<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Mark One FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-18279
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
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(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 16, 1998, there were issued and outstanding 2,843,375
shares of the registrant's common stock.
As of March 16, 1998, 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 $39.8 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, 1997. (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, 1997,
the Company had consolidated total assets of $134.3 million, deposits of $88.2
million, net loans receivable of $117.6 million and stockholders' equity of
$30.1 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. The Bank is an Ohio chartered stock savings bank conducting
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.
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.
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<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, 1997, the Bank had no concentrations of
loans exceeding 10% of total loans that are not otherwise disclosed below.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1997 1996 1995
----------------- ------------------ -------------------
Amount % Amount % Amount %
------- ---- ------- ---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
Real estate loans:
One- to four-family residential $87,234 73.26% $63,386 73.38% $55,629 73.55%
Multi-family residential.................. 14,795 12.42 11,537 13.36 10,989 14.53
Construction.............................. 4,709 3.95 1,799 2.08 525 .69
Other residential and non-
residential (1)........................ 11,683 9.81 9,275 10.74 8,393 11.10
Consumer loans............................... 441 .37 264 .30 95 .13
Commercial loans............................. 217 .19 119 .14 -- --
-------- ------ -------- -------- ------- ------
Total................................... 119,079 100.00% 86,380 100.00% 75,631 100.00%
====== ====== ======
Less:
Loans in process.......................... 958 1,018 437
Loans held for sale....................... -- 535 1,697
Deferred loan fees........................ 207 136 150
Allowance for loan losses................. 266 166 102
-------- -------- -------
Total.................................. $117,648 $ 84,525 $73,245
======== ======== =======
</TABLE>
- -------------------------
(1) Includes home equity loans.
2
<PAGE> 4
LOAN MATURITY SCHEDULE
The following table sets forth certain information at December 31, 1997
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,
1998 1997 1997 Total
------------ ------------- ------------- ----------
(In thousands)
<S> <C> <C> <C> <C>
One- to four-family residential $ 279 $ 5,558 $ 86,103 $ 91,943
Multi-family and non-residential 1,413 2,588 22,480 26,478
Consumer............................ 127 155 159 441
Commercial.......................... -- 217 -- 217
-------- ------- ---------- ---------
Total.......................... $ 1,819 $ 8,518 $ 108,742 $ 119,079
======== ======= ========== =========
</TABLE>
The next table sets forth at December 31, 1997, the dollar amount of
all loans due one year or more after December 31, 1997 which have predetermined
interest rates and have floating or adjustable interest rates.
Predetermined Floating or
Rate Adjustable Rates
------------- ----------------
(In thousands)
One- to four-family residential $57,630 $34,031
Multi-family and non-residential 14,628 10,440
Consumer............................... 314 --
Commercial............................. -- 217
------- -------
Total................................. $72,572 $44,688
======= =======
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, 1997, $87.2
million, or 73.3%, of the Bank's gross loan portfolio consisted of loans secured
by one- to four-family residential real properties primarily located in the
Bank's market area.
The Bank originates both fixed rate and adjustable rate mortgage loans
("ARMs"). The Bank generally offers fixed rate mortgage loans with terms of 15
or 30 years. Adjustable rate loans are originated for terms of up to 30 years.
Currently, ARM loans offered by the Bank have six month, one year, 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 4.50
percentage points. Most 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% adjustment caps per six month period with 4% to 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, 1997,
approximately 66.5% of the Bank's one- to four-family mortgage loans were fixed
rate loans and approximately 33.5% were ARMs.
3
<PAGE> 5
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, 1997, approximately 18.3% 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%
and 125% loan to value programs.
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 $4.0 million of these second mortgage loans, which would
allow the Bank to lend up to $20.0 million of mortgages with combined
loan-to-value ratios of 100%. At December 31, 1997, the Bank had 121 of these
loans outstanding, with an aggregate balance of second mortgages of $2.6
million.
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, 1997, multi-family and
non-residential real estate loans totaled $14.8 million and $11.7 million,
respectively, and represented 12.4% and 9.8%, 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 80% 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 25 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. The Bank's largest multi-family real estate loan amounted to $1.9 million
at December 31, 1997 and was secured by a 72 unit apartment complex. The Bank's
second largest multi-family real estate loan amounted to $1.8 million at
December 31, 1997 and was secured by a 66 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, 1997.
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 office building located in Roselawn, Ohio. Such loan had a balance
of $1.6 million at December 31, 1997. The Bank's second largest non-residential
real estate loan amounted to $800,000 at December 31, 1997 and was secured by an
orthopedic medical office building. Both of these loans are located in the
Bank's market area and were performing according to their terms at December 31,
1997.
4
<PAGE> 6
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 in construction lending
involving loans to qualified borrowers generally for construction of one- to
four-family or multi-family residential properties. These properties are
primarily located in the Bank's market area. At December 31, 1997, the Bank's
loan portfolio included $4.7 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 automobile 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. At December
31, 1997, the Bank's consumer loans totaled $441,000, or .37%, 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.
5
<PAGE> 7
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. It is management's intention to aggressively grow the
mortgage loan portfolio with an expanded lending staff. 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 $300,000 are required to be presented to the Board
appointed Loan Committee for final approval. One- to eight-family loans below
$250,000, 240,000 and $100,000 may be approved by the President, Vice President
and Assistant Vice President of the Bank, respectively. Together, the President
and Vice President can approve mortgage loans up to $300,000. Non-residential
real estate loans must be approved by the Loan Committee. 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.
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<PAGE> 8
Originations and Sales of Loans. The Bank's loans are primarily
originated by 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.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Loans originated:
<S> <C> <C> <C>
Real estate loans:
One- to four-family........................... $ 33,946 $ 18,811 $ 11,026
Multi-family residential...................... 6,925 724 1,184
Construction.................................. 5,746 1,733 525
Non-residential (1)........................... 6,095 4,653 818
----------- ----------- ------------
Total loans originated..................... $ 52,712 $ 25,921 $ 13,553
=========== =========== ============
Loans sold........................................ $ 824 $ 2,172 $ 200
=========== =========== ============
</TABLE>
- ----------------------
(1) Includes home equity lines of credit of $3,472 and $3,747 during 1997 and
1996.
The Bank originates residential mortgage loans for sale in the
secondary market to the Federal Home Loan Mortgage Corporation ("FHLMC").
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 of 1% of the loan amount.
Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by adding 3/8 to 1/2 percent to the
published rates of FHLMC. Mortgage loan rates reflect factors such as general
interest rate levels, the supply of money available to the savings industry ,
competition 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, origination fees are generally not
charged for owner-occupied non-buydown 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 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
7
<PAGE> 9
maintain an adequate allowance for loan losses based on, among other things, the
Bank's and the industry's historical loan loss experience, evaluation of
economic conditions and regular reviews of delinquencies and loan portfolio
quality. The Bank increases its allowance for loan losses by charging provisions
for loan losses against the Bank's income. Management anticipates that the
Bank's provisions for loan losses will increase in the future as it implements
the Board's strategy of continuing existing lines of business while gradually
expanding one- to four-family residential non-conforming loans to secondary
market guidelines and consumer lending.
General allowances are made pursuant to management's assessment of risk
in the Bank's loan portfolio as a whole. Specific allowances are provided for
individual loans when ultimate collection is considered questionable by
management after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loan.
The Bank also establishes a 1% to 4% allowance on all loans originated under
special loan programs for home borrowers 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,
------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period.................... $165,513 $101,709 $63,833
Loans charged off................................. -- -- --
Recoveries - real estate mortgage -
residential..................................... -- -- --
Provision for loan losses......................... 100,750 63,804 37,876
-------- -------- --------
Balance at end of period.......................... $266,263 $165,513 $101,709
======== ======== ========
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,
----------------------------------------------------------------------------------
1997 1996 1995
-------------------------- --------------------------- ------------------------
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............................ $189,105 73.26% $ 91,815 73.38% $ 50,102 73.55%
Multi-family and non-residential 58,797 22.23 66,262 24.10 51,607 25.63
Construction................................... 11,773 3.95 4,497 2.08 -- .69
Consumer....................................... 4,414 .37 2,641 .30 -- .13
Commercial..................................... 2,174 .19 298 .14 -- --
-------- ------ -------- ------ -------- ------
Total allowance for loan losses $266,263 100.00% $165,513 100.00% $101,709 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
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<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 and 118 at the dates
indicated. In addition, the Bank had no real estate acquired as a result of
foreclosure or loans accounted for on a nonaccrual basis.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1997 1996 1995
------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate - Residential......................... $ -- $ -- $ --
Commercial........................................ -- -- --
Consumer.......................................... -- -- --
--------- --------- ---------
Total.......................................... $ -- $ -- $ --
========= ========= =========
Accruing loans which are contractually
past due 90 days or more:
Real estate - Residential......................... $ 155 $ -- $ --
Commercial........................................ -- -- --
Consumer.......................................... -- -- --
--------- --------- ---------
Total.......................................... $ 155 $ -- $ --
========= ========= =========
Total nonperforming loans...................... $ 155 $ -- $ --
========= ========= =========
Percentage of total loans............................ .13% --% --%
========= ========= =========
Other non-performing assets.......................... $ -- $ -- $ --
========= ========= =========
Loans modified in troubled debt
restructurings..................................... $ -- $ -- $ --
========= ========= =========
</TABLE>
At December 31, 1997, 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.
The $155,000 of non performing loans includes three loans of which one
for $59,000 is paid current as of March 1998. The remaining $96,000 represents
two loans to one borrower that, as of March 1998, is classified as non-accrual.
These loans are in process of foreclosure and a charge of approximately $15,000
to the allowance will be made in the first quarter of fiscal 1998.
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.
Mortgage-Related Securities. The Bank invests in mortgage-related
securities such as CMOs, primarily as an alternative to mortgage loans or
mortgage-backed securities and may purchase them in the future. For a discussion
of the sale of the Bank's $12.6 million portfolio of CMOs during the fourth
quarter of fiscal 1997, including the associated $535,000 loss, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Securities" in the Company's 1997 Annual Report to Stockholders
(the "Annual Report"), which is incorporated herein by reference.
