------------------------------------
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
------------ ------------- -------------- ---------
Available For Sale
------------------
<S> <C> <C> <C> <C>
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
=========== ======== =========== ==========
</TABLE>
Estimated market values for mortgage-backed securities are based on
published market or security dealers' estimated prices.
For the year ended December 31, 1996, the Company sold
available-for-sale mortgage-backed securities for aggregate proceeds
of $1,667,340, resulting in gross realized gains and losses of
$7,270 and $2,812, respectively.
For the year ended December 31, 1995, the Bank sold available-for-sale
mortgage-backed securities for aggregate proceeds of $20,394,270,
resulting in gross realized losses of $812,708.
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.
(Continued)
25
<PAGE> 27
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Mortgage-Backed Securities, Continued
-------------------------------------
A summary of mortgage-backed 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.
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------
Amortized Market
cost value
------------ ------------
<S> <C> <C>
Due within one year or less $ -- --
Due after one year through five years 150,055 155,578
Due after five years through ten years 797,424 814,820
Due after ten years 14,688,522 14,063,717
=========== ==========
$15,636,001 15,034,115
=========== ==========
</TABLE>
(5) Loans Receivable, Net
---------------------
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1996 1995
---- ----
<S> <C> <C>
Real estate loans:
One-to-four family residential $63,385,905 55,628,977
Multi-family residential 11,536,914 10,988,709
Construction 1,798,879 525,000
Other residential and non-residential 9,275,220 8,392,963
Consumer loans 264,060 95,445
Commercial loans (non-mortgage) 119,302 --
----------- ----------
86,380,280 75,631,094
----------- ----------
Less:
Loans in process 1,018,460 437,359
Loans held-for-sale 535,327 1,697,114
Deferred loan fees 135,606 149,814
Allowance for loan losses 165,513 101,709
----------- ----------
Total $84,525,374 73,245,098
=========== ==========
</TABLE>
(Continued)
26
<PAGE> 28
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(5) Loans Receivable, Net, Continued
--------------------------------
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 101,709 63,833 32,520
Provision for loan losses 63,804 37,876 30,780
Loan charge-offs -- -- (167)
Recoveries -- -- 700
----------- ----------- ----------
Balance, end of year $ 165,513 101,709 63,833
=========== =========== ==========
</TABLE>
The Company serviced loans for the Federal Home Loan Mortgage
Corporation of approximately $2,372,000 and $199,000 at December 31,
1996 and 1995, respectively.
The Company had no nonaccrual loans as of December 31, 1996, 1995 and
1994.
Most of the Company's loan activity is with customers located within
Hamilton County, Ohio and contiguous counties.
(6) 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, 1996.
(7) Accrued Interest Receivable
---------------------------
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Mortgage loans $ 447,421 393,980
Investment securities 66,377 --
Mortgage-backed securities 75,326 113,734
========== ==========
$ 589,124 507,714
========== ==========
</TABLE>
(Continued)
27
<PAGE> 29
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(8) Premises and Equipment
----------------------
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1995
---- ----
<S> <C> <C>
Land $ 15,400 15,400
Buildings and improvements 673,540 695,184
Furniture, fixtures and equipment 547,403 432,122
------------- ------------
1,236,343 1,142,706
Accumulated depreciation 629,004 551,835
------------- ------------
$ 607,339 590,871
============= ============
</TABLE>
(9) Deposits
--------
Deposits are comprised of the following:
<TABLE>
<CAPTION>
December 31,1996 December 31, 1995
---------------------------------- ---------------------------------
Weighted Weighted
average average
interest interest
Amount Percent rate Amount Percent rate
--------------- ------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Savings accounts $ 3,710,025 4.7% 2.00% 3,619,986 4.4% 2.00%
NOW accounts 3,301,631 4.2 2.48 1,921,347 2.4 1.76
Money market deposit
accounts 11,599,813 14.7 3.72 12,695,676 15.5 3.71
Certificate accounts, classified
at date of issuance:
6 months or less 5,386,983 6.8 5.42 4,407,130 5.4 5.49
1 year 15,473,880 19.6 5.62 15,378,024 18.8 5.96
22 months 875,842 1.1 6.95 2,747,290 3.4 7.09
2 years 9,521,681 12.0 6.11 10,234,331 12.5 5.96
33 months 4,449,715 5.6 7.15 6,999,813 5.3 7.29
3 years 2,218,520 2.8 5.86 3,160,459 3.9 5.29
5 or more years 22,544,688 28.5 8.40 20,584,005 28.4 8.61
--------------- ----- ----- ---------- ----- ----
Total certificate
accounts 60,471,309 76.4 6.86 63,511,052 77.7 6.95
--------------- ===== ==== ========== ===== ====
Total deposits $ 79,082,778 100.0% 5.98% 81,748,061 100.0% 6.10%
=============== ===== ==== ========== ===== ====
</TABLE>
Deposits with balances equal to or greater than $100,000 at
December 31, 1996 and 1995 approximate $16,028,000 and
$15,659,000, respectively.
