<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark One
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________to________
Commission File Number: 0-18279
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WESTWOOD HOMESTEAD FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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
</TABLE>
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 2, 1999, there were issued and outstanding 2,288,818 shares
of the registrant's common stock.
As of March 2, 1999, 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 $19.7 million
($10.125 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, 1998. (Parts I and II)
2. Portions of Proxy Statement for the 1998 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 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, 1998,
the Company had consolidated total assets of $129.9 million, deposits of $87.3
million, net loans receivable of $118.6 million and stockholders' equity of
$24.0 million.
The executive offices of the Company are located at 3002 Harrison
Avenue, Cincinnati, Ohio 45211-5789, and its telephone number is (513) 661-5735.
The Bank. 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 properties
located in its market area.
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, the Bank has 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. As part of a balance sheet realignment in 1998, the Bank
sold $9.1 million in existing one- to four-family fixed rate loans. At December
31, 1998, the Bank had no concentrations of loans exceeding 10% of total loans
that are not otherwise disclosed below.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Amount % Amount % Amount %
------ - ------ - ------ -
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
Real estate loans:
One- to four-family residential $ 75,427 62.37% $ 87,234 73.26% $ 62,851 73.21%
Multi-family residential.................. 19,170 15.85 14,795 12.42 11,537 13.44
Construction.............................. 4,221 3.49 4,709 3.95 1,799 2.10
Other residential and non-
residential (1)........................ 20,772 17.17 11,683 9.81 9,275 10.80
Consumer loans............................... 1,053 .87 441 .37 264 .31
Commercial loans............................. 300 .25 217 .19 119 .14
-------- ------ -------- ------ -------- ------
Total................................... 120,943 100.00% 119,079 100.00% 85,845 100.00%
====== ====== ======
Less:
Loans in process.......................... 1,766 958 1,018
Deferred loan fees........................ 245 207 136
Allowance for loan losses................. 294 266 166
-------- -------- --------
Total $118,638 $117,648 $ 84,525
======== ======== ========
</TABLE>
- --------------
(1) Includes home equity loans.
2
<PAGE> 4
LOAN MATURITY SCHEDULE
The following table sets forth certain information at December 31, 1998
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,
1999 1998 1998 Total
---- ---- ---- -----
(In thousands)
<S> <C> <C> <C> <C>
One- to four-family residential..... $ 259 $ 2,359 $ 73,490 $ 76,108
Multi-family and non-residential.... -- 7,791 35,691 43,482
Consumer............................ 109 944 -- 1,053
Commercial.......................... -- 300 -- 300
------- -------- -------- --------
Total $ 368 $ 11,394 $109,181 $120,943
======= ======== ======== ========
</TABLE>
The next table sets forth at December 31, 1998, the dollar amount of
all loans due one year or more after December 31, 1998 which have predetermined
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates
---- ----------------
(In thousands)
<S> <C> <C>
One- to four-family residential........ $ 49,300 $ 26,808
Multi-family and non-residential....... 27,740 15,742
Consumer............................... 870 183
Commercial............................. -- 300
--------- ---------
Total................................. $ 77,910 $ 43,033
========= =========
</TABLE>
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. In
addition, the Bank's mortgage loans generally give Westwood Homestead the right
to declare a loan due and payable in the event, among other things, that a
borrower sells the real property subject to the mortgage and the loan is not
repaid.
One- to Four-Family Real Estate Loans. The primary emphasis of the
Bank's lending activity is the origination of loans secured by first mortgages
on one- to four-family residential properties. At December 31, 1998, $76.1
million, or 62.9%, 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
to 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 six month or one year
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,
1998, approximately 64.4% of the Bank's one- to four-family mortgage loans were
fixed rate loans and approximately 35.6% 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, 1998, approximately 12.5% 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, 1998, the Bank had 128 of these
loans outstanding, with an aggregate balance of second mortgages of $2.7
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 is also
active in the origination of loans secured by non-residential real estate and
multi-family properties. At December 31, 1998, multi-family and non-residential
real estate loans totaled $19.1 million and $20.8 million, respectively, and
represented 15.9% and 17.2%, respectively, of the Bank's gross loan portfolio. A
few 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 $1.8 million
at December 31, 1998 and was secured by a 72 unit apartment complex. The Bank's
second largest multi-family real estate loan amounted to $1.7 million at
December 31, 1998 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, 1998.
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, 1998. The Bank's second largest non-residential
real estate loan also amounted to $1.6 million at December 31, 1998 and was
secured by a retail shopping center. Both of these loans are located in the
Bank's market area and were performing according to their terms at December 31,
1998.
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, 1998, the Bank's
loan portfolio included $4.2 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 and signature loans. Management is seeking to
expand the Bank's consumer loan portfolio. At December 31, 1998, the Bank's
consumer loans totaled $1.1 million, or .87%, of the Bank's gross loan
portfolio. The Bank's efforts in this area have met with stiff competition. As a
result, consumer loans outstanding to date are slightly less than anticipated.
Consumer loans tend to be originated at higher interest rates than
mortgage loans and for shorter terms. However, consumer loans generally involve
more risk than one- to four-family residential real estate loans. Repossessed
collateral for a defaulted loan may not provide an adequate source of repayment
of the outstanding loan balance as a result of damage, loss or depreciation, and
the remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Further, the application of various state and federal laws, including federal
and state bankruptcy and insolvency law, may limit the amount which may be
recovered. In underwriting consumer loans, the Bank considers the borrower's
credit history, an analysis of the borrower's income and ability to repay the
loan, and the value of the collateral.
Loan Solicitation and Processing. Loan originations are derived from a
number of sources, including walk-in customers and referrals, realtors,
depositors, telemarketing, mailings, newspaper advertising, the Internet and
previous borrowers. It is management's intention to aggressively grow the
mortgage loan portfolio and is currently negotiating with
5
<PAGE> 7
an outside originator. 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 1-4 residential
approved loans are subject to change if the loan is not funded within 45 days
after application, although the Bank will commit to provide the financing for a
longer period depending on the circumstances causing the delay. It has been
management's experience that substantially all approved loans are funded. Fire
and casualty insurance, as well as flood insurance, are required for all loans
as appropriate, and a title opinion is required for most loans secured by real
estate.
6
<PAGE> 8
Originations and Sales of Loans. The Bank's loans are primarily
originated by 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,
----------------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loans originated:
One- to four-family........................... $ 34,436 $ 33,946 $ 18,811
Multi-family residential...................... 6,846 6,925 724
Construction.................................. 3,906 5,746 1,733
Other residential and non-residential 9,505 6,095 4,653
----------- ----------- ------------
Total loans originated..................... $ 54,693 $ 52,712 $ 25,921
=========== =========== ============
Loans sold........................................ $ 21,910 $ 824 $ 2,172
=========== =========== ============
</TABLE>
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. In managing the Bank's interest rate
risk, $9.1 million of existing fixed rate loans were sold with servicing
retained in the second quarter. An additional $12.8 million of current
originations were sold in the secondary market.
Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by adding 1/4 to 3/8 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 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 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 maintain an
appropriate 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
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<PAGE> 9
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.
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,
----------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period.................... $ 266,263 $ 165,513 $ 101,709
Loans charged off................................. (14,038) -- --
Recoveries - real estate mortgage -
residential..................................... -- -- --
Provision for loan losses......................... 41,460 100,750 63,804
----------- ----------- -----------
Balance at end of period.......................... $ 293,685 $ 266,263 $ 165,513
=========== =========== ===========
Ratio of net charge-offs to average
loans outstanding during the period............ 0.01% --% --%
=========== =========== ===========
</TABLE>
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<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,
---------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
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............................ $ 90,250 62.37% $189,105 73.26% $ 91,815 73.38%
Multi-family and non-residential 176,177 33.02 58,797 22.23 66,262 24.10
Construction................................... 6,136 3.49 11,773 3.95 4,497 2.08
Consumer....................................... 10,522 .87 4,414 .37 2,641 .30
Commercial..................................... 10,600 .25 2,174 .19 298 .14
-------- ------ -------- ------ -------- ------
Total allowance for loan losses........... $293,685 100.00% $266,263 100.00% $165,513 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
9
<PAGE> 11
Non-Performing Loans and Other Problem Assets. Management reviews the
Bank's loans on a regular basis. Loans are placed on a non-accrual status when
the loan is past due in excess of 90 days and collection of principal and
interest is doubtful.
Real estate acquired by the Bank as a result of foreclosure is
classified as real estate owned until such time as it is sold. The Bank
generally tries to sell the property at a price no less than its net book value,
however, it will consider slight discounts to the appraised value to expedite
the return of the funds to an earning status. When such property is acquired, it
is recorded at its fair value less estimated costs of sale. Any required
write-down of the loan to its appraised fair market value upon foreclosure is
charged against the allowance for loan losses. Subsequent to foreclosure, in
accordance with generally accepted accounting principles, a valuation allowance
is established if the carrying value of the property exceeds its fair value net
of related selling expenses.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated. No loans were recorded as
restructured loans within the meaning of SFAS No. 114 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,
----------------------------------------------
1998 1997 1996
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate - Residential......................... $ 167 $ -- $ --
Commercial........................................ -- -- --
Consumer.......................................... -- -- --
--------- --------- ---------
Total.......................................... $ 167 $ -- $ --
========= ========= =========
Accruing loans which are contractually past
due 90 days or more:
Real estate - Residential......................... $ 319 $ 155 $ --
Commercial........................................ -- -- --
Consumer.......................................... -- -- --
--------- --------- ---------
Total.......................................... $ 319 $ 155 $ --
========= ========= =========
Total nonperforming loans...................... $ 486 $ 155 $ --
========= ========= =========
Percentage of total loans............................ .40% .13% --%
========= ========= =========
Other non-performing assets.......................... $ -- $ -- $ --
========= ========= =========
Loans modified in troubled debt
restructurings..................................... $ -- $ -- $ --
========= ========= =========
</TABLE>
At December 31, 1998, 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 $167,000 of non performing loans includes two loans of which one
for $91,000 has a sale contract pending. The remaining $76,000 represents two
loans to one borrower that, as of March 1999, has agreed to a payment plan to
bring the loans current.