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 collateralize 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
11
<PAGE> 13
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, 1997, these securities had a
market value of $2.2 million and an amortized cost of $2.1 million, representing
1.6% of the Company'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,
-----------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Securities available for sale:
U.S. government and agency securities $ 1,000 $ 3,969 $ 993
Collateralized mortgage obligations -- 11,990 13,110
Mortgage-backed securities........................ 2,151 3,044 4,270
------- ------- -------
Total investment securities.................... 3,151 19,003 18,373
Cash and cash equivalents............................ 10,368 13,420 869
FHLB stock........................................... 1,024 954 890
------- ------- -------
Total investments.............................. $14,543 $33,377 $20,132
======= ======= =======
</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,
1997.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Portfolio
---------------- ----------------- ----------------- ------------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
------- ------- ------- ------- ------- ------- ------ ------ ------- ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities................ $1,000 5.27% $ -- --% $ -- --% $ -- --% $1,000 $1,000 5.27%
Mortgage-backed securities -- -- 207 7.60% 231 7.77% 1,713 7.40% 2,151 2,151 6.74
------ ---- ---- ------ ------ ------
Total..................... $1,000 $207 $231 $1,713 $3,151 $3,151
====== ==== ==== ====== ====== ======
</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 7 years. The majority of deposits at the Bank
are CDS, which at December 31, 1997 represented 76.1% 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 $2.2 million in deposits outstanding as of December 31,
1997. Transaction accounts made up 71% of the deposits which contributed to the
3.82% cost of funds for the branch. Although the branch has not yet reached
break-even, 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, 1997, such certificates of deposit represented $9.1 million, or
approximately 10.3%, of total deposits with a weighted average interest rate of
9.4%. Such certificates of deposit are, in large part, responsible for the
Bank's high costs of funds. These deposits started 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 $14.2 million, or
16.2%, of the Bank's total savings portfolio at December 31, 1997. 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,
--------------------------------------------------------------
1997 1996 1995
------------------- ------------------- ----------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings deposits............... $ 3,769 1.98% $ 6,063 1.91% $ 3,608 1.98%
NOW accounts................... 4,646 3.03 1,996 1.91 1,486 1.93
Money market accounts.......... 10,046 3.64 12,089 3.67 12,737 3.65
Certificates of deposit........ 63,961 6.69 63,474 6.63 67,590 6.51
------- ---- ------- ---- ------- ----
Total..................... $82,422 5.90 $83,622 5.75 $85,421 5.80
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of time
deposits at December 31, 1997.
<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%.................. $ 29,510 $ 4,049 $ 316 $ 1,238 $ 35,113
6.00 - 7.99%.................. 1,952 6,794 3,090 8,317 20,153
8.00 - 9.99%.................. 7,177 2,675 1,395 597 11,844
--------- ---------- ---------- ---------- ----------
$ 38,639 $ 13,518 $ 4,801 $ 10,152 $ 67,110
========= ========== ========== ========== ==========
</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,
1997.
Certificates
Maturity Period of Deposits
(In thousands)
Three months or less....................... $ 4,460
Over three through six months.............. 1,644
Over six through 12 months................. 2,428
Over 12 months............................. 5,690
----------
Total.................................. $ 14,222
==========
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. At December 31, 1997, $14.8 million 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,
------------------------------------------
1997 1996 1995
------ ------ -----
(In thousands)
<S> <C> <C> <C>
Amounts outstanding at end of period:
FHLB advances................................... 14,765 127 139
Weighted average rate paid on:
FHLB advances................................... 6.33% 8.18% 8.17%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
Federal funds purchased......................... $ 1,200 $ 1,600 $ 3,600
FHLB advances................................... 18,775 1,000 7,700
Approximate average short-term borrowings
outstanding with respect to:
Federal funds purchased......................... $ 4,064 $ 1,000 $ 1,600
FHLB advances................................... 7,043 1,000 3,600
Approximate weighted average rate paid on: (1)
Federal funds purchased ........................ 5.77% 5.84% 6.20%
FHLB advances................................... 5.89% 5.50% 6.15%
</TABLE>
- ---------------------------
(1) Based on rates and amounts during periods borrowings were outstanding.
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.
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
18
<PAGE> 20
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 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
19
<PAGE> 21
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. The Bank's current CRA rating is "satisfactory."
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 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
20
<PAGE> 22
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, 1997.
<TABLE>
<CAPTION>
Percent of
Amount Assets(1)
------- ---------
(Dollars in thousands)
<S> <C> <C>
Tangible capital.................................. $29,016 21.88%
Tangible capital requirement...................... 3,978 1.50
------- -----
Excess.......................................... $25,038 20.38%
======= =====
Tier 1/Core capital(2)............................ $29,016 21.88%
Tier 1/Core capital requirement................... 1,989 3.00
------- -----
Excess.......................................... $27,027 18.88%
======= =====
Risk-based capital................................ $29,282 40.36%
Risk-based capital requirement.................... 10,608 8.00
------- -----
Excess.......................................... $18,678 32.36%
======= =====
</TABLE>
- ----------------------
(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.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized.
21
<PAGE> 23
Pursuant to regulations implementing the prompt corrective action
provisions of FDICIA, the federal banking regulators 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.
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. Guidelines of the Federal banking
agencies, including the FDIC, 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.
22
<PAGE> 24
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 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
current assessment rate applicable to the Bank is 6.4 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 13.3% of interest-bearing liabilities at December
31, 1997, 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 $2.9 million.
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, 1997, of $1.0 million. 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, 1997, Westwood Homestead
had $14.8 million in FHLB advances outstanding.
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, Westwood Homestead must maintain average daily reserves against their
transaction accounts. No reserves are required to be maintained on the first
$4.3 million of transaction accounts, reserves equal to 3% must be maintained on
the next $52.0 million of transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or in a
noninterest bearing account at a Federal Reserve Bank, the effect of the reserve
requirement is to reduce the amount of the institutions interest-earning assets.
As of December 31, 1997, Westwood Homestead met its reserve requirements.
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<PAGE> 25
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 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
24
<PAGE> 26
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.
OHIO SAVINGS BANK LAW. The Superintendent is responsible for the
regulation and supervision of Ohio savings banks in accordance with the laws of
the State of Ohio. Ohio law prescribes the permissible investments and
activities of Ohio savings banks, including the types of lending that such banks
may engage in and the investments in real estate, subsidiaries and corporate or
government securities that such banks may make. The ability of Ohio savings
banks to engage in these state-authorized investments generally is subject to
oversight and approval by the FDIC.
Merger or Acquisition. The Superintendent must approve any mergers
involving, or acquisitions of control of, Ohio savings banks. The Superintendent
may initiate certain supervisory measures or formal enforcement actions against
Ohio savings banks. Ultimately, if the grounds provided by law exist, the
Superintendent may place an Ohio savings bank in conservatorship or
receivership.
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<PAGE> 27
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.
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 or
(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
26
<PAGE> 28
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 .014% times taxable
net worth.
PERSONNEL
As of December 31, 1997, Westwood Homestead had 17 full-time employees
and six 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 1997 Square Footage 1997
------ ------ -------------- -------------- ---------------
<C> <C> <C> <C> <C> <C>
3002 Harrison Avenue 1922 Owned $ 414,000 4,000 $86.0 million
Cincinnati, Ohio
1101 St. Gregory Street 1996 Leased N/A 285 2.2 million
Cincinnati, Ohio
</TABLE>
27
<PAGE> 29
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
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
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 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 7A. QUANTITATIVE AND QUALITATIVE DISCOSURES ABOUT MARKET RISK
The information contained in the section captioned "Asset Liability
Managemen" 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 1998 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
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<PAGE> 30
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.
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, 1997 and 1996
(b) Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995
(c) Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995
(d) Consolidated Statements of Cash Flow for the Years Ended
December 31, 1997, 1996 and 1995
(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 *
3.2 Bylaws of Westwood Homestead Financial Corporation *
29
<PAGE> 31
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.
30
<PAGE> 32
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 27, 1998 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 27, 1998 Date: March 27, 1998
By: /s/ JOHN E. ESSEN By: /s/ RAYMOND J. BRINKMAN
--------------------------- -----------------------
John E. Essen Raymond J. Brinkman
(Chief Financial and Accounting Officer Director
and Treasurer)
Date: March 27, 1998 Date: March 27, 1998
By: /s/ CARL H. HEIMERDINGER By: /s/ ROGER M. HIGLEY
--------------------------- -----------------------
Carl H. Heimerdinger Roger M. Higley
Chairman of the Board Director
Date: March 27, 1998 Date: March 27, 1998
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 27, 1998
By: /s/ JAMES D. KEMP
---------------------------
James D. Kemp
Director
<PAGE> 33
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
EXHIBIT 13
<PAGE> 2
==============================================================================
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
[WESTWOOD HOMESTEAD LOGO]
1997 ANNUAL REPORT TO STOCKHOLDERS
==============================================================================
<PAGE> 3
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 and its primary assets consist of the outstanding capital stock
of the Bank 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 five quarters
of trading. The prices do not represent actual transactions and do not include
retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C> <C>
December 31, 1996 12.25 10.25
March 31, 1997 14.81 11.63
June 30, 1997 14.50 12.38
September 30, 1997 18.00 13.88
December 31, 1997 18.13 13.75
</TABLE>
As of December 31, 1997, there were approximately 500 shareholders of record,
not including those shares held in either nominee or street name through various
brokerage firms or banks.
<PAGE> 4
PRESIDENT'S LETTER TO STOCKHOLDERS
- --------------------------------------------------------------------------------
We are pleased to provide you with our Westwood Homestead Financial
Corporation's Annual Report for 1997. Your Board of Directors, officers and
employees greatly appreciate your investment in our stock.
A YEAR OF GROWTH
During the past year the lending department turned in another solid performance
with an increase of $32.5 million in net loans receivable for a 38.2% gain over
the previous year. Our 100% Mortgage Loan Program continues to produce well. At
year-end we had 121 loans with over $2,569,000 outstanding in fixed rate seconds
produced from this Program with a weighted average interest rate of 12.40%.
Even with this growth in lending, we are pleased to report that at year-end,
nonperforming loans to total loans was .13% and that our allowance for loan loss
to total loans stood at .23%.