(Continued)
28
<PAGE> 30
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Deposits, Continued
-------------------
Certificate accounts at December 31, 1996 are scheduled to mature as
follows:
<TABLE>
<CAPTION>
In the year ending:
<S> <C>
December 31, 1997 $ 31,494,489
December 31, 1998 15,435,657
December 31, 1999 5,082,229
December 31, 2000 2,169,498
December 31, 2001 2,883,356
After December 31, 2001 3,406,080
-------------------
$ 60,471,309
===================
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Savings accounts $ 115,555 71,341 84,852
NOW accounts 38,201 25,675 29,568
Money market deposit
accounts 443,359 464,545 456,595
Certificate accounts 4,207,731 4,405,115 4,323,533
------------ --------- ---------
Total interest expense
on deposits $ 4,804,846 4,966,676 4,894,548
============ ========= =========
</TABLE>
Interest paid (including interest credited) on deposits and borrowings
was approximately $4,836,000, $5,261,000, and $5,047,000 for the years ended
December 31, 1996, 1995, 1994, respectively.
(10) Federal Home Loan Bank of Cincinnati Advances
---------------------------------------------
Advances from the FHLB of Cincinnati are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
Maturity Date Interest rate 1996 1995
------------- ------------- ---- ----
<S> <C> <C> <C>
November 1, 2004 8.15% $ 57,134 62,145
December 1, 2004 8.20% 70,324 76,459
=============== ==============
$ 127,458 138,604
=============== ==============
</TABLE>
(Continued)
29
<PAGE> 31
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(10) Federal Home Loan Bank of Cincinnati Advances, Continued
--------------------------------------------------------
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 Company 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 $192,720 at December 31,
1996.
(11) Income Taxes
------------
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statements of income $ 165,000 (114,000) 400,000
Stockholders' equity:
Unrealized gains (losses) on
securities available for sale (33,703) 1,099,425 (1,267,899)
============ ============ ============
Total income tax expense (benefit) $ 131,297 985,425 (867,899)
============ ============ ============
</TABLE>
Income tax expense (benefit), from operations, is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $ 68,283 (67,627) 387,000
Deferred 96,717 (46,373) 13,000
----------- ---------- ----------
$ 165,000 (114,000) 400,000
============ ========== ==========
</TABLE>
(Continued)
30
<PAGE> 32
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Income Taxes, Continued
-----------------------
Actual income tax expense (benefit) for the years ended December 31,
1996, 1995 and 1994 differs 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 income
taxes expense (benefit) as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ --------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
----------- ---------- ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax expense
(benefit) $ 178,181 34.0% $(114,623) (34.0)% $394,594 34.0%
Increase (decrease) in income
taxes resulting in:
Graduated tax rates (1,949) (.4) - - - -
Other (11,232) (2.1) 623 .2 5,406 .5
--------- ---- --------- ---- -------- ----
$ 165,000 31.5% $(114,000) (33.8)% $400,000 34.5%
========= ==== ========= ==== ======== ====
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
tax liabilities are presented below:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Unrealized loss on securities $202,177 168,474
Loan loss reserves 58,976 34,581
Accrued expenses, principally due to
differences in benefit accruals 112,904 127,500
Deferred loan fees 219,677 274,596
Premises and equipment, principally due
to differences in depreciation 8,856 -
-------- -------
Total gross deferred tax assets 602,590 605,151
Less-valuation allowance - -
-------- -------
Total net deferred tax assets 602,590 605,151
-------- -------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends 137,155 115,497
Deferred loan costs 338,960 299,300
Premises and equipment, principally
due to differences in depreciation - 865
-------- -------
Total gross deferred tax liability 476,115 415,662
-------- -------
Net deferred tax asset $126,475 189,489
======== =======
</TABLE>
(Continued)
31
<PAGE> 33
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Income Taxes, Continued
-----------------------
No valuation allowance for deferred tax assets was recorded as of
December 31, 1996 and 1995 as management believes that the
amounts representing future deferred tax benefits will more
likely than not be recognized since the Company 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 Company 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 December 31, 1996 and 1995 includes approximately
$2,440,000 of tax bad debt reserves for which no deferred
Federal income tax liability has been recognized.