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.
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 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.
11
<PAGE> 13
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, 1998, these securities had a
market value of $1,529,000 and an amortized cost of $1,510,000, representing
1.2% of the Company's total assets. See Notes 3 and 4 to the Company's
Consolidated Financial Statements incorporated herein by reference.
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. As part of a
balance sheet realignment in the fourth quarter of fiscal 1997 the Bank sold the
$12.0 million portfolio of CMOs.
The following table sets forth the carrying value of the Bank's
investments at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Securities available for sale :
U.S. government and agency securities............. $ -- $ 1,000 $ 3,969
Collateralized mortgage obligations............... -- -- 11,990
Mortgage-backed securities........................ 1,529 2,151 3,044
----- --------- ---------
Total investment securities.................... 1,529 3,151 19,003
Cash and cash equivalents............................ 5,010 10,368 13,420
FHLB stock........................................... 1,141 1,024 954
--------- --------- ---------
Total investments.............................. $ 7,680 $ 14,543 $ 33,377
========= ========= =========
</TABLE>
12
<PAGE> 14
The following table sets forth the scheduled maturities, carrying
values, market values and average yields for the Bank's investment securities at
December 31, 1998.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
---------------- ----------------- -----------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Mortgage-backed securities... -- -- 147 7.45% 86 8.01%
--- ------ -----
Total...................... $ -- $ 147 $ 86
=== ====== =====
</TABLE>
<TABLE>
<CAPTION>
More than Ten Years Total Investment Portfolio
------------------- --------------------------
Carrying Average Carrying Market Average
Value Yield Value Value Yield
----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Securities available
for sale:
Mortgage-backed
securities........... 1,276 7.24% 1,510 1,529 7.30
------- ------- -------
Total............... $ 1,276 $ 1,510 $ 1,529
======= ======= =======
</TABLE>
13
<PAGE> 15
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, Westwood
Homestead derives funds primarily from loan principal repayments, maturing
investment securities, and interest payments. Loan repayments and interest
payments are a relatively stable source of funds, while deposit inflows and
outflows are significantly influenced by general interest rates and money market
conditions.
Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a variety of deposit instruments,
including passbook and statement accounts and certificates of deposit currently
ranging in term from 30 days to 5 years. The majority of deposits at the Bank
are C.Ds, which at December 31, 1998 represented 75.8% 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 building renovation and
drive-thru which was completed this past year have increased the Bank's
visibility and accessibility for our customers. Increased advertising and
employee incentives have also contributed to a 59% increase in checking accounts
during 1998. The Bank's Mount Adams branch, opened in June 1996, had $3.0
million in deposits outstanding as of December 31, 1998. Transaction accounts
made up 74% of the deposits which contributed to the 3.78% cost of funds for the
branch. The branch has started to generate a monthly profit after 21 months of
operation.
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 $12.2 million, or
14.6%, of the Bank's total savings portfolio at December 31, 1998. 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.
14
<PAGE> 16
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,
----------------------------------------------------------------
1998 1997 1996
---- ---- ----
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings deposits............... $ 3,561 1.98% $ 3,769 1.98% $ 6,063 1.91%
NOW accounts................... 7,399 2.93 4,646 3.03 1,996 1.91
Money market accounts.......... 9,406 3.65 10,046 3.64 12,089 3.67
Certificates of deposit........ 63,771 6.17 63,961 6.69 63,474 6.63
-------- ---- --------- ---- ---------- ----
Total..................... $ 84,137 5.43 $ 82,422 5.90 $ 83,622 5.75
======== ========= ==========
</TABLE>
The following table sets forth the amount and maturities of time
deposits at December 31, 1998.
<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%.................. $ 30,065 $ 8,749 $ 1,612 $ 831 $ 41,257
6.00 - 7.99%.................. 7,142 3,196 1,286 7,266 18,890
8.00 - 9.99%.................. 3,083 1,492 641 -- 5,216
--------- ---------- ---------- ---------- ----------
$ 40,290 $ 13,437 $ 3,539 $ 8,097 $ 65,363
========= ========== ========== ========== ==========
</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,
1998.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
--------------- -----------
(In thousands)
<S> <C>
Three months or less....................... $ 3,661
Over three through six months.............. 805
Over six through 12 months................. 3,498
Over 12 months............................. 4,280
----------
Total.................................. $ 12,244
==========
</TABLE>
15
<PAGE> 17
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 in addition
to other advance programs 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, 1998, $17.5 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,
---------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Amounts outstanding at end of period:
FHLB advances................................... 17,454 14,765 127
Weighted average rate paid on:
FHLB advances................................... 6.22% 6.33% 8.18%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
Federal funds purchased......................... $ -- $ 1,200 $ 1,600
FHLB advances................................... 17,455 18,775 1,000
Approximate average short-term borrowings
outstanding with respect to:
Federal funds purchased......................... $ -- $ 4,064 $ 1,000
FHLB advances................................... 15,863 7,043 1,000
Approximate weighted average rate paid on: (1)
Federal funds purchased ........................ -- 5.77% 5.84%
FHLB advances................................... 6.22% 5.89% 5.50%
</TABLE>
- ------------------
[FN]
(1) Based on rates and amounts during periods borrowings were outstanding.
</FN>
16
<PAGE> 18
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
17
<PAGE> 19
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.
18
<PAGE> 20
The CRA requires that, in connection with examinations of financial
institutions within their jurisdiction, the Federal Reserve Board and the FDIC
evaluate the record of the financial institutions in meeting the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those banks. These factors are
also considered by the Federal Reserve Board and the FDIC in evaluating mergers,
acquisitions and applications to open a branch or facility. 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
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.
19
<PAGE> 21
The table below provides information with respect to the Bank's
compliance with its regulatory capital requirements at December 31, 1998.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
------ ----------
(Dollars in thousands)
<S> <C> <C>
Tangible capital.................................. $23,535 18.56%
Tangible capital requirement...................... 1,902 1.50
------- -----
Excess.......................................... $21,633 17.06%
======= =====
Tier 1/Core capital(2)............................ $23,535 18.56%
Tier 1/Core capital requirement................... 3,804 3.00
------- -----
Excess.......................................... $19,731 15.56%
======= =====
Risk-based capital................................ $23,828 31.32%
Risk-based capital requirement.................... 6,087 8.00
------- -----
Excess.......................................... $17,741 23.32%
======= =====
</TABLE>
[FN]
(1) Based on average adjusted total assets for purposes of the tangible
capital and core capital requirements and risk-weighted assets for
purpose of the risk-based capital requirement.
(2) Reflects the capital requirement which the Bank must satisfy to avoid
regulatory restrictions that may be imposed pursuant to prompt
corrective action regulations.
</FN>
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
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<PAGE> 22
remains critically undercapitalized on average during the calendar quarter
beginning 270 days after the date it became critically undercapitalized.
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 CAMELS 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
CAMELS 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 CAMELS 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. See "Holding Company Dividends And Stock Repurchases."
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.
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<PAGE> 23
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.
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.
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 7.3% of interest-bearing liabilities at December
31, 1998, 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, 1998, the maximum amount Westwood Homestead could lend
to one borrower was approximately $3.5 million, and Westwood Homestead's largest
amount lent to one borrower was $3.4 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, 1998, of $1.1 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, 1998, Westwood Homestead
had $17.5 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
$4.7 million of transaction accounts, reserves equal to 3% must be maintained on
the next $47.8 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, 1998, Westwood Homestead met its reserve requirements.
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<PAGE> 24
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.
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<PAGE> 25
The FDIC has adopted regulations to clarify the foregoing restrictions
on activities of FDIC-insured state-chartered banks and their subsidiaries.
Under the regulations, the term activity refers to the authorized conduct of
business by an insured state bank and includes acquiring or retaining any
investment other than an equity investment. A bank or subsidiary is considered
acting as principal w hen 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.
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<PAGE> 26
Merger or Acquisition. The Superintendent must approve any mergers
involving, or acquisitions of control of, Ohio savings banks. The Superintendent
may initiate certain supervisory measures or formal enforcement actions against
Ohio savings banks. Ultimately, if the grounds provided by law exist, the
Superintendent may place an Ohio savings bank in conservatorship or
receivership.
Examination. The Superintendent conducts regular examinations of Ohio
savings banks approximately once every eighteen months. Such examinations are
usually conducted jointly with the FDIC. The Superintendent imposes assessments
on Ohio savings banks based on the savings bank's asset size to cover the cost
of supervision and examination.
Governing Law. In addition to being governed by the laws of Ohio
specifically governing Ohio-chartered savings banks, Westwood Homestead is also
governed by Ohio corporate law, to the extent such law does not conflict with
the laws specifically governing savings banks.
Activities and Investments. Since the enactment of FIRREA, all
state-chartered institutions have generally been limited to activities and
investments of the type and in the amount authorized for federally chartered
institutions, notwithstanding state law. The FDIC is authorized to permit such
associations to engage in state authorized activities or investments that do not
meet this standard (other than nonsubsidiary equity investments and investments
in junk bonds) for institutions that meet fully phased-in capital requirements
if it is determined that such activities or investments do not pose a
significant risk to the SAIF.
TAXATION
FEDERAL INCOME TAXATION
Thrift institutions are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Code") in the same general manner as
other corporations. Through tax years beginning before December 31, 1995,
savings associations such as the Bank which meet certain definitional tests and
other conditions prescribed by the Code benefitted from certain favorable
provisions regarding their deductions from taxable income for annual additions
to their bad debt reserve. For purposes of the bad debt reserve deduction, loans
are separated into "qualifying real property loans," which generally are loans
secured by interests in real property, and nonqualifying real property loans,
which are all other loans. The bad debt reserve deduction with respect to
nonqualifying loans must be based on actual loss experience. The amount of the
bad debt reserve deduction with respect to qualifying real property loans may be
based upon actual loss experience (the "experience method") or a percentage of
taxable income determined without regard to such deduction (the "percentage of
taxable income method"). The Bank generally elected to use the method which
resulted in the greatest deduction for federal income tax purposes in any given
year.