On the liability side, we continued to see good growth during 1997 in our
checking account programs. Checking account balances increased by 115% to end
the year at $7.1 million. Overall, deposits grew to $88.2 million or 11.5%
during fiscal 1997.
Total assets at December 31, 1997 amounted to $134.3 million compared to $120.0
million at December 31, 1996. This increase of $14.3 million, or 12%, was the
direct result of the increase in loans receivable.
EARNINGS
Net income for the year ended December 31, 1997, was $883,000, an increase of
$524,000 over the previous year. A 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. In December 1997, as part of a balance
sheet realignment, $12.6 million of securities were sold for a loss of $535,000.
The sale proceeds will be used to fund future loan growth.
SHAREHOLDER GOALS
Executing our Strategic Plan, our Board of Directors authorized the payment of a
"Return of Capital" of $3.50 per share in December 1997.
2
<PAGE> 5
We are pleased to report a decline in the Company's efficiency ratio during the
year from 63.15% to 60.48%. Excluding the loss from the sale of securities in
the fourth quarter, our return on equity and earnings per share increased to
3.12% and $0.47 per share, respectively, during 1997.
LOOKING FORWARD TO 1998
An important part of our future will be the application of technological
solutions to all levels of banking. To this end, we have converted our computer
systems to the client server technology. In early 1998, we plan on introducing
Ami, a voice response system, that will give our customers account information
over the telephone 24 hours a day. Later in the year, we plan to provide our
customers with a debit card from Visa(R) Check Card. At our main office, we are
planning to open a two lane drive-in teller system and a new MAC drive-up ATM
for "cash fill-ups". In the summer months, we have slated the opening of a new
two-story building adjacent to our main office to house our expanding loan
operation and our executive staff.
Respectfully,
/s/ Michael P. Brennan
Michael P. Brennan
President/CEO
3
<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Financial Condition Data: At December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Amount of: (Dollars in thousands)
Assets $ 134,259 $ 119,951 $ 96,638 $ 112,978 $ 114,344
Loans held for sale -- 527 1,697 -- --
Loans receivable, net 117,648 84,525 73,245 70,185 63,205
Cash and cash equivalents 10,368 13,420 869 748 2,608
Investment securities 1,000 3,969 993 1,886 2,003
Mortgage backed securities 2,151 15,034 17,380 36,935 44,600
Deposits 88,234 79,083 81,748 92,526 99,895
FHLB advances 14,765 127 139 5,349 --
Federal funds purchased -- -- -- 2,200 --
Stockholders' equity (Retained
income prior to 1996) 30,146 39,982 14,190 12,279 13,980
Number of:
Loans outstanding 1,735 1,391 1,140 1,070 1,045
Deposit accounts 7,074 6,732 7,841 7,655 7,554
Offices open 2 2 1 1 1
</TABLE>
<TABLE>
<CAPTION>
Operating Data: Year ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest income $ 10,269 $ 7,875 $ 7,756 $ 7,653 $ 7,749
Interest expense 5,564 4,834 5,262 5,047 5,010
------------ ------------ ------------ ------------ ------------
Net interest income 4,705 3,041 2,494 2,606 2,739
Provision for loan losses 101 64 38 30 12
------------ ------------ ------------ ------------ ------------
Net interest income after provision 4,604 2,977 2,456 2,576 2,727
Non-interest income (loss) (375) 132 (737) 79 72
Non-interest expense (1) 2,927 2,585 2,056 1,494 1,326
------------ ------------ ------------ ------------ ------------
Income (loss) before income tax 1,302 524 (337) 1,161 1,473
Federal income tax expense (benefit) 419 165 (114) 400 500
------------ ------------ ------------ ------------ ------------
Net income (loss) 883 359 (223) 761 973
============ ============ ============ ============ ============
Key Ratio Data:
Return on average assets 0.66% 0.34% -0.21% 0.66% 0.88%
Return on average equity 2.23 1.71 -1.59 5.39 7.19
Net interest margin 3.56 2.93 2.44 2.32 2.53
Non interest expense to average assets 2.19 2.45 1.97 1.31 1.20
Allowance for loan loss to total loans .23 .20 .14 .09 .05
Non performing loans to total loans .13 -- -- .03 .17
</TABLE>
(1) Includes $584,000 in 1996 for SAIF special assessment.
4
<PAGE> 7
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 $883,000 in 1997
which includes the charge of $535,000 relating to the balance sheet realignment
of $12.6 million of securities. The proceeds of this sale are being reinvested
in higher yielding loans. Although the Company had no chargeoffs during the
year, the Company increased its allowance for loan loss by $101,000 due to the
inherent risk associated with the new products such as non-conforming loans (to
secondary market guidelines), 100%-125% loan to value programs, an aggressive
first time home buyer campaign and commercial loans. Net income increased
$582,000 to $359,000 in 1996 from a loss of $223,000 in 1995. This increase was
primarily due to the loss on sale of securities of $814,000 in 1995.
NET INTEREST INCOME
Net interest income increased $1,663,000, or 54.7%, during the year 1997 to
$4,705,000 due primarily to the investment of proceeds from the stock conversion
for the full year. Net interest income increased $547,000, or 21.9%, during the
year 1996 to $3,041,000. Net interest margin was 3.56%, 2.93%, and 2.44% for the
years 1997, 1996 and 1995 respectively.
Interest income increased $2,393,000 during 1997 as conversion proceeds were
invested in loans and short term investments. The average balance of loans
receivable increased $23.4 million, or 29.6%, while the average yield increased
23 basis points to 8.29%. The yield on interest earning assets climbed to 7.77%
in 1997. During 1996 interest income increased $119,000 while the average yield
on interest earning assets decreased slightly from 7.60% in 1995 to 7.59% in
1996.
5
<PAGE> 8
Interest expense increased $730,000 during 1997 as Federal Home Loan Bank
advances were used to fund much of the increase in loan demand. The cost of
liabilities increased 20 basis points to 5.95% for the year ended December 31,
1997. 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.
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>
------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------------------
(Dollars in thousands) Average Average Average Average
Balance Interest Yield Balance Interest Yield
------------------------------------------------------------------------------
Interest earning assets
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net $ 102,346 8,480 8.29% $ 78,975 6,362 8.06%
Investment securities 2,845 167 5.88% 1,961 107 5.43%
Mortgage backed securities 13,983 892 6.38% 16,168 1,044 6.46%
Other interest earning assets 12,967 730 5.63% 6,640 363 5.47%
------------------------------------------------------------------------------
Total interest earning assets 132,141 10,269 7.77% 103,744 7,876 7.59%
Non-interest earning assets 1,531 1,820
------------ ------------
Total assets $ 133,672 $ 105,564
------------ ------------
Interest bearing liabilities
Deposits $ 82,422 4,861 5.90% $ 83,622 4,805 5.75%
Federal funds and FHLB
advances 11,107 703 6.33% 447 30 6.62%
------------------------------------------------------------------------------
Total interest bearing liabilities 93,529 5,564 5.95% 84,069 4,835 5.75%
----------- ----------- ----------- ------------
Non interest bearing liabilities 547 512
------------ ------------
Total liabilities 94,076 84,581
Equity 39,596 20,983
------------ ------------
Total liabilities and equity $ 133,672 $ 105,564
------------ ------------
Net interest earning assets $ 38,612 $ 19,675
============ ============
Net interest income 4,705 1.82% 3,041 1.84%
=========== =========== =========== ============
Net interest margin 3.56% 2.93%
=========== ============
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------
1995
--------------------------------------
(Dollars in thousands) Average Average
Balance Interest Yield
--------------------------------------
Interest earning assets
<S> <C> <C> <C>
Loans receivable, net 71,395 5,752 8.06%
Investment securities 1,842 95 5.16%
Mortgage backed securities 27,765 1,837 6.62%
Other interest earning assets 1,089 72 6.61%
--------------------------------------
Total interest earning assets 102,091 7,756 7.60%
Non-interest earning assets 2,105
------------
Total assets 104,196
------------
Interest bearing liabilities
Deposits 85,421 4,967 5.81%
Federal funds and FHLB
advances 4,318 295 6.84%
--------------------------------------
Total interest bearing liabilities 89,739 5,262 5.86%
----------- ------------
Non interest bearing liabilities 385
------------
Total liabilities 90,124
Equity 14,072
------------
Total liabilities and equity 104,196
------------
Net interest earning assets 12,352
============
Net interest income 2,494 1.74%
=========== ============
Net interest margin 2.44%
============
</TABLE>
6
<PAGE> 9
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,
----------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------------------------- ---------------------------------------------
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 $ 1,882 181 54 2,117 $ 611 (1) 0 610
Investment securities 48 9 4 61 6 5 0 11
Mortgage backed securities (141) (13) 2 (152) (767) (44) 19 (792)
Other interest earning assets 346 11 10 367 370 (13) (67) 290
------------ --------- ------------ --------- ------------ --------- ------------ ---------
Total interest earning assets 2,135 188 70 2,393 220 (53) (48) 119
Interest expense
Deposits (69) 127 (2) 56 (105) (58) 1 (162)
Borrowings 706 (1) (31) 674 (265) (10) 9 (266)
------------ --------- ------------ --------- ------------ --------- ------------ ---------
Total interest bearing liabilities 637 126 (33) 730 (370) (68) 10 (428)
------------ --------- ------------ --------- ------------ --------- ------------ ---------
Change in net interest income $ 1,498 62 103 1,663 $ 590 15 (58) 547
============ ========= ============ ========= ============ ========= ============ =========
</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. Service
charges and fees increased 74% to $134,000 during 1997. As part of the balance
sheet realignment in 1997, the loss on security sales of $532,000 resulted in a
$507,000 decrease from 1996 in non-interest income. 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.