Based on its stockholders' equity level, the Company was not allowed
the special bad debt deduction in the years ended December 31,
1996 and 1995.
Income taxes paid were approximately $152,000, $110,000, and $354,000
for the years ended December 31, 1996, 1995 and 1994,
respectively.
(12) Benefit Plans
-------------
Directors' Retirement Plan
--------------------------
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 amended Plan. The Company makes quarterly
contributions to eligible directors' accounts in an amount
equal to his/her most recent twelve months director's base
annual fees for a specified number of years based on length of
service, not to exceed ten years. Total expense for such
participants, including prior service costs, was $375,000 in
1995. The Plan has corresponding net assets in a trust of
approximately $384,000 and $375,000 at December 31, 1996 and
1995, respectively. The Plan was approved by the members of the
Bank at its annual meeting on February 12, 1996. As a result of
discussions with federal regulators, in June of 1996 the Board
of
(Continued)
32
<PAGE> 34
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Benefit Plans, Continued
------------------------
Directors' Retirement Plan, Continued
-------------------------------------
Directors of the Bank voted to reduce the benefits provided
under the original Plan and to submit an amended Plan for
approval by the stockholders of the Company following
completion of the Conversion.
On December 23, 1996, the stockholders of the Company approved the
adoption of an amended Plan, effective January 1, 1995, and,
upon approval of the reduced benefit, the Company recorded an
$80,000 recovery of Plan expense. Net expense of this Plan for
1996 was a $40,000 benefit. There was one retiree from the
Board of Directors receiving benefits under the amended Plan
during the year ended December 31, 1996 and no retirees from
the Board of Directors receiving benefits under the original
Plan during the year ended December 31, 1995.
Employee Stock Ownership Plan
-----------------------------
Effective January 1996, the Company established the Employee Stock
Ownership Plan ("ESOP") for the benefit of eligible employees.
The Plan purchased 227,470 shares of the Company's stock at
$10.375 per share in September 1996. To be eligible, an
employee must be 21 years of age and have completed at least
one year of service. The ESOP is to be funded by contributions
made by the Company or the Bank in cash or shares of common
stock. Shares purchased are held in a suspense account for
allocation among participants. Contributions to the ESOP and
shares released from the suspense account will be allocated
among participants on the basis of their annual compensation.
The purchase of the shares by the ESOP has been recorded in the
consolidated financial statements through a charge to a contra
equity account for the unallocated shares. The contra equity
account is reduced as the shares are committed to be released
to the participants. The Company records compensation expense
as shares are committed to be released to directly compensate
employees equal to the fair value of the shares committed. The
difference between the fair value of the shares committed to be
released and the cost of such shares are charged or credited to
additional paid-in capital. Additionally, ESOP shares that have
been committed to be released are considered outstanding for
earnings per share computations. For the year ended December 31
1996, the Company committed 11,722 shares to be released to
employees, with corresponding expense of $133,000. The
remaining 215,748 unallocated shares had a fair value of
approximately $2,616,000 at December 31, 1996.
Savings Plan
------------
The Company 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 $13,000, $21,000 and
$19,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
(Continued)
33
<PAGE> 35
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(13) Commitments and Contingencies
-----------------------------
Off-Balance Sheet Risk
----------------------
The Company 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. These financial instruments
involve, to varying degrees, elements of credit risk that are
not recognized in the consolidated statement of financial
condition.
The Company'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 Company uses the
same credit policies in making commitments and obligations as
it does for on-balance sheet instruments. In extending
commitments, the Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company 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.
A summary of financial instruments with off-balance sheet risk
follows:
<TABLE>
<CAPTION>
Contract or notional amount
December 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Undisbursed construction loans in process $1,018,460 437,359
Undisbursed lines of credit on home equity loans 2,976,408 1,091,725
Loan commitments:
Adjustable (6.13% to 9.25% and 7.25% to 10.75%
at December 31, 1996 and 1995, respectively) 426,750 186,900
Fixed (7.00% to 12.40% and 6.75% to 7.00%
at December 31, 1996 and 1995, respectively) 4,911,650 319,300
</TABLE>
Market risk arises from fixed rate loan commitments. A rise in
interest rates prior to closing will cause a decrease in the
fair value of fixed rate loan commitments.