Legislation that is effective for tax years beginning after December
31, 1995 requires institutions to recapture into taxable income over a six
taxable year period the portion of the tax loan reserve that exceeds the
pre-1988 tax loan loss reserve. The Bank will no longer be allowed to use the
reserve method for tax loan loss provisions, but would be allowed to use the
experience method of accounting for bad debts. There will be no future effect on
net income from the recapture because the taxes on these bad debt reserves has
already been accrued as a deferred tax liability.
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.
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<PAGE> 27
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 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, 1998, Westwood Homestead had 22 full-time employees
and seven part-time employees, none of whom was represented by a collective
bargaining agreement. Westwood Homestead believes that it enjoys good relations
with its personnel.
ITEM 2. PROPERTIES
The following table sets forth the location and certain additional
information regarding the Bank's offices at December 31, 1998.
<TABLE>
<CAPTION>
Book Value at Deposits at
Year Owned or December 31, Approximate December 31,
Opened Leased 1998 Square Footage 1998
------ ------ ---- -------------- ----
<S> <C> <C> <C> <C> <C>
3002 Harrison Avenue 1922 Owned $1.7 million 9,640 $84.3 million
Cincinnati, Ohio
1101 St. Gregory Street 1996 Leased N/A 285 3.0 million
Cincinnati, Ohio
</TABLE>
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<PAGE> 28
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, 1998.
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 DISCLOSURES ABOUT MARKET RISK
The information contained in the section captioned "Asset Liability
Management" 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
KPMG LLP (KPMG) has been principal accountants for Westwood Homestead
Financial Corporation (Westwood Homestead) since 1989 and were engaged to audit
the consolidated financial statements for the year ended December 31, 1998. On
December 21, 1998, the decision was made to terminate KPMG's appointment as
principal accountants upon completion by KPMG of the audit for the year ended
December 31, 1998 and issuance of the auditors report thereon. This change in
principal accountants is intended to be effective for the year ended December
31, 1999. The decision to change accountants was approved by the Audit Committee
and Board of Directors of Westwood Homestead.
In connection with the audits of the two fiscal years ended December
31, 1998 and 1997, and the subsequent interim period through January 29, 1999,
there were no disagreements with KPMG on any matter of accounting principles or
practices, financial statement disclosure, or audit scope or procedures, which
if not resolved to the satisfaction of KPMG,
27
<PAGE> 29
would have caused them to refer to the nature of such disagreements in their
reports on the consolidated financial statements of Westwood Homestead.
The audit reports of KPMG on the consolidated financial statements of
Westwood Homestead as of and for the years ended December 31, 1998 and 1997 did
not contain any adverse opinion or disclaimer of opinion nor were they qualified
or modified as to uncertainty, audit scope or accounting principles.
On December 21, 1998, the Board of Directors of Westwood Homestead
approved and appointed Crowe, Chizek and Company LLP as Westwood Homestead's
principal accountants for the year ended December 31, 1999. Crowe, Chizek and
Company LLP will be engaged as principal accountants upon completion by KPMG of
the audit for the year ended December 31, 1998 and issuance of the auditors'
report thereon.
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 1999 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
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
28
<PAGE> 30
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, 1998 and 1997
b) Consolidated Statements of Operations for the Years
Ended December 31, 1998, 1997 and 1996
c) Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1998, 1997
and 1996
d) Consolidated Statements of Cash Flow for the Years
Ended December 31, 1998, 1997 and 1996
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 *
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 1998 Annual Report to Stockholders
21 Subsidiaries of the Registrant.
27 Financial Data Schedule
b) With the exception of the Form 8-K filed on December 29, 1998
to report a change in accountants, there were no reports on
Form 8-K 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.
29
<PAGE> 31
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 29, 1999 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.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Michael P. Brennan By /s/ Robert H. Bockhorst
------------------------------------ ------------------------------------
Michael P. Brennan Robert H. Bockhorst
(Director and Chief Executive Director
Officer
Date: March 29, 1999 Date: March 29, 1999
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 29, 1999 Date: March 29, 1999
By: /s/ Carl H. Heimerdinger By: /s/ Roger M. Higley
------------------------------------ ------------------------------------
Carl H. Heimerdinger Roger M. Higley
Chairman of the Board Director
Date: March 29, 1999 Date: March 29, 1999
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 29, 1999 Date: March 29, 1999
By: /s/James D. Kemp
------------------------------------
James D. Kemp
Director
Date: March 27, 1999
</TABLE>
<PAGE> 32
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
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 1998 Annual Report to Stockholders
21 Subsidiaries of the Registrant.
27 Financial Data Schedule
</TABLE>
- --------------
[FN]
* Incorporated by reference to the registrant's Form S-1
Registration Statement No. 333-2298.
</FN>
<PAGE> 1
EXHIBIT 13
<PAGE> 2
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
WESTWOOD HOMESTEAD LOGO
1998 ANNUAL REPORT TO STOCKHOLDERS
<PAGE> 3
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
Westwood Homestead Financial Corporation (the "Company") is an Indiana
corporation formed in March 1996 for the purpose of acquiring all the capital
stock issued by The Westwood Homestead Savings Bank ("Westwood Homestead" or the
"Bank") in connection with its conversion from a state chartered mutual savings
bank to a state chartered stock savings bank. The Company is headquartered in
Cincinnati, Ohio and its primary assets consist of the outstanding capital stock
of the Bank.
Westwood Homestead is an Ohio chartered savings bank headquartered in
Cincinnati, Ohio, that traces its origin back to 1883. The Bank has occupied its
main office since 1922. 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. The Bank also
originates multi-family residential loans, commercial property loans,
non-residential real estate loans, residential construction, consumer and
business loans.
MARKET INFORMATION
- --------------------------------------------------------------------------------
STOCK PRICE INFORMATION
<TABLE>
<CAPTION>
Quarter Ended High Low Dividends
------------- ---- --- ---------
<S> <C> <C> <C>
December 31, 1996 12.25 10.25 --
March 31, 1997 14.81 11.63 $ .07
June 30, 1997 14.50 12.38 $ .07
September 30, 1997 18.00 13.88 $ .07
December 31, 1997 18.13 13.75 $3.57
March 31, 1998 17.13 13.25 $ .09
June 30, 1998 15.00 11.88 $ .09
September 30, 1998 12.88 10.25 $ .10
December 31, 1998 11.13 9.50 $ .10
</TABLE>
The Company's common stock is traded on the NASDAQ National Market under the
symbol "WEHO." As of December 31, 1998, there were approximately 425
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 Westwood Homestead Financial Corporation's
Annual Report for 1998. Your Board of Directors, officers and employees greatly
appreciate your investment in our company.
A YEAR OF MODERATE GROWTH
Loan originations for 1998 were $54.7 million compared to $52.7 million for
1997. Net loans receivable increased $1.3 million over the previous year. Loan
sales activity for 1998 included a $9.1 million sale of one-to-four family loans
to another bank and the sale of $12.7 million of residential loans into the
secondary market of which $3.7 million was sold servicing released. At year-end
the loans outstanding in our fixed rate second mortgages produced from our 100%
LTV Mortgage Loan Program increased slightly by $151,000.
Non-performing loans to total loans increased to .41% and our allowance for loan
losses to total loans increased to .25%.
On the liability side, we continued to see good growth during 1998 in our
checking account programs. Checking account balances increased by 25% to end the
year at $9.5 million. Checking account dollars now exceed 10% of all deposits.
Overall, deposits decreased to $87.3 million or 1% during fiscal 1998 which was
a result of not retaining some of the maturing high rate 10 year CD's.
Total assets at December 31, 1998, amounted to $129.9 million compared to $134.3
million at December 31, 1997. This decrease of $4.4 million, or 3%, was the
direct result of a non-recurring loan sale and cash being used to fund the
Company's stock repurchase program.
EARNINGS
Net income for the year ended December 31, 1998, was $1,334,000, an increase of
$451,000 over the previous year. A substantial impact on our earnings for 1997
can be attributed to a balance sheet realignment when $12.6 million of
securities were sold for a loss of $535,000.
2
<PAGE> 5
CAPITAL MANAGEMENT
Executing our Strategic Plan, our Board of Directors authorized two stock
buybacks during 1998. The Company completed a 10% stock repurchase in the second
quarter, and a 9% stock repurchase of the Company's outstanding shares in the
fourth quarter. The total number of shares repurchased in 1998 was 514,557. On
January 12, 1999, the Company announced the commencement of an additional
repurchase of 232,000, or 10%, of the outstanding shares.
Total equity to assets ratio at year-end 1998 was 18.46% down from 22.45% a year
earlier, and down from 33% at the conversion to stock ownership in September
1996. Our return on equity and earnings per share increased to 4.94% and $0.58
per share, respectively, during 1998.
OTHER 1998 HIGHLIGHTS
In early 1998, we introduced Ami, a voice response system, that gives our
customers access to account information over the telephone 24 hours a day. At
our main office, we dedicated the opening of a two lane drive-up window system
and a new drive-up MAC ATM for "cash fill-ups". In the fall, we opened a new
two-story building adjacent to our main office to house our expanding loan
operation and our executive staff. Later in the year, we added Visa(R) Check
Card to our list of customer services.