7
<PAGE> 10
NON-INTEREST EXPENSE
Non-interest expense increased $342,000, or 13.2%, in fiscal 1997 primarily as a
result of anticipated expenses related to the stock benefit plans totaling
$662,000. Due to the special SAIF assessment paid in 1996, FDIC insurance
premiums decreased $674,000 in 1997. Because of higher capital levels at
December 31, 1996, franchise tax increased $252,000, or 130%, over 1996. The
Bank's commitment to enhance its technology was reinforced as the core
transaction processing was converted to Fiserv Inc in the fall of 1997. As a
result, approximately $50,000 in one-time charges were recognized causing data
processing costs to increase $68,000. Management believes this investment in
technology will allow for efficient and effective delivery of products and
services to its customers. The main office location opened its two lane drive-
through and ATM in February 1998 which will provide greater convenience for
customers. The Bank also has plans for additional office space at the main
office to accommodate current and future increases in staffing. This expansion
in 1998 will be a $1 million investment for continued growth of Westwood
Homestead.
In 1996 non-interest expense increased $529,000 from $2,056,000 primarily due to
the SAIF special assessment of $584,000 while 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.
Legal and accounting fees increased $71,000, or 100%, due to activities relating
to being a public company.
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, 1997. 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.
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.
8
<PAGE> 11
<TABLE>
<CAPTION>
(In thousands) 0-6 6-12 1-3 3-5 Over 5 Fair
Months Month Years Years Years Total Value
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1-4 Residential fixed $ 136 40 362 1,532 54,637 56,707 57,255
1-4 Residential adjustable 4,439 5,294 10,135 1,775 8,164 29,807 29,456
Other fixed 58 685 1,603 902 9,516 12,764 12,476
Other adjustable 5,661 2,272 5,412 -- 2,467 15,812 15,394
Second mortgage 1 10 95 2,267 2,373 2,678
Consumer 340 4 155 149 10 658 666
Securities 2,629 -- 4 202 273 3,108 3,151
Other investments 10,138 -- -- -- -- 10,138 10,138
--------------------------------------------------------------------------------------------
Total $ 23,402 8,295 17,681 4,655 77,334 131,367 131,214
--------------------------------------------------------------------------------------------
Transaction accounts $ 21,124 -- -- -- -- 21,124 21,124
Time deposits 24,271 14,367 18,320 6,950 3,202 67,110 67,958
Borrowings 5,000 2,000 4,650 1,000 2,115 14,765 14,419
--------------------------------------------------------------------------------------------
Total $ 50,395 16,367 22,970 7,950 5,317 102,999 103,501
--------------------------------------------------------------------------------------------
Interest sensitivity GAP $ (26,993) (8,072) (5,289) (3,295) 72,017
Cumulative GAP (26,993) (35,065) (40,354) (43,649) 28,368
Ratio of interest earning assets
to interest bearing liabilities 46.4% 50.7% 77.0% 58.6% 1454.5%
Ratio of cumulative
GAP to total assets -20.1% -26.1% -30.1% -32.5% 21.1%
</TABLE>
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") based on 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 over a twelve month
period and MVPE for various rate shock levels at December 31, 1997.
<TABLE>
<CAPTION>
Change MVPE NII
in Rates ----------------- ---------------
% Change % Change
<S> <C> <C>
+400 bps -42.2% -28.0%
+300 bps -33.2% -20.4%
+200 bps -23.3% -13.0%
+100 bps -12.3% -6.3%
-100 bps 13.7% 6.0%
-200 bps 29.0% 11.9%
-300 bps 46.2% 17.1%
-400 bps 65.5% 21.0%
</TABLE>
9
<PAGE> 12
BALANCE SHEET ANALYSIS
Total assets increased $14.3 million, or 11.9%, to $134.3 million at December
31, 1997 from $120.0 million at December 31, 1996. 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 $32.5 million, or 38.2%, in 1997 to $117.6 million from $85.1 million
the previous year. At December 31, 1997, the loan portfolio consisted of 38.9%
adjustable rate loans as compared to 34.2% at December 31, 1996. These increases
reflect management's intention to build the loan portfolio while improving the
Bank's GAP position. Loan originations were $52.7 million in 1997 compared to
$25.8 million in 1996.
During 1997 real estate loans secured by one to four family units increased
$23.8 million, of which $13.9 million were adjustable in rate. Construction
loans increased $2.9 million to $4.7 million at December 31, 1997 due primarily
to more aggressive marketing.
In the second full year of activity, real estate loans sold in the secondary
market totaled $818,000. Currently the Bank's policy is to sell all newly
originated 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, 1997 totaled $3.1 million. At December 31, 1997, the Bank
had no loans held for sale in the secondary market, compared to $527,000 at year
end 1996.
SECURITIES
Total securities decreased $15.8 million to $3.2 million at December 31, 1997
from $19.0 million the prior year. In order to maximize the interest earning
assets, management took advantage of the falling interest rate cycle and sold
$12.6 million of adjustable rate Collateralized Mortgage Obligations ("CMO") as
part of a balance sheet realignment. At December 31, 1997 total securities
represented 2.4% of total assets compared to 15.8% for 1996.
DEPOSITS
Deposits increased $9.1 million, or 11.5%, in fiscal 1997 to $88.2 million from
$79.1 million at December 31, 1996. During 1997 checking account balances
increased $3.8 million, or 115%, to $7.1 million at December 31, 1997. 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. Additional depositor services are being added as a result
of the data processing conversion and the opening of the drive-through at the
main office.
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. Advances increased
to $14.8 million during 1997 from $127,000 at December 31, 1996 in order to fund
increased loan demand and leverage the Company's capital.
10
<PAGE> 13
STOCKHOLDERS' EQUITY
Stockholders' equity decreased $9.9 million to $30.1 million at December 31,
1997 compared to $40.0 million at December 31, 1996 primarily as a result of the
return of capital and cash dividends to stockholders of $10.7 million and open
market common stock repurchases of $1.1 million for the Management Recognition
Plan. The ratio of equity to assets decreased from 33% at December 31, 1996 to
22% at December 31, 1997 as a result of controlled growth and the return of
capital distribution.
NON-PERFORMING ASSETS
The Bank's non-performing assets at December 31, 1997 totaled $155,000 which
were 90 days delinquent and still accruing interest. 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. The Company increased its allowance for loan loss by
$101,000 due to the inherent risk associated with the introduction of new loan
products such as non-conforming (to secondary market guidelines) and 100%-125%
loans, an aggressive first time homebuyer campaign and commercial loans. The
allowance for loan losses at December 31, 1997 was $266,000 and represented .23%
of total loans as compared to .20% at December 31, 1996.
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, repayments and prepayments of loans,
advances from the Federal Home Loan Bank, sale of loans in the secondary market,
and maturities and sales of securities. As of December 31, 1997, the Bank's
deposits included $9.1 million of long term high rate certificates of which $6.2
million are due to mature in the first four months of 1998. The excess liquidity
provided by the security sales in December 1997 will be used to fund any non
renewing accounts as well as future loan demand.
Firm commitments to grant loans at December 31, 1997 totaled $3.2 million,
unused lines of credit equaled $3.7 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.
11
<PAGE> 14
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, 1997.
<TABLE>
<CAPTION>
Percent of
Amount Average
Assets
----------------- --------------------
(In thousands)
<S> <C> <C>
Tangible Capital $ 29,016 21.88%
Tangible capital requirement 1,989 1.50%
----------------- --------------------
Excess $ 27,027 20.38%
================= ====================
Tier 1 Capital $ 29,016 21.88%
Tier 1 Capital requirement 3,978 3.00%
----------------- --------------------
Excess $ 25,038 18.88%
================= ====================
Risk-based Capital $ 29,282 40.36%
Risk-based Capital Requirement 5,814 8.00%
----------------- --------------------
Excess $ 23,468 32.36%
================= ====================
</TABLE>
12
<PAGE> 15
IMPACT OF NEW ACCOUNTING STANDARDS
Comprehensive Income. In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income". This statement is effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in full set of general-purpose financial statements. This statement
requires that all items are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. It also
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a financial statement of financial
position. The Company intends to adopt SFAS No. 130 in 1998. Management does not
expect the adoption of SFAS No. 130 to have a material effect on the Company's
consolidated financial condition or results of operations.
Pensions and other Postretirement Benefits. In February 1998, the FASB issued
SFAS No. 132, "Employers' Disclosures about Pension and other Postretirement
Standards". This statement is effective for fiscal years beginning after
December 15, 1997. Restatement of comparative period disclosures is required
unless the information is not readily available, in which case the notes to the
financial statements shall include all available information and a description
of the information not available. This statement standardizes the disclosure
requirements of SFAS No. 87 and No. 106 to the extent practicable and recommends
a parallel format for presenting information about pensions and other
postretirement benefits. Statement 132 does not change any of the measurement or
recognition provisions provided for in SFAS No. 87, No. 88, or No. 106. The
Company intends to adopt SFAS No. 132 in 1998. Management does not expect the
adoption of SFAS No. 132 to have a material effect on the Company's consolidated
financial condition or results of operations.
YEAR 2000 COMPLIANCE
A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000 which would affect the speed and accuracy
of the data processing that is essential to our operations. We have established
a Year 2000 Action Plan to review our internal information systems as well as
the efforts of our outside data processing service provider. The progress of the
Action Plan is monitored by the Board and is progressing satisfactorily.
Most of the material data processing that could be affected by this problem is
provided by a third party service bureau who provides quarterly updates on
compliance progress. They have informed the Bank that compliance is 85% complete
and client testing will commence in September 1998. If the service bureau is
unable to resolve this problem in time and the Bank is unable to engage another
provider, we would likely experience significant data processing delays,
mistakes or failures.