(Continued)
34
<PAGE> 36
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(13) Commitments and Contingencies, Continued
----------------------------------------
Contingencies
-------------
The Company can be involved in various claims and legal actions
arising in the ordinary course of business. At December 31,
1996, there are no such legal matters that will have a material
adverse effect on the Company's financial condition, results of
operations or liquidity.
The Company'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
were to pay a premium equal to 0.04% of insured deposits as
compared to the previous rates ranging from 0.23% of insured
deposits for well capitalized institutions to 0.31% of deposits
for undercapitalized institutions. This amendment created a
significant disparity between the deposit insurance premiums
paid by BIF and SAIF members.
In order to eliminate this premium disparity, both the United
States Senate and the House of Representatives, as a part of a
budget reconciliation package, approved legislation which
levied a one-time assessment on institutions with deposits
insured by the SAIF in order to recapitalize the SAIF. The
assessment, set by the FDIC at 0.65% of SAIF-insured deposits
as of March 31, 1995, was paid on November 27, 1996. The effect
of this assessment was to reduce the Company's net income for
the year ended December 31, 1996 by $385,000. As a result of
this legislation, the Company's deposit insurance premiums will
be reduced from the current 23 basis points to approximately
6.5 basis points, a 72% decrease, effective for quarters ending
after December 31, 1996.
Concentration of Credit Risk
----------------------------
The Company considers its primary market area for lending and
savings activities to be the immediate geographic area of
Greater Cincinnati. Although the Company 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.
(Continued)
35
<PAGE> 37
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(14) 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
----------------
The carrying amount of cash equivalents is a reasonable
estimate of fair value.
Securities
----------
Estimated market values for securities are based on published
market or securities dealers' estimated prices.
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 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
by discounting the future cash flows 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 Company for similar advances of comparable
maturities by the FHLB.
(Continued)
36
<PAGE> 38
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(14) Fair Value of Financial Instruments, Continued
----------------------------------------------
The estimated fair values of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31,1995
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ----------- ----------- ----------
(Thousands) (Thousands) (Thousands) (Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 13,420 13,420 869 869
Securities 3,969 3,969 993 993
Mortgage-backed securities 15,034 15,034 17,380 17,380
Loans held for sale 527 527 1,697 1,728
Loans receivable:
1-4 family adjustable rate mortgages 15,864 15,685 8,892 8,865
Other adjustable 13,366 13,088 12,440 12,252
1-4 family fixed rate mortgages 46,673 45,300 44,884 44,544
Other fixed 7,748 7,588 7,038 6,908
Second mortgages 793 868 148 162
Consumer loans 264 267 95 95
Commercial 119 118 - -
Less: Allowance for loan losses (166) (166) (102) (102)
Deferred loan fees (136) (136) (150) (150)
------- ------- ------- ------
Net loans $ 84,525 82,612 73,245 72,574
======= ======= ======= ======
Financial liabilities:
Deposits:
Certificate accounts 60,471 61,263 63,511 65,137
Money market deposit accounts 11,600 11,600 12,696 12,696
Savings accounts 3,710 3,710 3,620 3,620
Now accounts 3,302 3,162 1,921 1,921
------- ------- ------- ------
Total deposits 79,083 79,735 81,748 83,374
------- ------- ------- ------
FHLB advances $ 127 110 138 131
======= ======= ======= ======
</TABLE>
(Continued)
37
<PAGE> 39
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(15) Regulatory Matters
------------------
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -
and possibly additional discretionary - actions by regulators
that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's
capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and
ratios (set forth in the table below) of Tangible, Tier I/Core
and Risk-based capital (as defined in the regulations).
Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from FDIC
categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum Tangible, Tier
I/Core, Risk-based ratios as set forth in the table. There are
no conditions or events since that notification that management
believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------- --------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Tangible Capital $28,799,276 26.63% $1,622,277 1.50% $5,407,590 5.00%
Tier I/Core Capital 28,799,276 26.63% 3,244,555 3.00% 6,489,110 6.00%
Risk-based Capital 28,964,789 45.27% 5,118,880 8.00% 6,398,600 10.00%
As of December 31, 1995:
Tangible Capital 14,517,003 13.93% 1,562,904 1.50% 5,209,680 5.00%
Tier I/Core Capital 14,517,003 13.93% 3,125,808 3.00% 6,251,616 6.00%
Risk-based Capital 14,618,712 25.30% 4,623,280 8.00% 5,779,100 10.00%
</TABLE>
(Continued)
38
<PAGE> 40
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Parent Company Financial Statements
-----------------------------------
Condensed financial data for Westwood Homestead Financial Corporation
(Parent company only) at December 31, 1996 and for the period
from inception at September 27, 1996 to December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
Condensed Statement of Financial Condition
December 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
Assets:
Interest-bearing deposits with banks $11,612,736
Investment in subsidiary 28,405,983
Prepaid income taxes 1,399
-----------
Total assets $40,020,118
===========
Liabilities and stockholders' equity:
Accrued expenses 37,700
Stockholder's equity 39,982,418
-----------
Total liabilities and stockholders' equity $40,020,118
===========
<CAPTION>
Condensed Statement of Income Period
from Inception (September 27, 1996) through December 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
Interest income: interest-bearing deposits $ 138,583
Non-interest expenses 47,898
-----------
Income before Federal income taxes and
equity in earnings of subsidiary 90,685
Federal income tax expense 19,601
-----------
Income before equity in earnings of subsidiary 71,084
Equity in earnings of subsidiary 287,979
-----------
Net income $ 359,063
===========
</TABLE>
(Continued)
39
<PAGE> 41
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Parent Company Financial Statements, Continued
----------------------------------------------
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
Period from Inception (September 27, 1996) through December 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net income $ 359,063
Adjustments to reconcile net income to cash provided by
operating activities:
Equity in earnings of subsidiary (287,979)
Increase in prepaid income taxes (1,400)
Increase in accrued expenses 37,700
------------
Net cash provided by operating activities 107,384
------------
Cash flows from investing activities:
Purchase of common stock issued by subsidiary (13,865,353)
------------
Net cash used in investing activities (13,865,353)
------------
Cash flows from financing activities:
Proceeds from issuance of common stock 27,730,706
Purchase of common stock by employee stock
ownership plan (2,360,001)
------------
Net cash provided by financing activities 25,370,705
------------
Net increase in cash and cash equivalents 11,612,736
Cash and cash equivalents at beginning of year -
------------
Cash and cash equivalents at end of year $ 11,612,736
============
</TABLE>
(Continued)
40
<PAGE> 42
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(17) Quarterly Results of Operations (Unaudited)
-------------------------------------------
The following is a summary of the quarterly results of operations
for the years ended December 31, 1996 and 1995 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------
December 31, September 30, June 30, March 31,
1996 1996 1996 1996
------------ ------------ ------- -------------
<S> <C> <C> <C> <C>
Total interest income $ 2,208 2,000 1,852 1,815
Total interest expense 1,158 1,254 1,212 1,210
Net interest income 1,050 746 640 605
Provision for loan losses 19 15 15 15
Non-interest income 40 23 24 45
Non-interest expenses and
provision for income taxes 656 1,026 536 532
Net income (loss) 415 (272) 113 103
Earnings per common share
since conversion .16 N/A N/A N/A
<CAPTION>
Three Months Ended
-----------------------------------------------
December 31, September 30, June 30, March 31,
1995 1995 1995 1995
------------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Total interest income $ 1,873 1,893 1,981 2,009
Total interest expense 1,258 1,263 1,367 1,373
Net interest income 615 630 614 636
Provision for loan losses 10 28 - -
Non-interest income (loss) (207) 11 (571) 29
Non-interest expenses and
provision for income taxes 702 421 330 489
Net income (loss) (304) 192 (287) 176
Earnings per common share
since conversion N/A N/A N/A N/A
</TABLE>
41
<PAGE> 43
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
and WESTWOOD HOMESTEAD SAVINGS BANK
<S> <C>
Carl H. Heimerdinger Michael P. Brennan
Chairman of the Board Director
Retired President/CEO
Treasurer, Cincinnati Public Schools Westwood Homestead Savings Bank
John B. Bennet, Sr. Raymond J. Brinkman CPA
Vice Chairman of the Board Director
Retired Retired
Self-employed dentist Senior Manager, Deloitte & Touche LLP
Mary Ann Jacobs Roger M. Higley
Secretary Director
Partner, Law Firm Ritter & Randolph Self-employed dentist
Robert H. Bockhorst James D. Kemp
Director Director
Self-employed appraiser & real Vice President of Sales, Hilliard Lyons
estate investor
<CAPTION>
OFFICERS OF WESTWOOD HOMESTEAD SAVINGS BANK
- --------------------------------------------------------------------------------
<S> <C>
* Michael P. Brennan Juliana R. Bauer
President/CEO Assistant Vice President
Savings Manager
* John E. Essen CPA
Chief Financial Officer Ruth H. Webber
and Treasurer Assistant Secretary
Gerald T. Mueller
Vice President
Director of Lending * Also officers of Westwood Homestead Financial Corporation
</TABLE>
BANKING LOCATIONS
- --------------------------------------------------------------------------------
3002 Harrison Avenue 1101 St. Gregory Street
Cincinnati, Ohio 45211 Cincinnati, Ohio 45202
<PAGE> 44
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
CORPORATE OFFICE INDEPENDENT AUDITOR
Westwood Homestead Financial Corp. KPMG Peat Marwick L.L.P.