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,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------
Amount of: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets $ 129,871 $ 134,259 $ 119,951 $ 96,638 $ 112,978
Loans held for sale 288 -- 527 1,697 --
Loans receivable, net 118,638 117,648 84,525 73,245 70,185
Cash and cash equivalents 5,010 10,368 13,420 869 748
Investment securities -- 1,000 3,969 993 1,886
Mortgage backed securities 1,529 2,151 15,034 17,380 36,935
Deposits 87,336 88,234 79,083 81,748 92,526
FHLB advances 17,454 14,765 127 139 5,349
Federal funds purchased -- -- -- -- 2,200
Stockholders' equity (Retained
income prior to 1996) 23,977 30,146 39,982 14,190 12,279
Number of:
Loans outstanding 1,999 1,735 1,391 1,140 1,070
Deposit accounts 7,255 7,074 6,732 7,841 7,655
Offices open 2 2 2 1 1
</TABLE>
<TABLE>
<CAPTION>
Operating Data: Year ended December 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest income $ 10,219 $ 10,269 $ 7,875 $ 7,756 $ 7,653
Interest expense 5,552 5,564 4,834 5,262 5,047
----- ----- ----- ----- -----
Net interest income 4,667 4,705 3,041 2,494 2,606
Provision for loan losses 41 101 64 38 30
----- ----- ----- ----- -----
Net interest income after provision 4,626 4,604 2,977 2,456 2,576
Non-interest income (loss) 582 (375) 132 (737) 79
Non-interest expense (1) 3,187 2,927 2,585 2,056 1,494
----- ----- ----- ----- -----
Income (loss) before income tax 2,021 1,302 524 (337) 1,161
Federal income tax expense (benefit) 687 419 165 (114) 400
----- ----- ----- ----- -----
Net income (loss) 1,334 883 359 (223) 761
===== ===== ===== ===== =====
Key Ratio Data:
Return on average assets 1.04% 0.66% 0.34% -0.21% 0.66%
Return on average equity 4.94 2.23 1.71 -1.59 5.39
Net interest margin 3.75 3.56 2.93 2.44 2.32
Efficiency ratio 63.21 60.20 63.15 65.38 55.63
Non interest expense to average assets 2.49 2.19 2.45 1.97 1.31
Allowance for loan loss to total loans .25 .23 .20 .14 .09
Non performing loans to total loans .41 .13 -- -- .03
</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 December 1997 as part of its capital management plan, the
Company paid a special dividend of $3.50 in the form of a return of capital.
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, multi-family, nonresidential and construction
real estate loans located in its market area.
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.
BALANCE SHEET ANALYSIS
Total assets decreased $4.4 million, or 3.3%, to $129.9 million at December 31,
1998 from $134.3 million at December 31, 1997. Management continues the process
of realigning the balance sheet to enhance shareholder value. Significant
improvements have been realized in the areas of capital management, loan and
deposit mix, and non-interest income. The following paragraphs discuss the
significant changes in the major balance sheet categories during these periods.
LOANS
Increased mortgage banking activity resulted in a modest $1.0 million increase
during 1998 in loans receivable to $118.6 million at December 31, 1998. In
managing the Bank's interest rate risk, $9.1 million of existing fixed rate
loans were sold with servicing retained in the second quarter. An additional
$12.8 million of current originations were sold in the secondary market. Loan
originations were $54.7 million in 1998 compared to $52.7 million in 1997.
Currently the Bank's policy is to sell all newly originated conforming 30 year
fixed rate loans below 8% and all 15 year fixed rate loans below 7%. The Asset
Liability Committee ("ALCO") reviews this policy periodically as part of its
overall asset/liability management strategy. Total loans serviced for the
secondary market at December 31, 1998 totaled $18.8 million. At December 31,
1998, the Bank had $288,000 of loans held for sale to the secondary market.
Real estate loans secured by one to four family units decreased from 73.3% to
62.4% of the loan portfolio at December 31, 1998. Multifamily residential loans
increased $4.4 million, or 29.7%, while nonresidential loans increased $9.1
million, or 77.8% during 1998. The Bank has a history of successfully
underwriting these loans and managing the associated risks. As the competition
in single family lending increases and margins decrease, the bank will attempt
to manage the mix of the loan portfolio accordingly.
5
<PAGE> 8
SECURITIES
Total securities decreased $1.7 million to $1.5 million at December 31, 1998
from $3.2 million the prior year as a result of maturities and normal
amortization. The primary objective of the investment portfolio is to provide
and invest liquidity to respond to loan demand, deposit volatility, and other
cash management considerations.
DEPOSITS
Deposits decreased $0.9 million in fiscal 1998 from $88.2 million to $87.3
million at December 31, 1998. Of the $7.1 million of long term high rate
certificates that matured during the year, approximately $5.0 million were not
retained by the bank. The remaining $2.5 million of the high rate certificates
at December 31, 1998 will mature in 1999. During 1998 checking account balances
increased $2.4 million, or 33.8%, to $9.5 million at December 31, 1998. The
increased convenience and accessibility provided by the new drive-thru this year
has facilitated this growth in transaction accounts.
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
$2.7 million to $17.4 million during 1998 in order to fund loan demand and the
Company's stock repurchase program.
STOCKHOLDERS' EQUITY
Stockholders' equity decreased $6.1 million to $24.0 million at December 31,
1998 compared to $30.1 million at December 31, 1997. During 1998 the Company
repurchased 514,557 shares of its stock resulting in $6.6 million of treasury
stock at December 31, 1998. These repurchases represent 18% of the shares issued
in the stock conversion. The remaining 37,535 shares for the Management
Recognition Plan were also purchased during the year. Net income of $1.3 million
was partially offset by cash dividends of $782,000 paid during 1998. The ratio
of equity to assets decreased from 22% at December 31, 1997 to 18% at December
31, 1998 as a result of these capital management strategies.
RESULTS OF OPERATIONS
Westwood Homestead Financial Corporation reported net income of $1.3 million, or
58 cents per share in 1998 as compared with $883,000, or 34 cents per share in
1997. This $719,000 pretax increase resulted primarily from the absence of
$532,000 in securities losses from the previous year and an increase of $408,000
in gains from loan sales. Return of average equity and return on average assets
was 4.94% and 1.04%, respectively. Net income increased $524,000 for fiscal 1997
from $359,000 in 1996 primarily due to a $1.7 million increase in net interest
income from the stock conversion proceeds partially offset by an increase of
$342,000 in operating expenses and $532,000 loss on the sale of securities.
Return of average equity and return on average assets were 2.23% and 0.66%,
respectively.
NET INTEREST INCOME
Net interest income decreased $37,000, or 0.8%, for fiscal year 1998 to
$4,667,000 as a result of a decrease in net interest earning assets of $14.1
million, or 36.5%. Aggressive capital management strategies such as the return
of capital paid in 1997 and the stock repurchases in 1998 have significantly
reduced the
6
<PAGE> 9
amount of earning assets. Net interest rate spread increased 46.2% to 2.66% as a
result of the dramatic changes in both the asset and liability side of the
balance sheet. Net interest income increased $1,663,000, or 54.7%, during the
year 1997 to $4,704,000. Net interest margin was 3.75%, 3.56%, and 2.93% for the
years 1998, 1997 and 1996 respectively.
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>
------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------
(Dollars in thousands) Average Average Average Average Average Average
Balance Interest Yield Balance Interest Yield Balance Interest Yield
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets
Loans receivable, net $115,813 9,704 8.38% $102,346 8,480 8.29% $ 78,975 6,362 8.06%
Investment securities 191 10 5.37% 2,845 167 5.88% 1,961 107 5.43%
Mortgage backed securities 1,831 127 6.93% 13,983 892 6.38% 16,168 1,044 6.46%
Other interest earning assets 6,680 378 5.66% 12,967 730 5.63% 6,640 363 5.47%
-------- --------- -------- -------- -------- -------- -------- -------- -------
Total interest earning assets 124,515 10,219 8.21% 132,141 10,269 7.77% 103,744 7,876 7.59%
Non interest earning assets 3,419 1,531 1,820
-------- -------- --------
Total assets $127,934 $133,672 $105,564
-------- -------- --------
Interest bearing liabilities
Deposits $ 84,137 4,565 5.43% $ 82,422 4,861 5.90% $ 83,622 4,805 5.75%
Federal funds and FHLB
advances 15,863 987 6.22% 11,107 703 6.33% 447 30 6.62%
-------- --------- -------- -------- -------- -------- -------- -------- -------
Total interest bearing
liabilities 100,000 5,552 5.55% 93,529 5,564 5.95% 84,069 4,835 5.75%
-------- --------- -------- -------- -------- -------- -------- -------- -------
Non interest bearing liabilities 934 547 512
-------- -------- --------
Total liabilities 100,934 94,076 84,581
Equity 27,000 39,596 20,983
-------- -------- --------
Total liabilities and equity $127,934 $133,672 $105,564
-------- -------- --------
Net interest earning assets $ 24,515 $ 38,612 $ 19,675
======== ======== ========
Net interest income 4,667 2.66% 4,705 1.82% 3,041 1.84%
========= ======== ======== ======== ======== =======
Net interest margin 3.75% 3.56% 2.93%
======== ======== =======
</TABLE>
7
<PAGE> 10
Interest income decreased $50,000, or 0.5% for the year ended December 31, 1998
to $10.2 million. A $7.6 million decrease in interest earning assets was mostly
offset by a 44 basis point increase in the average yield. The average balance of
loans receivable increased $13.5 million, or 13.2%, while the average yield
increased 9 basis points to 8.38%. The yield on interest earning assets climbed
to 8.21% in 1998. During 1997 interest income increased $2,393,000 as conversion
proceeds were invested in loans and short term investments while the yield on
average interest earning assets increased from 7.59% in 1996 to 7.77% in 1997.
Interest expense decreased $12,000, or 0.2% for the year ended December 31, 1998
to $5.6 million. A $6.4 million increase in interest bearing liabilities was
more than offset by a 40 basis point decrease in the average rate. Repricing
CDs resulted in the average cost of deposits decreasing 47 basis points during
1998. Interest expense increased $730,000 in 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.
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,
------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
--------------------------------------- ----------------------------------------
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 $1,116 95 13 1,224 $1,882 181 54 2,117
Investment securities (156) (14) 13 (157) 48 9 4 61
Mortgage backed securities (775) 77 (66) (764) (141) (13) 2 (152)
Other interest earning assets (354) 4 (2) (352) 346 11 10 367
--------------------------------------- ----------------------------------------
Total interest earning assets (169) 162 (42) (49) 2,135 188 70 2,393
Interest expense
Deposits 101 (390) (8) (297) (69) 127 (2) 56
Borrowings 301 (11) (5) 285 706 (1) (31) 674
--------------------------------------- ----------------------------------------
Total interest bearing liabilities 402 (401) (13) (12) 637 126 (33) 730
--------------------------------------- ----------------------------------------
Change in net interest income $ (571) 563 (29) (37) $1,498 62 103 1,663
======================================= ========================================
</TABLE>
8
<PAGE> 11
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. Increased
mortgage banking activity boosted gains on loan sales to $431,000 in 1998
compared to $23,000 in 1997 primarily as a result of the favorable interest rate
environment that existed in 1998. Service charges and fees increased 12.6% to
$151,000 in 1998 compared to $134,000 in 1997. The number of checking accounts
have increased 19.8% during 1998 as a result of continued emphasis on the
expansion of transaction accounts. 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 EXPENSE
Non-interest expense increased $261,000, or 8.9%, in fiscal 1998 primarily due
to a $209,000 increase in compensation and benefits. Increased staffing and
merit raises increased wages $154,000 for the year ended December 31, 1998.