13
<PAGE> 16
[KPMG PEAT MARWICK LLP LETTERHEAD]
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,
1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/S/ KPMG Peat Marwick LLP
Cincinnati, Ohio
January 30, 1998
14
<PAGE> 17
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Cash and cash equivalents:
Cash on hand and in banks $ 1,253,797 517,403
Interest-bearing deposits with banks 8,040,268 11,654,007
Federal funds sold 1,074,214 1,248,979
------------- -------------
Total cash and cash equivalents 10,368,279 13,420,389
------------- -------------
Securities available for sale (amortized cost of $1,000,000 at
December 31, 1997 and $3,962,180 at December 31, 1996) (note 3) 999,690 3,969,430
Mortgage-backed securities available for sale (amortized cost of $2,108,201
at December 31, 1997 and $15,636,001 at December 31,1996) (note 4) 2,150,618 15,034,115
Loans held for sale (net of unrealized losses of $7,946 at December 31, 1996) - 527,381
Loans receivable (net of allowance for loan losses of $266,263
at December 31, 1997; $165,513 at December 31, 1996) (notes 5 and 10) 117,648,013 84,525,374
Stock in the Federal Home Loan Bank of Cincinnati, at cost (notes 6 and 10) 1,023,800 953,600
Accrued interest receivable (note 7) 712,797 589,124
Premises and equipment, at cost, less accumulated depreciation (note 8) 1,082,978 607,339
Income taxes (note 11):
Deferred - 126,475
Prepaid 177,416 83,947
Prepaid expenses and other assets 95,190 114,209
------------- -------------
Total assets $ 134,258,781 119,951,383
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits (note 9) $ 88,234,007 79,082,778
Federal Home Loan Bank of Cincinnati advances (note 10) 14,764,818 127,458
Advances from borrowers for taxes and insurance 865,808 633,857
Accrued expenses and other liabilities 85,461 124,872
Deferred tax liability (note 11) 162,975 -
------------- -------------
Total liabilities 104,113,069 79,968,965
Commitments and contingencies (note 13)
Stockholders' Equity (note 2):
Common stock, $.01 par value; $15,000,000 shares authorized;
2,843,375 shares issued and outstanding in 1997 and 1996 28,434 28,434
Additional paid-in capital 18,789,500 27,709,597
Retained income - substantially restricted (note 11) 14,962,966 14,876,066
Net unrealized gains (losses) on securities available for sale,
net of taxes (notes 3 and 4) 26,957 (393,293)
Employee stock ownership plan (note 12) (2,686,661) (2,238,386)
Management recognition plan (note 12) (975,484) -
------------- -------------
Total stockholders' equity 30,145,712 39,982,418
------------- -------------
Total liabilities and stockholders' equity $ 134,258,781 119,951,383
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
15
<PAGE> 18
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans receivable $ 8,479,730 6,362,235 5,751,852
Mortgage-backed securities 891,733 1,043,999 1,837,236
Interest-bearing deposits with banks, investment
securities and other 897,310 469,372 167,259
-------------- -------------- --------------
Total interest income 10,268,773 7,875,606 7,756,347
-------------- -------------- --------------
Interest expense:
Deposits (note 9) 4,861,496 4,804,846 4,966,676
Borrowings 702,834 29,587 295,478
-------------- -------------- --------------
Total interest expense 5,564,330 4,834,433 5,262,154
-------------- -------------- --------------
Net interest income 4,704,443 3,041,173 2,494,193
Provision for loan losses (note 5) 100,750 63,804 37,876
-------------- -------------- --------------
Net interest income after provision for loan losses 4,603,693 2,977,369 2,456,317
-------------- -------------- --------------
Non-interest income (loss):
Service charges and other fees 134,258 76,767 76,106
Gain on loan sales 23,020 50,363 466
Gain (loss) on sales of securities (notes 3 and 4) (532,371) 4,458 (814,178)
-------------- -------------- --------------
Total non-interest income (loss) (375,093) 131,588 (737,606)
-------------- -------------- --------------
Non-interest expenses:
Compensation and benefits (note 12) 1,583,341 998,446 1,184,801
Occupancy costs 182,519 150,020 99,259
Franchise tax 444,555 192,913 160,798
Federal deposit insurance premiums (note 13) 50,828 724,531 207,008
Data processing 152,454 83,528 73,485
Legal, accounting, and examination fees 191,253 142,413 70,967
Consulting fees 37,260 51,798 61,021
Advertising 37,546 47,913 40,144
Other 246,798 193,332 158,353
-------------- -------------- --------------
Total non-interest expenses 2,926,554 2,584,894 2,055,836
-------------- -------------- --------------
Income (loss) before income
tax expense (benefit) 1,302,046 524,063 (337,125)
Income tax expense (benefit) (note 11) 419,000 165,000 (114,000)
-------------- -------------- --------------
Net income (loss) $ 883,046 359,063 (223,125)
============== ============== ==============
Earnings per share - basic and diluted (note 1) $ .34 .16 N/A
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
gain (loss)
Additional on securities
Common paid-in Retained available
stock capital income for sale
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 $ - - 14,740,128 (2,461,216)
Net loss - - (223,125) -
Unrealized gain on securities available for sale,
net of tax - - - 2,134,235
----------- ----------- ----------- -----------
Balances at December 31, 1995 - - 14,517,003 (326,981)
Net income - - 359,063 -
Net proceeds from 2,843,375 shares of common
stock issued in stock conversion (note 2) 28,434 27,702,272 - -
Purchase of 227,470 shares of common stock
by employee stock ownership plan (note 12) - - - -
Amortization of employee stock ownership
plan (note 12) - 7,325 - -
Unrealized loss on securities available for sale,
net of tax - - - (66,312)
----------- ----------- ----------- -----------
Balances at December 31, 1996 28,434 27,709,597 14,876,066 (393,293)
Net income - - 883,046 -
Dividends on common stock at $.28 per share - - (796,146) -
Return of capital distribution at $3.50 per share - (9,196,587) - -
Purchase of 76,200 shares by management
recognition plan - 248,806 - -
Amortization of management recognition plan - - - -
Amortization of employee stock ownership plan - 27,684 - -
Unrealized gain on securities available for sale,
net of tax - - - 420,250
----------- ----------- ----------- -----------
Balances at December 31, 1997 $ 28,434 18,789,500 14,962,966 26,957
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Unallocated
common Unearned
stock common
held by stock held
ESOP by MRP Total
----------- ----------- -----------
<S> <C> <C> <C>
Balances at December 31, 1994 - - 12,278,912
Net loss - - (223,125)
Unrealized gain on securities available for sale,
net of tax - - 2,134,235
----------- ----------- -----------
Balances at December 31, 1995 - - 14,190,022
Net income - - 359,063
Net proceeds from 2,843,375 shares of common
stock issued in stock conversion (note 2) - - 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) 121,615 - 128,940
Unrealized loss on securities available for sale,
net of tax - - (66,312)
----------- ----------- -----------
Balances at December 31, 1996 (2,238,386) 39,982,418
Net income - - 883,046
Dividends on common stock at $.28 per share - - (796,146)
Return of capital distribution at $3.50 per share (755,225) - (9,951,812)
Purchase of 76,200 shares by management
recognition plan - (1,300,162) (1,051,356)
Amortization of management recognition plan - 324,678 324,678
Amortization of employee stock ownership plan 306,950 - 334,634
Unrealized gain on securities available for sale,
net of tax - - 420,250
----------- ----------- -----------
Balances at December 31, 1997 (2,686,661) (975,484) 30,145,712
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
17
<PAGE> 20
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 883,046 359,063 (223,125)
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 (21,527) (14,119) 22,073
Depreciation of premises and equipment 122,762 81,863 56,413
Federal Home Loan Bank of Cincinnati stock dividend (70,200) (63,700) (58,100)
Employee stock ownership plan amortization 334,632 128,940 -
Management recognition plan amortization 324,678 - -
Deferred income tax expense 72,958 96,717 (46,373)
Accretion of net loan fees deferred 71,715 (9,471) (16,370)
Provision for loan losses 100,750 63,804 37,876
(Gain) loss on sales of securities 532,371 (4,458) 814,178
Gain on loan sales (23,020) (50,363) (466)
Net loans originated held for sale (677,493) (1,063,186) (1,897,114)
Proceeds from sale of loans held for sale 824,107 2,283,283 200,466
Change in:
Accrued interest receivable (123,673) (81,410) 61,701
Prepaid expenses and other assets 19,019 (14,469) (86,101)
Accrued expenses and other liabilities (39,411) 65,039 (16,463)
Income taxes (93,468) 91,542 (169,331)
-------------- -------------- --------------
Net cash provided by (used in) operating activities 2,237,246 1,869,075 (1,320,736)
-------------- -------------- --------------
Cash flows from investing activities:
Proceeds from maturing securities available for sale 1,000,000 1,000,000 -
Purchase of securities available for sale - (3,937,700) -
Proceeds from sales of securities available for sale 2,002,690 - 1,002,471
Proceeds from sales of mortgage-backed securities available for sale 12,103,218 1,667,340 20,394,270
Principal payments on mortgage-backed securities 873,228 558,848 1,448,082
Net (increase) decrease in loans receivable (32,891,317) (11,334,609) (3,081,623)
Additions to premises and equipment (598,401) (98,331) (100,306)
Sale of Federal Home Loan Bank of Cincinnati Stock - - 13,400
-------------- -------------- --------------
Net cash provided by (used in) investing activities (17,510,582) (12,144,452) 19,676,294
-------------- -------------- --------------
Cash flows from financing activities:
Net increase (decrease) in deposits 9,151,229 (2,665,283) (10,778,228)
Proceeds from stock conversion, net of conversion costs - 27,730,706 -
Dividends and return of capital on common stock (10,747,958) - -
Purchase of common stock by ESOP - (2,360,001) -
Purchase of common stock by MRP (1,051,356) - -
Increase (decrease) Federal funds purchased - - (2,200,000)
Short-term advances from the Federal Home Loan Bank of Cincinnati, net 3,000,000 - (5,200,000)
Long-term advances from the Federal Home Loan Bank of Cincinnati 11,650,000 - -
Repayments on the Federal Home Loan Bank of Cincinnati advances (12,640) (11,146) (10,216)
Net increase (decrease) in advances from borrowers for
taxes and insurance 231,951 132,366 (45,794)
-------------- -------------- --------------
Net cash provided by (used in) financing activities 12,221,226 22,826,642 (18,234,238)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents (3,052,110) 12,551,265 121,320
Beginning cash and cash equivalents 13,420,389 869,124 747,804
-------------- -------------- --------------
Ending cash and cash equivalents $ 10,368,279 13,420,389 869,124
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE> 21
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December, 1997, 1996 and 1995
(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.