3002 Harrison Avenue 1600 PNC Center
Cincinnati, OH 45211 201 East Fifth Street
(513) 661-5735 Cincinnati, OH 45202
SPECIAL COUNSEL LEGAL COUNSEL
Housley Kantarian & Bronstein, P.C. Ritter & Randolph
1220 19th Street, N.W., Suite 700 105 E. Fourth Street
Washington, DC 20036 Cincinnati, OH 45202
STOCK TRANSFER AGENT ANNUAL REPORT ON FORM 10-K
Inquiries regarding stock transfer, A copy of the Company's annual
registration, lost certificates or report on Form 10-K, filed with
changes in name and address SEC is available without charge
should be directed to the stock by writing:
transfer agent and registrar by
writing:
Keith M. Maurmeier John E. Essen CPA
Senior Trust Officer Chief Financial Officer
Star Bank Westwood Homestead Financial Corp.
P.O. Box 1118 3002 Harrison Avenue
Cincinnati, OH 45201-1118 Cincinnati, OH 45311
MARKET MAKERS
- -------------------------------------------------------------------------------
ABN Amro Chicago Corp. Herzog, Heine, Geduld, Inc.
Capital Resources, Inc. Keefe, Bruyette & Woods, Inc.
Everen Securities, Inc. Sandler O'Neill & Partners, L.P.
Friedman Billings Ramsey & Co. S. J. Wolfe & Co.
As of February 15, 1997
- -------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders of Westwood Homestead Financial Corporation
will be held on April 1, 1997, at 9:00 a.m., local time, at Westwood Homestead
Savings Bank, 3002 Harrison Avenue, Cincinnati, Ohio. Stockholders are invited
to attend.
- -------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent
- ------
Westwood Homestead Financial Corporation
Percentage State Of
Subsidiaries (1) Owned Incorporation
- ---------------- ----- -------------
Westwood Homestead Savings Bank 100% United States
- -----------
(1) The operations of the subsidiary are included in the consolidated
financial statements contained in the annual report to stockholders
attached hereto as an exhibit.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 517,403
<INT-BEARING-DEPOSITS> 11,654,007
<FED-FUNDS-SOLD> 1,248,979
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,003,545
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 85,052,755
<ALLOWANCE> 165,513
<TOTAL-ASSETS> 119,951,383
<DEPOSITS> 79,082,778
<SHORT-TERM> 0
<LIABILITIES-OTHER> 758,729
<LONG-TERM> 127,458
<COMMON> 28,434
0
0
<OTHER-SE> 39,953,984
<TOTAL-LIABILITIES-AND-EQUITY> 119,951,383
<INTEREST-LOAN> 6,362,235
<INTEREST-INVEST> 1,043,999
<INTEREST-OTHER> 469,372
<INTEREST-TOTAL> 7,875,606
<INTEREST-DEPOSIT> 4,804,846
<INTEREST-EXPENSE> 4,834,433
<INTEREST-INCOME-NET> 3,041,173
<LOAN-LOSSES> 63,804
<SECURITIES-GAINS> 4,458
<EXPENSE-OTHER> 2,584,894
<INCOME-PRETAX> 524,063
<INCOME-PRE-EXTRAORDINARY> 524,063
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 359,063
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
<YIELD-ACTUAL> 1.84
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 101,709
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 165,513
<ALLOWANCE-DOMESTIC> 165,513
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