Depreciation on equipment and software purchased late in 1997 relating to the
data processing conversion and the building expansion in 1998 increased $50,000
as occupancy costs increased $68,000 over fiscal year 1997. Data processing
decreased $66,000 in 1998 as a result of the deconversion costs in 1997. Other
expense increased $59,000 primarily due to technology enhancements. 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 has provided
greater convenience for customers. The Bank also completed construction for
additional office space at the main office to accommodate current and future
increases in staffing. This expansion in 1998 was a $1 million investment for
continued growth of Westwood Homestead.
Non-interest expense increased $342,000, or 13.2%, in fiscal 1997 primarily as a
result of 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 in 1997.
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 ALCO primarily
utilizes "GAP" analysis to measure interest rate 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.
9
<PAGE> 12
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, 1998. 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.
<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 $ 207 89 259 2,126 49,598 52,279 52,279
1-4 Residential adjustable 4,662 3,438 6,916 3,387 7,859 26,262 26,262
Other fixed 323 -- 1,184 873 17,439 19,819 19,819
Other adjustable 6,410 2,172 7,533 -- -- 16,115 16,115
Second mortgage 9 202 3,437 3,648 3,648
Consumer 185 18 302 548 -- 1,053 1,053
Securities 1,143 -- 77 71 211 1,502 1,502
Other investments 5,457 -- -- -- -- 5,457 5,457
-----------------------------------------------------------------------------------
Total $ 18,387 5,717 16,280 7,207 78,544 126,135 126,135
-----------------------------------------------------------------------------------
Transaction accounts $ 21,973 -- -- -- -- 21,973 21,973
Time deposits 21,625 18,665 16,976 7,391 706 65,363 65,363
Borrowings 5,000 1,000 7,350 4,103 17,453 17,453
-----------------------------------------------------------------------------------
Total $ 48,598 19,665 24,326 7,391 4,809 104,789 104,789
-----------------------------------------------------------------------------------
Interest sensitivity GAP $ (30,211) (13,948) (8,046) (184) 73,735
Cumulative GAP (30,211) (44,159) (52,205) (52,389) 21,346
Ratio of interest earning assets
to interest bearing liabilities 37.8% 29.1% 66.9% 97.5% 1633.3%
Ratio of cumulative
GAP to total assets -23.3% -34.0% -40.2% -40.3% 16.4%
</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, 1998.
<TABLE>
<CAPTION>
MVPE NII
Change -------- --------
in Rates % Change % Change
-------- --------
<S> <C> <C>
+300 bps -19.7% -2.7%
+200 bps -13.6% -1.8%
+100 bps -7.1% -0.9%
-100 bps 7.6% 0.8%
-200 bps 15.9% 1.7%
-300 bps 25.2% 3.0%
</TABLE>
10
<PAGE> 13
NON-PERFORMING ASSETS
The Bank's non-performing assets at December 31, 1998 totaled $486,000 which
were 90 days delinquent of which $167,000 has been placed on nonaccrual status.
All these loans were secured by single family properties. 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. Non-performing loans represented 0.41% of
total loans and 0.37% of total assets. 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 appropriate 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's provision for loan losses was $41,000
in 1998 as compared to $101,000 in 1997. The allowance for loan losses at
December 31, 1998 was $294,000 and represented .25% of total loans as compared
to .23% at December 31, 1997. The bank charged-off $14,000 in consumer loans
during 1998.
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, repayments of loans, advances from the Federal Home Loan
Bank, sale of loans in the secondary market, and maturities and sales of
securities.
Firm commitments to grant loans at December 31, 1998 totaled $4.7 million,
unused lines of credit equaled $4.1 million and unadvanced portion of
construction loans equaled $1.8 million. The Bank believes that it has adequate
resources of liquidity to fund such commitments.
The Bank is an FDIC insured institution subject to the FDIC regulatory capital
requirements. The table below provides information with respect to the Bank's
compliance with its regulatory capital requirements at December 31, 1998.
<TABLE>
<CAPTION>
Percent of
(In thousands ) Amount Average Assets
------- --------------
<S> <C> <C>
Tangible Capital $23,535 18.56%
Tangible capital requirement 1,902 1.50%
------- ------
Excess $21,633 17.06%
======= ======
Tier 1 Capital $23,535 18.56%
Tier 1 Capital requirement 3,804 3.00%
------- ------
Excess $19,731 15.56%
======= ======
Risk-based Capital $23,828 31.32%
Risk-based Capital Requirement 6,087 8.00%
------- ------
Excess $17,741 23.32%
======= ======
</TABLE>
11
<PAGE> 14
IMPACT OF NEW ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement standardizes the accounting for derivative
instruments. Under this standard, entities are required to carry all derivative
instruments in the balance sheet at fair value.
Westwood Homestead must adopt Statement 133 by January 1, 2000; however, early
adoption is permitted. On adoption, the provisions of Statement 133 must be
applied prospectively. Westwood Homestead has not determined when it will adopt
Statement 133 nor has it determined the impact that Statement 133 will have on
its consolidated financial statements. Management believes that such
determination will not be meaningful until closer to the date of initial
adoption.
In October 1998, the FASB issued SFAS No 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise. This statement changes the way mortgage banking
enterprises (and enterprises that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise) account for
certain securities and other interests they retain after securitizing mortgage
loans that were held for sale. This statement is effective for the first fiscal
quarter beginning after December 15, 1998. Early adoption is permitted as of the
issuance of the statement. The Company does not expect the implementation of the
statement to have a material impact on the consolidated financial statements.
YEAR 2000 READINESS DISCLOSURE
The paragraphs of this section constitute a "Year 2000 Readiness Disclosure" as
defined in the Year 2000 Information and Readiness Disclosure Act (Pub. L. No.
105-271). The Company faces risks associated with the Year 2000 date change
similar to those faced by other financial institutions. Assessing, remediating,
and testing information technology systems for Year 2000 compliance is a top
priority for the Company. A Year 2000 plan has been approved by the Board of
Directors which includes multiple phases, tasks to be completed, and target
dates for completion. Issues addressed therein include awareness, assessment,
renovation, validation, implementation, testing, and contingency planning.
The Company has assigned the Manager of Information Systems to oversee the Year
2000 project. The Company has completed its awareness, assessment and renovation
phases and is actively involved in validating and implementing its plan. Most of
the material data processing that could be affected by this problem is provided
by the third party service bureau, Fiserv. Fiserv has represented to management
that all of the core data processing code has been renovated to address the Year
2000 issue. At the present time, the Company is well into its testing phase and
anticipates that this phase will be substantially completed by March 31, 1999.
The Company's vendors and suppliers have been contacted for written confirmation
of their product readiness for Year 2000 compliance. Negative or deficient
responses are analyzed and periodically reviewed to prescribe timely actions
within the Company's contingency planning. The Company's main service provider
has completed testing of its mission critical application software and item
processing software; the test results, which have been documented and validated,
indicate the software to be Year 2000 compliant. The Company has authorized the
acceptance of proxy testing by selected data exchange service providers. Federal
Financial Institution Examination Council ("FFIEC") guidance on testing Year
2000 compliance of service providers states that proxy tests are acceptable
compliance tests. In proxy testing, the service provider tests with a
representative sample of financial institutions that use a particular service,
with the
12
<PAGE> 15
results of such testing shared with all similarly situated clients of the
service providers. since the proxy tests have been conducted with financial
institutions that are similar in type and complexity to its own, using the same
version of the Year 2000 ready software and the same hardware and operating
systems. The test results, which have been documented and validated indicate the
data exchange software and item processing activities to be Year 2000 compliant.
The Company also recognizes the importance of determining that its borrowers are
facing the Year 2000 problem in a timely manner to avoid deterioration of the
loan portfolio solely due to this issue. All material relationships have been
identified and questionnaires are being completed to assess the inherent risks.
The Company plans to work on a one-on-one basis with any borrower who has been
identified as having high Year 2000 risk exposure.
Accordingly, management does not believe that the Company has incurred or will
incur material costs associated with the Year 2000 issue since it routinely
upgrades and purchases technologically advanced software and hardware on a
continual basis. However, some reallocation of internal resources and will be
required. There can be no assurances that all hardware and software that the
Company will use will be Year 2000 compliant. Management cannot predict the
amount of financial difficulties it may incur due to customers and vendors
inability to perform according to their agreements with the Company or the
effects that other third parties may cause as a result of this issue. Therefore,
there can be no assurance that the failure or delay of others to address the
issue or that the costs involved in such process will not have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Based on testing results to date, the Company's mission critical systems have
been deemed to be Year 2000 compliant. Therefore, the Company's contingency plan
will focus on business continuity issues affected by service outages not related
to Year 2000. With regards to non-mission critical systems, the Company's
contingency plans are to replace those systems that test as being noncompliant.
Alternatively, some systems could be handled manually on an interim basis. It is
anticipated that the Company's deposit customers will have increased demands for
cash in the latter part of 1999 and correspondingly the Company will maintain
higher liquidity levels.