(c) Securities and Mortgage-backed Securities
-----------------------------------------
The Company classifies their debt and equity securities into one
of three categories: held to maturity, available for sale or
trading. Securities held to maturity are limited to debt
securities that the Company has the positive intent and the
ability to hold to maturity;
(Continued)
19
<PAGE> 22
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, Continued
-----------------------------------------------------
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. 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, net of
deferred loan origination fees and costs and the 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)
20
<PAGE> 23
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 considers the expected loss of interest income on
nonperforming loans when calculating loan loss reserves, and
specified impaired loans are 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 Company recognizes as separate assets the rights to service
mortgage loans for others, however those servicing rights are
acquired. The Company also makes an assessment of capitalized
mortgage servicing rights for impairment to be based on the
current value of those rights. During 1997, approximately
$12,000 of servicing rights were capitalized. The carrying
value of mortgage servicing rights approximated $30,000 and
$26,000 at December 31, 1997 and 1996, respectively. 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
$35,000 and $34,000 at December 31, 1997 and 1996,
respectively. Quoted market prices are used, when available,
as the basis of measuring the fair value of servicing rights.
(Continued)
21
<PAGE> 24
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(d) Loans Receivable, Continued
---------------------------
The carrying amount of the servicing rights is measured for
impairment each quarter. The servicing portfolio is first
stratified by original terms of the loans, and then by
interest rates within the original terms of the loans for
measuring impairment. If the carrying value of an individual
stratum exceeds its fair value, a valuation allowance would be
established. No valuation allowance was recorded at December
31, 1997 and 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.
Loans that are on nonaccrual status are also considered to be
impaired, 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 any
material impaired loans during 1997, 1996 or 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
------------
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the estimated future tax 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.
The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that
includes the enactment date.
(Continued)
22
<PAGE> 25
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(g) Stock Option Plan
-----------------
The Company accounts for its stock option plan in accordance with
the provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of
Accounting Principles Board ("APB") Opinion No. 25, Accounting
for Stock Issued to Employees and provide pro forma net income
and pro forma earnings per share disclosures for employee
stock option grants as if the fair-value-based method defined
in SFAS No. 123 had been applied. APB Opinion No. 25 provides
for compensation expense to be recorded on the date of grant
only if the current market price of the underlying stock
exceeded the exercise price. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
(h) Earnings Per Share
------------------
On December 15, 1997, the Company adopted SFAS No. 128, Earnings
per Share. SFAS No. 128 requires the dual presentation of
basic and diluted earnings per share (EPS) on the face of the
income statement. Basic EPS is computed by dividing net income
by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is computed similar
to basic EPS except that the denominator is increased to
include the number of additional common shares that would have
been outstanding if dilutive common shares had been issued.
EPS is not applicable for periods prior to the completion of
the Bank's stock conversion on September 27, 1996. EPS for
1996 has been computed based upon net income per share for the
postconversion period from October 1, 1996 to December 31,
1996. The effect on EPS for the postconversion period from
September 27, 1996 to September 30, 1996 is not meaningful.
(Continued)
23
<PAGE> 26
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(h) Earnings Per Share, Continued
-----------------------------
The following is a reconciliation of the numerators and
denominators of the basic and diluted EPS computations for
income from continuing operations:
<TABLE>
<CAPTION>
For the Year Ended 1997
------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- -------------- --------------
<S> <C> <C> <C>
BASIC EPS $ 883,046 2,604,969 $ 0.34
EFFECT OF DILUTIVE SECURITIES:
Options - 9,276
-------------- --------------
DILUTED EPS
Income available to
common stockholders $ 883,046 2,614,245 $ 0.34
============== ============== ==============
For the Period from October 1, 1996
to December 31, 1996
------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- -------------- --------------
BASIC EPS $ 414,758 2,621,766 $ 0.16
EFFECT OF DILUTIVE SECURITIES - -
-------------- --------------
DILUTED EPS $ 414,758 2,621,766 $ 0.16
============== ============== ==============
</TABLE>
(i) Reclassifications
Certain prior year amounts have been reclassified to conform
with the current year presentation.
(Continued)
24
<PAGE> 27
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(j) 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 December 31, 1997 and 1996, for the year ended December
31, 1997 and for the period from conversion through December 31,
1996 are presented in Note 16. 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, 1997,
the Bank could make distributions of approximately, $16 million
without prior regulatory approval.
(Continued)
25
<PAGE> 28
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> <C>
December 31, 1997 $ 1,000,000 - (310) 999,690
============== ============== ============== ==============
December 31, 1996 $ 3,962,180 14,168 (6,918) 3,969,430
============== ============== ============== ==============
</TABLE>
During 1997, the Company received aggregate proceeds of $2,002,690 from
the sale of securities available for sale, which resulted in
$2,690 of gross realized gains.
During 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, 1997
-------------------------------
Amortized Market
cost value
-------------- --------------
<S> <C> <C>
Due within one year or less $ 1,000,000 999,690
============== ==============
</TABLE>
(Continued)
26
<PAGE> 29
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
available for sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------------------------
Principal Unamortized Unearned Amortized Market
balance premiums discounts cost value
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
GNMA certificates $ 348,647 5,809 (546) 353,910 377,430
FHLMC certificates 1,083,663 21,121 (58) 1,104,726 1,119,632
FNMA certificates 641,612 8,491 (538) 649,565 653,556
--------------- --------------- --------------- --------------- ---------------
$ 2,073,922 35,421 (1,142) 2,108,201 2,150,618
=============== =============== =============== =============== ===============
December 31, 1996
-----------------------------------------------------------------------------------------
Principal Unamortized Unearned Amortized Market
balance premiums discounts cost value
--------------- --------------- --------------- --------------- ---------------
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
=============== =============== =============== =============== ===============
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated market value of mortgage-backed securities available for sale are as
follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C>
GNMA certificates $ 353,910 23,520 - 377,430
FHLMC certificates 1,104,726 16,770 (1,864) 1,119,632
FNMA certificates 649,565 6,631 (2,640) 653,556
=============== =============== =============== ===============
$ 2,108,201 46,921 (4,504) 2,150,618
=============== =============== =============== ===============
</TABLE>
(Continued)
27
<PAGE> 30
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Mortgage-Backed Securities, Continued
-------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
--------------- --------------- --------------- ---------------
<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>
Estimated market values for mortgage-backed securities are based on
published market or security dealers' estimated prices.
During 1997, the Company sold available for sale mortgage-backed securities
for aggregate proceeds of $12,103,218, resulting in gross realized
losses of $535,061.
During 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.
During 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.
A summary of mortgage-backed securities available for sale 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, 1997
---------------------------------
Amortized Market
cost value
--------------- ---------------
<S> <C> <C>
Due within one year or less $ - -
Due after one year through five years 202,959 207,395
Due after five years through ten years 224,940 230,598
Due after ten years 1,680,302 1,712,625
=============== ===============
$ 2,108,201 2,150,618
=============== ===============
</TABLE>
(Continued)
28
<PAGE> 31
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(5) Loans Receivable, Net
---------------------
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Real estate loans:
One-to-four family residential $ 87,233,765 63,385,905
Multi-family residential 14,794,457 11,536,914
Construction 4,709,315 1,798,879
Other residential and non-residential 11,683,227 9,275,220
Consumer loans 441,366 264,060
Commercial loans (non-mortgage) 217,428 119,302
-------------- --------------
119,079,558 86,380,280
-------------- --------------
Less:
Loans in process 957,961 1,018,460
Loans held-for-sale - 535,327
Deferred loan fees, net 207,321 135,606
Allowance for loan losses 266,263 165,513
============== ==============
Total $ 117,648,013 84,525,374
============== ==============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 165,513 101,709 63,833
Provision for loan losses 100,750 63,804 37,876
Loan charge-offs - - -
Recoveries - - -
-------------- -------------- --------------
Balance, end of year $ 266,263 165,513 101,709
============== ============== ==============
</TABLE>
The Company serviced loans for the Federal Home Loan Mortgage Corporation of
approximately $3,053,830 and $2,372,000 at December 31, 1997 and 1996,
respectively.
The Company had no nonaccrual loans as of December 31, 1997, 1996 and 1995.
Most of the Company's loan activity is with customers located within
Hamilton County, Ohio and contiguous counties.
(Continued)
29
<PAGE> 32
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(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 $805,200 at December 31, 1997.
(7) Accrued Interest Receivable
---------------------------
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1997 1996
---- ----
<S> <C> <C>
Mortgage loans $ 649,986 447,421
Investment securities 42,271 66,377
Mortgage-backed securities 20,540 75,326
===================== ====================
$ 712,797 589,124
===================== ====================
</TABLE>
(8) Premises and Equipment
----------------------
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1997 1996
---- ----
<S> <C> <C>
Land $ 15,400 15,400
Buildings and improvements 673,540 673,540
Furniture, fixtures and equipment 848,001 547,403
Construction in progress 297,803 -
-------------------- --------------------
1,834,744 1,236,343
Accumulated depreciation 751,766 629,004
-------------------- --------------------
$ 1,082,978 607,339
==================== ====================
</TABLE>
(Continued)
30
<PAGE> 33
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Deposits
Deposits are comprised of the following:
<TABLE>
<CAPTION>
December 31,1997 December 31, 1996
---------------------------------------- -----------------------------------------
Weighted Weighted
average average
interest interest
Amount Percent rate Amount Percent rate
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Savings accounts $ 3,757,636 4.2% 2.00% 3,710,025 4.7% 2.00%
NOW accounts 7,123,483 8.1 3.37 3,301,631 4.2 2.48
Money market deposit
accounts 10,242,860 11.6 3.74 11,599,813 14.7 3.72
Certificate accounts, classified
at date of issuance:
6 months or less 6,325,975 7.2 5.71 5,386,983 6.8 5.42
1 year 16,670,939 18.9 5.99 15,473,880 19.6 5.62
22 months 74,370 .1 6.32 875,842 1.1 6.95
2 years 14,603,575 16.6 6.17 9,521,681 12.0 6.11
33 months 1,706,995 1.9 6.57 4,449,715 5.6 7.15
3 years 3,732,962 4.2 6.25 2,218,520 2.8 5.86
5 or more years 23,995,212 27.2 8.01 22,544,688 28.5 8.40
----------- ----------- ----------- ----------- ----------- -----------
Total certificate
accounts 67,110,028 76.1 6.75 60,471,309 76.4 6.86
----------- ----------- ----------- ----------- ----------- -----------
Total deposits $88,234,007 100.0% 5.93% 79,082,778 100.0% 5.98%
=========== =========== =========== =========== =========== ===========
</TABLE>
Deposits with balances equal to or greater than $100,000 at December 31,
1997 and 1996 approximate $15,460,195 and $16,028,000, respectively.