13
<PAGE> 16
[KPMG LOGO]
1600 PNC Center
201 East Fifth Street
Cincinnati, OH 45202
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,
1998 and 1997, and the related consolidated statements of operations,
comprehensive income, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Cincinnati, Ohio
January 29, 1999
14
<PAGE> 17
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------- -------------
<S> <C> <C>
Cash and cash equivalents:
Cash on hand and in banks $ 693,767 1,253,797
Interest-bearing deposits with banks 1,594,668 8,040,268
Federal funds sold 2,721,415 1,074,214
------------- -------------
Total cash and cash equivalents 5,009,850 10,368,279
------------- -------------
Securities available for sale (amortized cost of $1,000,000
at December 31, 1997) (note 3) -- 999,690
Mortgage-backed securities available for sale (amortized cost of $1,509,510
at December 31, 1998 and $2,108,201 at December 31, 1997) (note 4) 1,529,042 2,150,618
Loans held for sale 288,159 --
Loans receivable (net of allowance for loan losses of $293,685 at
December 31, 1998; $266,263 at December 31, 1997) (notes 5 and 10) 118,637,922 117,648,013
Stock in the Federal Home Loan bank of Cincinnati, at cost (notes 6 and 10) 1,141,400 1,023,800
Accrued interest receivable (note 7) 717,818 712,797
Premises and equipment, at cost, less accumulated depreciation (note 8) 2,176,233 1,082,978
Income taxes (note 11):
Prepaid -- 177,416
Prepaid expenses and other assets 370,367 95,190
------------- -------------
Total assets $ 129,870,791 134,258,781
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 9) $ 87,335,911 88,234,007
Federal Home Loan bank of Cincinnati advances (note 10) 17,453,551 14,764,818
Advances from borrowers for taxes and insurance 789,478 865,808
Accrued expenses and other liabilities 133,823 85,461
Deferred tax liability (note 11) 181,518 162,975
------------- -------------
Total liabilities 105,894,281 104,113,069
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 1998 and 1997 28,434 28,434
Additional paid-in capital 18,811,404 18,789,500
Retained income--substantially restricted (note 11) 15,514,498 14,962,966
Treasury stock, 514,557 shares at cost (6,647,447) --
Accumulated other comprehensive income 12,047 26,957
Employee stock ownership plan (note 12) (2,419,063) (2,686,661)
Management recognition plan (note 12) (1,323,363) (975,484)
------------- -------------
Total stockholders' equity 23,976,510 30,145,712
------------- -------------
Total liabilities and stockholders' equity $ 129,870,791 134,258,781
============= =============
</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, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 9,703,591 8,479,730 6,362,235
Mortgage-backed securities 126,833 891,733 1,043,999
Interest-bearing deposits with banks, investment
securities, and other 388,576 897,310 469,372
----------- ----------- -----------
Total interest income 10,219,000 10,268,773 7,875,606
----------- ----------- -----------
Interest expense:
Deposits (note 9) 4,564,524 4,861,496 4,804,846
Borrowings 987,426 702,834 29,587
----------- ----------- -----------
Total interest expense 5,551,950 5,564,330 4,834,433
----------- ----------- -----------
Net interest income 4,667,050 4,704,443 3,041,173
Provision for loan losses (note 5) 41,460 100,750 63,804
----------- ----------- -----------
Net interest income after provision for loan losses 4,625,590 4,603,693 2,977,369
----------- ----------- -----------
Non-interest income (loss):
Service charges and other fees 151,136 134,258 76,767
Gains on loan sales 431,368 23,020 50,363
Gain (loss) on sales of securities (notes 3 and 4) -- (532,371) 4,458
----------- ----------- -----------
Total non-interest income (loss) 582,504 (375,093) 131,588
----------- ----------- -----------
Non-interest expenses:
Compensation and benefits (note 12) 1,792,387 1,583,341 998,446
Occupancy costs 250,922 182,519 150,020
Franchise tax 454,388 444,555 192,913
Federal deposit insurance premiums (note 13) 51,843 50,828 724,531
Data processing 85,994 152,454 83,528
Legal, accounting, and examination fees 155,923 191,253 142,413
Consulting fees 41,784 37,260 51,798
Advertising 48,481 37,546 47,913
Other 305,585 246,798 193,332
----------- ----------- -----------
Total non-interest expenses 3,187,307 2,926,554 2,584,894
----------- ----------- -----------
Income before income tax expense 2,020,787 1,302,046 524,063
Income tax expense (note 11) 687,000 419,000 165,000
----------- ----------- -----------
Net income $ 1,333,787 883,046 359,063
=========== =========== ===========
Earnings per share--basic and diluted (note 1) $ .58 .34 .16
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Net Income $ 1,333,787 883,046 359,063
Other comprehensive income (loss):
Unrealized holding gain (loss) on available for sale securities arising during
the period, net of tax of $(7,675), $35,487, and $(32,187), respectively (14,910) 68,886 (63,370)
Reclassification adjustment for prior period unrealized (gain) loss
recognized during current period, net of tax of $181,006 and $(1,516)
in 1997 and 1996, respectively -- 351,364 (2,942)
----------- ----------- -----------
Other comprehensive income (loss) (14,910) 420,250 (66,312)
----------- ----------- -----------
Comprehensive income $ 1,318,877 1,303,296 292,751
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
UNALLOCATED
ACCUMULATED COMMON
ADDITIONAL OTHER STOCK
COMMON PAID-IN RETAINED COMPREHENSIVE HELD BY
STOCK CAPITAL INCOME INCOME (LOSS) ESOP
--------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ -- -- 14,517,003 (326,981) --
Net income -- -- 359,063 -- --
Other comprehensive loss -- -- -- (66,312) --
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) -- -- -- -- (2,360,001)
Amortization of employee stock ownership plan (note 12) -- 7,325 -- -- 121,615
-------- ---------- ---------- -------- ----------
Balances at December 31, 1996 28,434 27,709,597 14,876,066 (393,293) (2,238,386)
Net income -- -- 883,046 -- --
Other comprehensive income -- -- -- 420,250 --
Dividends on common stock at $.28 per share -- -- (796,146) -- --
Return of capital distribution at $3.50 per share -- (9,196,587) -- -- (755,225)
Purchase of 76,200 shares by management recognition plan -- 248,806 -- -- --
Amortization of management recognition plan -- -- -- -- --
Amortization of employee stock ownership plan -- 27,684 -- -- 306,950
-------- ---------- ---------- -------- ----------
Balances at December 31, 1997 28,434 18,789,500 14,962,966 26,957 (2,686,661)
Net income -- -- 1,333,787 -- --
Other comprehensive loss -- -- -- (14,910) --
Dividends on common stock at $.38 per share -- -- (782,255) -- --
Purchase of 37,537 shares by management recognition plan -- -- -- -- --
Amortization of management recognition plan -- -- -- -- --
Amortization of employee stock ownership plan -- 21,904 -- -- 267,598
Purchase of 514,557 shares of common stock -- -- -- -- --
-------- ---------- ---------- -------- ----------
Balances at December 31, 1998 $ 28,434 18,811,404 15,514,498 12,047 (2,419,063)
======== ========== ========== -======= ==========
</TABLE>
<TABLE>
<CAPTION>
UNEARNED
COMMON
STOCK HELD TREASURY
BY MRP STOCK TOTAL
---------- ---------- -----------
<S> <C> <C> <C>
Balances at December 31, 1995 -- -- 14,190,022
Net income -- -- 359,063
Other comprehensive loss -- -- (66,312)
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)
Amortization of employee stock ownership plan (note 12) -- -- 128,940
---------- ---------- ----------
Balances at December 31, 1996 -- -- 39,982,418
Net income -- -- 883,046
Other comprehensive income -- -- 420,250
Dividends on common stock at $.28 per share -- -- (796,146)
Return of capital distribution at $3.50 per share -- -- (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 -- -- 334,634
---------- ---------- ----------
Balances at December 31, 1997 (975,484) -- 30,145,712
Net income -- -- 1,333,787
Other comprehensive loss -- -- (14,910)
Dividends on common stock at $.38 per share -- -- (782,255)
Purchase of 37,537 shares by management recognition plan (607,621) -- (607,621)
Amortization of management recognition plan 259,742 -- 259,742
Amortization of employee stock ownership plan -- -- 289,502
Purchase of 514,557 shares of common stock -- (6,647,447) (6,647,447)
---------- ---------- ----------
Balances at December 31, 1998 (1,323,363) (6,647,447) 23,976,510
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 21
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,333,787 883,046 359,063
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Net amortization of premiums and discounts on investment
and mortgage-backed securities 9,983 (21,527) (14,119)
Depreciation of premises and equipment 178,252 122,762 81,863
Federal Home Loan Bank of Cincinnati stock dividend (77,500) (70,200) (63,700)
Employee stock ownership plan amortization 289,502 334,632 128,940
Management recognition plan amortization 259,742 324,678 --
Deferred income tax expense 18,543 72,958 96,717
Accretion of net loan fees deferred 37,942 71,715 (9,471)
Provision for loan losses 41,460 100,750 63,804
(Gain) loss on sales of securities -- 532,371 (4,458)
Gain on loan sales (431,368) (23,020) (50,363)
Net loans originated held for sale (22,097,684) (677,493) (1,063,186)
Proceeds from sale of loans held for sale 22,240,893 824,107 2,283,283
Change in:
Accrued interest receivable (5,021) (123,673) (81,410)
Prepaid expenses and other assets (275,177) 19,019 (14,469)
Accrued expenses and other liabilities 48,362 (39,411) 65,039
Income taxes 185,081 (93,468) 91,542
------------ ------------ ------------
Net cash provided by operating activities 1,756,797 2,237,246 1,869,075
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturing securities available for sale 1,000,000 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 --
Proceeds from sales of mortgage-backed securities available
for sale -- 12,103,218 1,667,340
Principal payments on mortgage-backed securities 588,708 873,228 558,848
Net increase in loans receivable (1,069,310) (32,891,317) (11,334,609)
Additions to premises and equipment (1,271,507) (598,401) (98,331)
Purchase of Federal Home Loan Bank of Cincinnati stock (40,100) -- --
------------ ------------ ------------
Net cash used in investing activities (792,209) (17,510,582) (12,144,452)
------------ ------------ ------------
</TABLE>
(Continued)
19
<PAGE> 22
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $ (898,096) 9,151,229 (2,665,283)
Proceeds from stock conversion, net of conversion costs -- -- 27,730,706
Dividends and return of capital on common stock (782,255) (10,747,958) --
Purchase of common stock by ESOP -- -- (2,360,001)
Purchase of common stock by MRP (607,622) (1,051,356) --
Short-term advances (repayments) from the Federal Home Loan
Bank of Cincinnati, net (3,000,000) 7,000,000 --
Long-term advances from the Federal Home Loan Bank
of Cincinnati 5,700,000 7,650,000 --
Repayments on long-term advances from the Federal Home Loan
Bank of Cincinnati (11,267) (12,640) (11,146)
Net increase (decrease) in advances from borrowers for taxes
and insurance (76,330) 231,951 132,366
Purchase of treasury shares (6,647,447) -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities (6,323,017) 12,221,226 22,826,642
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (5,358,429) (3,052,110) 12,551,265
Beginning cash and cash equivalents 10,368,279 13,420,389 869,124
------------ ------------ ------------
Ending cash and cash equivalents $ 5,009,850 10,368,279 13,420,389
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 23
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(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 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) SEGMENT INFORMATION
The Bank's primary business activities include attracting deposits
from the general public and originating one-to-four family
residential property loans and also multi-family, nonresidential
and construction real estate loans in its market area. The Bank
also makes construction and consumer loans. Operations are managed
and financial performance is evaluated at the bank level.
Accordingly, all of the Company's banking operations are
considered by management to be aggregated in one reportable
operating segment.
(c) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Cash
equivalents consist of interest bearing deposits with banks and
Federal funds sold.
(Continued)
21
<PAGE> 24
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(d) 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. 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.
(e) 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.
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 probable loan losses is based on a
periodic analysis of the loan portfolio and reflects an amount,
which in management's judgment is appropriate to provide for
probable 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
probable loan losses when the collectibility of loan principal is
unlikely. Recoveries of loans previously charged off are credited
to the allowance.
(Continued)
22
<PAGE> 25
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Management believes that the allowance for loan losses is
appropriate. 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
impaired 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 1998, approximately $261,000
of servicing rights were capitalized. The carrying value of
mortgage servicing rights approximated $244,000 and $30,000 at
December 31, 1998 and 1997, 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 $251,000 and $35,000
at December 31, 1998 and 1997, respectively. Quoted market prices
are used, when available, as the basis of measuring the fair value
of servicing rights.
The carrying amount of the servicing rights is measured for
impairment each quarter. The servicing portfolio is first
stratified by original terms of the loans, and then by interest
rates within the original terms of the loans for measuring
impairment. If the carrying value of an individual stratum exceeds
its fair value, a valuation allowance would be established. No
valuation allowance was recorded at December 31, 1998 and 1997, 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
(Continued)
23
<PAGE> 26
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
have accrued at the loan's contractual rate applied to the
recorded loan balance. The Company did not have any material
impaired loans during 1998, 1997 or 1996.
(f) 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.
(g) 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.
(h) STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with
Statement of Financial Accounting Standards ("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.
(i) EARNINGS PER SHARE
The Company calculates earnings per share in accordance with 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, net of
assumed repurchases under the treasury stock method. 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.
(Continued)
24
<PAGE> 27
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
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 DECEMBER 31, 1998
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS $1,333,787 2,302,807 .58
EFFECT OF DILUTIVE SECURITIES:
Options -- 4,703
---------- ----------
DILUTED EPS
Income available to
common stockholders $1,333,787 2,307,510 .58
========== ========= ===
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EPS $ 883,046 2,604,969 .34
EFFECT OF DILUTIVE SECURITIES:
Options -- 9,276
---------- ---------
DILUTED EPS
Income available to
common stockholders $ 883,046 2,614,245 .34
========== ========= ===
</TABLE>
(j) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components.
Comprehensive income is defined as the change in equity (net
assets) of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources. For the
Company, this includes net income and unrealized gains and losses
on available for sale investment securities. This Statement
requires comprehensive income to be reported in a financial
statement that is displayed with the same prominence as other
financial statements. The implementation of SFAS No. 130 did not
have a material impact on the Company's consolidated financial
statements.
(Continued)
25
<PAGE> 28
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(k) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with
the current year presentation.
(l) 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. Costs related to the Conversion of
$703,444 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, 1998, the Bank could
make capital distributions of approximately $9,000,000 without prior
regulatory approval.
(Continued)
26
<PAGE> 29
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(3) SECURITIES AVAILABLE FOR SALE
The following summarizes the amortized cost, gross unrealized gains,
gross unrealized losses and market value of securities available for
sale, which are comprised entirely of United States Government agency
obligations:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ----- -----
<S> <C> <C> <C> <C>
December 31, 1998 $ -- -- -- --
============== == ==== =======
December 31, 1997 $ 1,000,000 -- (310) 999,690
============== == ==== =======
</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.
(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, 1998
-------------------------------------------------------------------------
PRINCIPAL UNAMORTIZED UNEARNED AMORTIZED MARKET
BALANCE PREMIUMS DISCOUNTS COST VALUE
---------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
GNMA certificates $ 257,492 5,121 (419) 262,194 280,222
FHLMC certificates 729,152 13,547 -- 742,699 735,244
FNMA certificates 498,570 6,417 (370) 504,617 513,576
---------- ---------- -------- --------- ---------
$1,485,214 25,085 (789) 1,509,510 1,529,042
========== ========== ======== ========= =========
</TABLE>
(Continued)
27
<PAGE> 30
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
<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
============== =============== ============== ============== ==============
</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, 1998
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
GNMA certificates $ 262,194 18,028 -- 280,222
FHLMC certificates 742,699 1,225 (8,680) 735,244
FNMA certificates 504,617 8,959 -- 513,576
-------------- --------------- -------------- ------------
$ 1,509,510 28,212 (8,680) 1,529,042
============== =============== ============== ============
DECEMBER 31, 1997
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- --------------- -------------- ------------
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>
Estimated market values for mortgage-backed securities are based on
published market or security dealers' estimated prices.
(Continued)
28
<PAGE> 31
'
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
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.
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, 1998
------------------------------
AMORTIZED MARKET
COST VALUE
-------------- -------------
<S> <C> <C>
Due within one year or less $ 237 237
Due after one year through five years 146,972 150,538
Due after five years through ten years 85,855 89,376
Due after ten years 1,276,446 1,288,891
-------------- -------------
$ 1,509,510 1,529,042
============== =============
</TABLE>
(5) LOANS RECEIVABLE, NET
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Real estate loans:
One-to-four family residential $ 75,427,619 87,233,765
Multi-family residential 19,169,687 14,794,457
Construction 4,220,783 4,709,315
Other residential and non-residential 20,771,992 11,683,227
Consumer loans 1,053,479 441,366
Commercial loans (non-mortgage) 299,649 217,428
--------------- --------------
120,943,209 119,079,558
--------------- --------------
Less:
Loans in process 1,766,339 957,961
Deferred loan fees, net 245,263 207,321
Allowance for loan losses 293,685 266,263
--------------- --------------
Total $ 118,637,922 117,648,013
=============== ==============
</TABLE>
(Continued)
29
<PAGE> 32
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year $ 266,263 165,513 101,709
Provision for loan losses 41,460 100,750 63,804
Loan charge-offs 14,038 -- --
Recoveries -- -- --
---------- ---------- ----------
Balance, end of year $ 293,685 266,263 165,513
========== ========== ==========
</TABLE>
The Company serviced loans of approximately $18.8 million and $3.1
million at December 31, 1998 and 1997, respectively.
The Company had $166,858 in nonaccrual loans as of December 31, 1998.
The Company had no nonaccrual loans as of December 31, 1997, and 1996.
Most of the Company's loan activity is with customers located within
Hamilton County, Ohio and contiguous counties.
(6) INVESTMENTS REQUIRED BY LAW
A minimum of 1% of net home mortgage loans (mortgage loans and contracts
secured by residential property less loans in process on residential
property) is required to be maintained in Federal Home Loan Bank of
Cincinnati (FHLB) common stock. This minimum requirement was $1,082,000
at December 31, 1998.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Mortgage loans $ 647,219 649,986
Investment securities and other 56,531 42,271
Mortgage-backed securities 14,068 20,540
--------- ---------
$ 717,818 712,797
========= =========
</TABLE>
(Continued)
30
<PAGE> 33
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(8) PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------- -----------
<S> <C> <C>
Land $ 202,050 15,400
Buildings and improvements 1,791,682 673,540
Furniture, fixtures, and equipment 1,112,518 848,001
Construction in progress -- 297,803
----------- -----------
3,106,250 1,834,744
Accumulated depreciation 930,017 751,766
----------- -----------
$ 2,176,233 1,082,978
=========== ===========
</TABLE>
(9) DEPOSITS
Deposits are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------- ----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT PERCENT RATE AMOUNT PERCENT RATE
------------- ---------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Savings accounts $ 3,599,685 4.1% 1.98% 3,757,636 4.2% 2.00%
NOW accounts 9,527,061 10.9 2.67 7,123,483 8.1 3.37
Money market deposit
accounts 8,846,478 10.1 3.64 10,242,860 11.6 3.74
Certificate accounts,
classified
at date of issuance:
6 months or less 9,487,118 10.9 5.09 6,325,975 7.2 5.71
1 year 19,145,332 21.9 5.39 16,670,939 18.9 5.99
22 months -- -- -- 74,370 .1 6.32
2 years 14,323,735 16.4 5.84 14,603,575 16.6 6.17
33 months 63,706 .1 6.06 1,706,995 1.9 6.57
3 years 4,311,105 4.9 5.98 3,732,962 4.2 6.25
5 or more years 18,031,691 20.7 7.06 23,995,212 27.2 8.01
---------- ---- ---- ---------- ---- ----
Total certificate
accounts 65,362,687 74.9 5.95 67,110,028 76.1 6.75
---------- ---- ---- ---------- ---- ----
Total deposits $87,335,911 100.0% 5.19% 88,234,007 100.0% 5.93%
=========== ===== ==== ========== ===== ====
</TABLE>
(Continued)
31
<PAGE> 34
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Deposits with balances greater than $100,000 at December 31, 1998 and
1997 approximate $15,956,116 and $15,460,195, respectively.
Certificate accounts at December 31, 1998 are scheduled to mature as
follows:
<TABLE>
<CAPTION>
<S> <C>
In the year ending:
December 31, 1999 $ 39,790,339
December 31, 2000 13,436,641
December 31, 2001 3,539,219
December 31, 2002 4,138,901
After December 31, 2002 4,457,587
-------------
$ 65,362,687
=============
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Savings accounts $ 70,401 74,708 115,555
NOW accounts 216,614 140,814 38,201
Money market deposit
accounts 343,581 365,633 443,359
Certificate accounts 3,933,928 4,280,341 4,207,731
------------ ------------ -------------
Total interest expense
on deposits $ 4,564,524 4,861,496 4,804,846
============ ============ =============
</TABLE>
Interest paid (including interest credited) on deposits and borrowings
was approximately $4.6 million, $4.9 million, and $4.8 million for the
years ended December 31, 1998, 1997, and 1996, respectively.