Certificate accounts at December 31, 1997 are scheduled to mature as
follows:
<TABLE>
<S> <C>
In the year ending:
December 31, 1998 $ 38,638,547
December 31, 1999 13,517,976
December 31, 2000 4,801,414
December 31, 2001 2,878,390
December 31, 2002 4,071,331
After December 31, 2002 3,202,370
--------------------
$ 67,110,028
====================
</TABLE>
(Continued)
31
<PAGE> 34
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(9) Deposits, Continued
-------------------
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Savings accounts $ 74,708 115,555 71,341
NOW accounts 140,814 38,201 25,675
Money market deposit
accounts 365,633 443,359 464,545
Certificate accounts 4,280,341 4,207,731 4,405,115
-------------- -------------- --------------
Total interest expense
on deposits $ 4,861,496 4,804,846 4,966,676
============== ============== ==============
</TABLE>
Interest paid (including interest credited) on deposits and borrowings
was approximately $4,857,482, $4,836,000, and $5,261,000 for the
years ended December 31, 1997, 1996, and 1995, respectively.
(10) Federal Home Loan Bank of Cincinnati Advances
---------------------------------------------
Advances from the FHLB of Cincinnati are summarized as follows:
<TABLE>
<CAPTION>
Maturing in Weighted average December 31,
------------------------------------
fiscal year interest rate 1997 1996
---------------------- ---------------------- ------------------ ----------------
<S> <C> <C>
1998 6.04% $ 7,000,000 -
1999 6.55 2,000,000 -
2000 6.36 2,650,000 -
2001 6.60 1,000,000 -
2004 8.18 114,818 127,458
2007 6.95 2,000,000 -
================== =================
$ 14,764,818 127,458
================== =================
</TABLE>
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 $22,149,806 at December 31,
1997.
(Continued)
32
<PAGE> 35
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Income Taxes
------------
Total income tax provision (benefit) was allocated as follows:
<TABLE>
Years ended December 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statements of operations $ 419,000 165,000 (114,000)
Stockholders' equity:
Unrealized gains (losses) on
securities available for sale (216,493) (33,703) 1,099,425
------------ ------------ ------------
Total income tax provision $ 202,507 131,297 985,425
============ ============ ============
</TABLE>
Income tax expense (benefit), from operations, is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 346,042 68,283 (67,627)
Deferred 72,958 96,717 (46,373)
--------------- --------------- ---------------
$ 419,000 165,000 (114,000)
=============== =============== ===============
</TABLE>
Actual income tax expense (benefit) for the years ended December 31,
1997, 1996 and 1995 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 tax expense
(benefit) as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax expense
(benefit) $ 442,696 34.0% $ 178,181 34.0% $(114,623) (34.0)%
Increase (decrease) in income
taxes resulting in:
Graduated tax rates - - (1,949) (.4) - -
ESOP compensation (15,869) (1.2) - - - -
Other (7,827) (.6) (11,232) (2.1) 623 .2
--------- --------- --------- --------- --------- ---------
$ 419,000 32.2 % $ 165,000 31.5% $(114,000) (33.8)%
========= ========= ========= ========= ========= =========
</TABLE>
(Continued)
33
<PAGE> 36
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Income Taxes, Continued
-----------------------
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,
----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Unrealized loss on securities $ - 202,177
Loan loss reserves 90,529 58,976
Accrued expenses, principally due to
differences in benefit accruals 129,786 112,904
Deferred loan fees 164,758 219,677
Premises and equipment, principally due
to differences in depreciation 20,326 8,856
--------------- ---------------
Total gross deferred tax assets 405,399 602,590
Less-valuation allowance - -
--------------- ---------------
Total net deferred tax assets 405,399 602,590
--------------- ---------------
Deferred tax liabilities:
Unrealized gain on securities 14,316 -
Federal Home Loan Bank stock dividends 161,023 137,155
Deferred loan costs 393,035 338,960
--------------- ---------------
Total gross deferred tax liability 568,374 476,115
--------------- ---------------
Net deferred tax (liability) asset $ (162,975) 126,475
=============== ===============
</TABLE>
No valuation allowance for deferred tax assets was recorded as of
December 31, 1997 and 1996 as management believes that the amounts
representing future deferred tax benefits will more likely than not
be realized 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.
On August 20, 1996, the President signed The Small Business Job
Protection Act (The Act) into law. The Act eliminated the percentage
of taxable income bad debt deduction for savings institutions,
effective for taxable years beginning after December 31, 1995. The
Company, therefore, is required to use the bad debt deduction based
upon actual loan loss experience (the Experience Method). The
Company's bad debt deduction utilizing the Experience Method in the
years ended December 31, 1997 and 1996, was $0 and $24,639,
respectively.
(Continued)
34
<PAGE> 37
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(11) Income Taxes, Continued
-----------------------
If the amounts which qualify as bad debt 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, 1997 and 1996 includes approximately
$2,440,000 of tax bad debt reserves for which no deferred Federal
income tax liability has been recognized.
Income taxes paid were approximately $527,000, $152,000, and $110,0000
for the years ended December 31, 1997, 1996 and 1995, 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 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 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 was $18,000 for
1997 and for 1996 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, 1997 and 1996 and no retirees from the
Board of Directors receiving benefits under the original Plan during
the year ended December 31, 1995. The Plan had corresponding net
assets in a trust of approximately $580,000 and $384,000 at December
31, 1997 and 1996, respectively.
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. In addition, from the proceeds of the
return
(Continued)
35
<PAGE> 38
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Benefit Plans, Continued
------------------------
Employee Stock Ownership Plan, Continued
----------------------------------------
of capital distribution on unallocated ESOP shares, the Plan
purchased 9,500 shares of the Company's stock at an average of
price of $14.88 per share in December 1997. 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 years ended December 31 1997 and 1996, the Company
released 27,369 and 11,722 shares to employees, respectively, with
corresponding compensation expense of $337,000 and $133,000,
respectively. The remaining 197,909 unallocated shares had a fair
value of approximately $3,364,000 at December 31, 1997.
Management Recognition Plan
---------------------------
Effective September 29, 1997, the Company's Board of Directors
established a Management Recognition Plan and Trust (MRP) as a
method of providing key employees with a proprietary interest in
the Company in a manner designed to encourage such individuals to
remain with the Company.
In 1997, the Bank contributed $1,051,356 to the MRP for the purpose
of purchasing Company common stock. The maximum number of shares
that the MRP trust may purchase in the aggregate, pursuant to the
MRP, is 113,735. During the second and third quarters of 1997, the
MRP trust purchased 76,200 shares of Company stock. All of these
shares have been awarded as restricted stock, which will vest at
the annual rate of 20%. The shares issued to the MRP have been
recorded as outstanding shares, and unearned compensation under
the MRP is recorded as a reduction of stockholders' equity and is
amortized to operations as the shares are earned. The plan
contains provisions for forfeiture of unvested shares in the event
of termination and vesting in the event of death, disability,
retirement or a change in control. Unvested MRP shares are not
reflected in the 1997 EPS calculation because their effect is
antidilutive.
During the year ended December 31, 1997, the Company recognized $325,000
in compensation expense related to the MRP.
(Continued)
36
<PAGE> 39
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Benefit Plans, Continued
------------------------
Stock Option Plan
-----------------
In 1997, the Company's stockholders approved a stock option plan (the
"Option Plan") adopted by the Company's Board of Directors,
pursuant to which the Company may grant stock options to directors
and selected employees of the Company and its affiliates,
including the Bank. The purpose of the Option Plan is to advance
the interests of the Company by providing directors and selected
employees of the Company and its affiliates, including the Bank,
with the opportunity to acquire shares of Common Stock. By
encouraging such stock ownership, the Company seeks to attract,
retain, and motivate the best available personnel for positions of
substantial responsibility and to provide additional incentive to
directors and employees of the Company and its affiliates to
promote the success of the business of the Company. The Option
Plan authorizes grants of options to purchase up to 10% of
authorized but unissued shares of common stock. Stock options are
granted with an exercise price equal to the stock's fair market
value at the date of grant. All stock options have 10-year terms
and vest and become fully exercisable after 4 years from the date
of grant.
At December 31, 1997, there were 190,293 shares granted under the
Option Plan. The per share weighted-average fair value of stock
options granted during 1997 was $6.54 on the date of grant using
the Black Scholes option-pricing model with the following
weighted-average assumptions: expected dividend yield 2%, expected
volatility of 15%, risk-free interest rate of 6.2% and an expected
life of 10 years (based on the terms of the grant).
The Company applies APB Opinion No. 25 in accounting for these plans
and, accordingly, no compensation cost has been recognized for its
stock options in the consolidated financial statements. Had the
Company determined compensation cost based on the fair value at
the grant date for its stock options under FASB No. 123, the
Company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1997
----
<S> <C> <C> <C>
Net income As reported $ 883,046
Pro forma 682,942
Net income per As reported 0.34
common share Pro forma 0.26
</TABLE>
Pro forma net income reflects options granted in 1997. Therefore, the
full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected
over the options' vesting period of 4 years.
(Continued)
37
<PAGE> 40
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(12) Benefit Plans, Continued
------------------------
Stock Option Plan, Continued
----------------------------
Information regarding shares under option is as follows:
<TABLE>
<CAPTION>
1997
------------------------------------
Number of Weighted-Average
shares Exercise Price
---------------- ----------------
<S> <C> <C>
Employees
---------
Outstanding at beginning of year - $ -
Awarded 104,991 17.06
Exercised - -
Adjustment for return of capital distribution 22,890 14.01
Expired - -
---------------- ----------------
Outstanding at end of year 127,881 $ 14.01
---------------- ----------------
Exercisable at end of year 25,576 $ 14.01
================
Directors
---------
Outstanding at beginning of year - $ -
Awarded 85,302 17.06
Exercised - -
Adjustment for return of capital distribution 18,599 14.01
Expired - -
---------------- ----------------
Outstanding at end of year 103,901 $ 14.01
================
Exercisable at end of year 20,783 $ 14.01
================
</TABLE>
At December 31, 1997, the weighted-average remaining contractual life
of outstanding options was 9.75 years.
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 $1,000, $13,000 and $21,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
(Continued)
38
<PAGE> 41
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,
-----------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Undisbursed construction loans in process $ 957,961 1,018,460
Undisbursed lines of credit on home equity loans 3,672,280 2,976,408
Loan commitments:
Adjustable (6.50% to 8.50% and 6.13% to 9.25%
at December 31, 1997 and 1996, respectively) 1,378,920 426,750
Fixed (7.13% to 13.99% and 7.00% to 12.40%
at December 31, 1997 and 1996, respectively) 1,810,300 4,911,650
</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.
Contingencies
-------------
The Company can be involved in various claims and legal actions
arising in the ordinary course of business. At December 31, 1997,
there are no such legal matters that are expected to have a
material adverse effect on the Company's financial condition or
results of operations.
(Continued)
39
<PAGE> 42
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(13) Commitments and Contingencies, Continued
----------------------------------------
Contingencies, Continued
------------------------
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 were reduced from 23 basis points to
approximately 6.5 basis points, a 72% decrease, effective for
quarters ended 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.
(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.
(Continued)
40
<PAGE> 43
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(14) Fair Value of Financial Instruments, Continued
----------------------------------------------
Loan Receivables
----------------
For certain homogeneous categories of loans, such as residential
mortgages and other consumer loans, fair value is estimated
using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the
current rates at which similar loans would be made to
borrowers with similar credit ratings 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.
The estimated fair values of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
(Thousands) (Thousands) (Thousands) (Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 10,368 10,368 13,420 13,420
Securities 1,000 1,000 3,969 3,969
Mortgage-backed securities 2,151 2,151 15,034 15,034
Loans held for sale - - 527 527
Loans receivable:
1-4 family adjustable rate mortgages 29,807 29,456 15,864 15,685
Other adjustable 15,812 15,394 13,366 13,088
1-4 family fixed rate mortgages 56,707 57,255 46,673 45,300
Other fixed 12,764 12,476 7,748 7,588
Second mortgages 2,373 2,678 793 868
Consumer loans 441 449 264 267
Commercial 217 217 119 118
Less: Allowance for loan losses (266) (266) (166) (166)
Deferred loan fees (207) (207) (136) (136)
------------ ------------ ------------ ------------
Net loans $ 117,648 117,452 84,525 82,612
============ ============ ============ ============
</TABLE>
(Continued)
41
<PAGE> 44
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(14) Fair Value of Financial Instruments, Continued
----------------------------------------------
FHLB Advances, Continued
------------------------
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- --------------- --------------- ---------------
(Thousands) (Thousands) (Thousands) (Thousands)
<S> <C> <C> <C> <C>
Financial liabilities:
Deposits:
Certificate accounts 67,110 67,958 60,471 61,263
Money market deposit accounts 10,243 10,243 11,600 11,600
Savings accounts 3,758 3,758 3,710 3,710
Now accounts 7,123 7,123 3,302 3,302
=============== =============== =============== ===============
Total deposits $ 88,234 89,082 79,083 79,875
=============== =============== =============== ===============
FHLB advances $ 14,765 14,419 127 110
=============== =============== =============== ===============
</TABLE>
(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, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1997 and 1996, notification from the 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.
(Continued)
42
<PAGE> 45
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(15) Regulatory Matters, Continued
-----------------------------
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------- --------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Tangible Capital $ 29,015,534 21.88% 1,988,913 1.50% 6,629,711 5.00%
Tier I/Core Capital 29,015,534 21.88% 3,977,827 3.00% 7,955,653 6.00%
Risk-based Capital 29,281,797 40.36% 10,607,537 8.00% 13,259,422 10.00%
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%
</TABLE>
(16) Parent Company Financial Statements
-----------------------------------
Condensed financial data for Westwood Homestead Financial Corporation
(Parent company only) at December 31, 1997 and 1996 and for the
year ended December 31, 1997 and for the period from inception at
September 27, 1996 to December 31, 1996 are as follows:
Condensed Statements of Financial Condition
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assets:
Interest-bearing deposits with banks $ 26,790 11,612,736
Accrued interest receivable 164 -
Investment in subsidiary 29,042,492 28,405,983
Prepaid income taxes 24,910 1,399
Due from subsidiary 1,051,356 -
--------------- ---------------
Total assets $ 30,145,712 40,020,118
=============== ===============
Liabilities and stockholders' equity:
Accrued expenses - 37,700
Stockholder's equity 30,145,712 39,982,418
--------------- ---------------
Total liabilities and stockholders' equity $ 30,145,712 40,020,118
=============== ===============
</TABLE>
(Continued)
43
<PAGE> 46
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Parent Company Financial Statements, Continued
----------------------------------------------
Condensed Statements of Income
Year ended December 31, 1997 and for the Period from Inception
(September 27, 1996) through December 31, 1996
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Interest-bearing deposits with banks $ 575,745 138,583
Non-interest expenses 160,003 47,898
---------------- ----------------
Income before income taxes and
equity in earnings of subsidiary 415,742 90,685
Income tax expense 141,000 19,601
---------------- ----------------
Income before equity in earnings of
subsidiary 274,742 71,084
Equity in earnings of subsidiary 608,304 287,979
================ ================
Net income $ 883,046 359,063
================ ================
</TABLE>
(Continued)
44
<PAGE> 47
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(16) Parent Company Financial Statements, Continued
----------------------------------------------
Condensed Statements of Cash Flows
Year ended December 31, 1997 and for the Period from Inception
(September 27, 1996) through December 31, 1996
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 883,046 359,063
---------------- ----------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Increase in accrued interest receivable (164) -
Equity in earnings of subsidiary (608,304) (287,979)
Increase in prepaid income taxes (23,511) (1,400)
Increase in due from subsidiary (1,051,356) -
Decrease in accrued expenses (37,700) 37,700
---------------- ----------------
Net cash provided by (used in) operating activities (837,989) 107,384
---------------- ----------------
Cash flows from investing activities:
Purchase of common stock issued by subsidiary - (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)
Payment of return of capital and cash dividends (10,747,957) -
---------------- ----------------
Net cash used in (provided by) financing activities (10,747,957) 25,370,705
---------------- ----------------
Net decrease in cash and cash equivalents (11,585,946) 11,612,736
Cash and cash equivalents at beginning of year 11,612,736 -
================ ================
Cash and cash equivalents at end of year $ 26,790 11,612,736
================ ================
</TABLE>
(Continued)
45
<PAGE> 48
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, 1997 and 1996 (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1997 1997 1997 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total interest income $ 2,782 2,695 2,470 2,322
Total interest expense 1,537 1,496 1,339 1,193
Net interest income 1,245 1,199 1,131 1,129
Provision for loan losses 16 31 36 18
Non-interest income (loss) (481) 43 33 29
Non-interest expenses and
provision for income taxes 745 1,017 803 779
Net income 3 194 325 361
Basic and diluted earnings per
common share .00 .08 .12 .14
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------
December 31, September 30, June 30, March 31,
1997 1997 1997 1997
---------------- ---------------- ---------------- ----------------
<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
Basic and diluted earnings per
common share since
conversion .16 N/A N/A N/A
</TABLE>
46
<PAGE> 49
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
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 estate investor Branch Manager Cincinnati Office, Hilliard Lyons
OFFICERS OF WESTWOOD HOMESTEAD SAVINGS BANK
- -------------------------------------------------------------------------------------------------------------------
* 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 Stanley B. Clinard
Vice President Assistant Vice President
Director of Lending Operations
Catherine A. Passano Delmar C. Schiferl
Assistant Vice President Assistant Vice President
Loan Officer Manager Consumer Lending
* Also officers of Westwood Homestead Financial Corporation
BANKING LOCATIONS
- -------------------------------------------------------------------------------------------------------------------
3002 Harrison Avenue 1101 St. Gregory Street
Cincinnati, Ohio 45211 Cincinnati, Ohio 45202
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
CORPORATE INFORMATION
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
CORPORATE OFFICE INDEPENDENT AUDITOR
Westwood Homestead Financial Corp. KPMG Peat Marwick LLP
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, registration, A copy of the Company's annual report on
lost certificates or changes in name and address Form 10-K, filed with SEC is available without
should be directed to the stock transfer agent charge by writing:
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 45211
MARKET MAKERS
- -------------------------------------------------------------------------------------------------------------------
ABN Amro Chicago Corp. Herzog, Heine, Geduld, Inc.
Keefe, Bruyette & Woods, Inc. Sandler O'Neill & Partners, L.P.
Friedman Billings Ramsey & Co. S. J. Wolfe & Co.
As of February 15, 1998
</TABLE>
ANNUAL MEETING
The Annual Meeting of Stockholders of Westwood Homestead Financial Corporation
will be held on April 13, 1998, 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,253,797
<INT-BEARING-DEPOSITS> 8,040,268
<FED-FUNDS-SOLD> 1,074,214
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,150,308
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 117,648,013
<ALLOWANCE> 266,263
<TOTAL-ASSETS> 134,258,781
<DEPOSITS> 88,234,007
<SHORT-TERM> 3,000,000
<LIABILITIES-OTHER> 1,114,244
<LONG-TERM> 11,764,818
0
0
<COMMON> 28,434
<OTHER-SE> 30,117,278
<TOTAL-LIABILITIES-AND-EQUITY> 134,258,781
<INTEREST-LOAN> 8,479,730
<INTEREST-INVEST> 891,733
<INTEREST-OTHER> 897,310
<INTEREST-TOTAL> 10,268,773
<INTEREST-DEPOSIT> 4,861,496
<INTEREST-EXPENSE> 5,564,330
<INTEREST-INCOME-NET> 4,704,443
<LOAN-LOSSES> 100,750
<SECURITIES-GAINS> (532,371)
<EXPENSE-OTHER> 2,926,554
<INCOME-PRETAX> 1,302,046
<INCOME-PRE-EXTRAORDINARY> 1,302,046
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 883,046
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
<YIELD-ACTUAL> 1.82
<LOANS-NON> 0
<LOANS-PAST> 155,000
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 165,513
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 266,263
<ALLOWANCE-DOMESTIC> 266,263
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