(Continued)
32
<PAGE> 35
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(10) FEDERAL HOME LOAN BANK OF CINCINNATI ADVANCES
Advances from the FHLB of Cincinnati are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE DECEMBER 31,
MATURING IN INTEREST RATE AT -----------------------------
FISCAL YEAR DECEMBER 31, 1998 1998 1997
------------------ ---------------------- -----------------------------
<S> <C> <C> <C>
1998 $ -- 7,000,000
1999 5.60 6,000,000 2,000,000
2000 5.85 4,650,000 2,650,000
2001 5.76 2,700,000 1,000,000
2004 8.17 103,551 114,818
2005 6.06 2,000,000 2,000,000
2007 6.95 2,000,000 --
------------ -----------
$ 17,453,551 14,764,818
============ ==========
</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 $26,180,371 at December 31,
1998.
(11) INCOME TAXES
Total income tax provision was allocated as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------- ----------
<S> <C> <C> <C>
Statements of operations $ 687,000 419,000 165,000
Stockholders' equity:
Unrealized gains (losses) on
securities available for sale (7,675) 216,493 (33,703)
---------- ----------- ---------
Total income tax provision $ 679,325 635,493 131,297
========== =========== =========
</TABLE>
(Continued)
33
<PAGE> 36
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Income tax expense from operations is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current $ 668,457 346,042 68,283
Deferred 18,543 72,958 96,717
--------- --------- ----------
$ 687,000 419,000 165,000
========= ========= ==========
</TABLE>
Actual income tax expense for the years ended December 31, 1998, 1997,
and 1996 differs from the "expected" amounts for those years computed by
applying the statutory U.S. Federal corporate income tax rate of 34% to
income before income tax expense as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ------------------------ -----------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
---------- --------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax expense $ 687,068 34.0% $ 442,696 34.0% $ 178,181 34.0%
Increase (decrease) in income
taxes resulting in:
Graduated tax rates -- -- -- -- (1,949) (.4)
ESOP compensation (9,446) (.5) (15,869) (1.2) -- --
Other 9,378 .5 (7,827) (.6) (11,232) (2.1)
--------- ------- --------- ------ --------- --------
$ 687,000 34.0% $ 419,000 32.2% $ 165,000 31.5%
========= ====== ========= ====== ========= ========
</TABLE>
(Continued)
34
<PAGE> 37
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
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,
-------------------------
1998 1997
------------ ----------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 99,853 90,529
Accrued expenses, principally due to
differences in benefit accruals 149,819 129,786
Deferred loan fees 109,838 164,758
Premises and equipment, principally due
to differences in depreciation 11,295 20,326
Other 57,422 --
----------- ----------
Total gross deferred tax assets 428,227 405,399
Less-valuation allowance -- --
----------- ----------
Total net deferred tax assets 428,227 405,399
----------- ----------
Deferred tax liabilities:
Unrealized gain on securities 6,641 14,316
Federal Home Loan Bank stock dividends 187,373 161,023
Deferred loan costs 415,731 393,035
----------- ----------
Total gross deferred tax liability 609,745 568,374
----------- ----------
Net deferred tax liability $ (181,518) (162,975)
=========== ==========
</TABLE>
No valuation allowance for deferred tax assets was recorded as of
December 31, 1998 and 1997 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 future periods as
permitted by the tax law to allow for utilization of the future
deductible amounts.
(Continued)
35
<PAGE> 38
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
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, 1998 and 1997
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 $575,200, $527,000, and $152,000
for the years ended December 31, 1998, 1997, and 1996, respectively.
(12) BENEFIT PLANS
(a) 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 $19,000 for
1998 and $18,000 for 1997. There was one retiree from the Board of
Directors receiving benefits under the Plan during the year ended
December 31, 1998 and 1997 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 $414,000 and $580,000 at
December 31, 1998 and 1997, respectively.
(Continued)
36
<PAGE> 39
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(b) 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 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 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 are 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 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, 1998, 1997, and 1996, the Company released 21,432, 27,370, and
11,692 shares to employees, respectively, with corresponding
compensation expense of $275,000, $337,000 and $130,000,
respectively. The remaining 214,326 unallocated shares had a fair
value of approximately $2,036,000 at December 31, 1998.
(c) 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 years ended December 31, 1998 and 1997, the Company
recognized $260,000 and $325,000, respectively, in compensation
expense related to the MRP.
(Continued)
37
<PAGE> 40
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(d) 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, 1998, there were 279,192 options outstanding under
the Option Plan. The per share weighted-average fair value of
stock options granted during 1998 and 1997 was $2.62 and $6.54,
respectively. The fair value of each option grant is estimated on
the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions used for grants in
1998 and 1997: expected dividend yield of 2% and 2.5%; expected
volatility of 15% for both years; risk-free interest rate of 5.85%
and 6.2% and an expected life of 10 years for both years (based on
the terms of the grant), respectively.
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>
1998 1997
------------ -----------
<S> <C> <C> <C>
Net income As reported $ 1,333,787 883,046
Pro forma 1,121,232 682,942
Net income per common share As reported .58 .34
Pro forma .49 .26
</TABLE>
Pro forma net income reflects options granted in 1998 and 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 four years.
(Continued)
38
<PAGE> 41
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
Information regarding shares under option is as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
WEIGHTED- WEIGHTED-
AVERAGE NUMBER AVERAGE
NUMBER OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Employees
Outstanding at beginning of year 127,881 $ 14.01 --
Awarded 26,410 10.00 104,991 $ 17.06
Exercised -- --
Adjustment for return of capital
distribution -- 22,890
Expired -- --
---------- ---------
Outstanding at end of year 154,291 $ 13.40 127,881 $ 14.01
========= =========
Exercisable at end of year 55,520 $ 13.63 25,576 $ 14.01
========= =========
Directors
Outstanding at beginning of year 103,901 $ 14.01 --
Awarded 21,000 10.00 85,302 $ 17.06
Exercised -- --
Adjustment for return of capital
distribution -- 18,599
Expired -- --
---------- ---------
Outstanding at end of year 124,901 $ 13.34 103,901 $ 14.01
========= =========
Exercisable at end of year 45,766 $ 13.64 20,783 $ 14.01
========= =========
</TABLE>
At December 31, 1998 and 1997, the weighted-average remaining
contractual life of outstanding options was 8.85 and 9.75 years,
respectively.
(e) 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. Contributions
to the plan were approximately $0, $0 and $13,000 for the years
ended December 31, 1998, 1997, and 1996, respectively.
(Continued)
39
<PAGE> 42
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(13) COMMITMENTS AND CONTINGENCIES
(a) 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>
1998 1997
------------ ------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit
risk:
Undisbursed construction loans in process $ 1,766,339 957,961
Undisbursed lines of credit on home equity loans 4,142,837 3,672,280
Loan commitments:
Adjustable (6.375% to 8.125% and 6.50% to 8.50%
at December 31, 1998 and 1997, respectively) 1,261,720 1,378,920
Fixed (6.625% to 13.25% and 7.13% to 13.99%
at December 31, 1998 and 1997, respectively) 3,430,155 1,810,300
=========== =========
</TABLE>
Market risk arises from fixed rate loan commitments. A rise in
interest rates prior to closing will cause a decrease in the fair
value of fixed rate loan commitments.
(b) CONTINGENCIES
The Company can be involved in various claims and legal actions
arising in the ordinary course of business. At December 31, 1998,
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)
40
<PAGE> 43
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
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.
(c) 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:
(a) CASH EQUIVALENTS
The carrying amount of cash equivalents is a reasonable estimate
of fair value.
(b) SECURITIES
Estimated market values for securities are based on published
market or securities dealers' estimated prices.
(c) 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.
(Continued)
41
<PAGE> 44
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(d) 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.
(e) 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, 1998 DECEMBER 31, 1997
----------------------------- ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
(thousands) (thousands) (thousands) (thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 5,009 5,009 10,368 10,368
Securities -- -- 1,000 1,000
Mortgage-backed securities 1,529 1,603 2,151 2,151
Loans held for sale 288 288 -- --
Loans receivable:
1-4 family adjustable rate mortgages 26,262 26,587 29,807 29,456
Other adjustable 15,815 15,855 15,812 15,394
1-4 family fixed rate mortgages 52,279 52,551 56,707 57,255
Other fixed 19,819 20,028 12,764 12,476
Second mortgages 3,648 4,191 2,373 2,678
Consumer loans 1,054 1,056 441 449
Commercial 300 305 217 217
Less: Allowance for loan losses (294) (294) (266) (266)
Deferred loan fees (245) (245) (207) (207)
----------- ---------- ---------- -----------
Net loans $ 118,638 120,034 117,648 117,452
=========== ========== ========== ===========
</TABLE>
(Continued)
42
<PAGE> 45
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------- ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
(thousands) (thousands) (thousands) (thousands)
<S> <C> <C> <C> <C>
Financial liabilities:
Deposits:
Certificate accounts $ 65,363 66,435 67,110 67,958
Money market deposit accounts 8,846 8,846 10,243 10,243
Savings accounts 3,600 3,600 3,758 3,758
Now accounts 9,527 7,606 7,123 7,123
----------- ---------- ---------- -----------
Total deposits $ 87,336 86,487 88,234 89,082
=========== ========== ========== ===========
FHLB advances $ 17,454 18,076 14,765 14,419
=========== ========== ========== ===========
</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, 1998, that the Bank meets all capital adequacy requirements
to which it is subject.
As of December 31, 1998 and 1997, 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)
43
<PAGE> 46
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
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, 1998:
Tangible Capital $ 23,534,815 18.56% $ 1,901,790 1.50% $ 6,339,300 5.00%
Tier I/Core Capital 23,534,815 18.56% 3,803,580 3.00% 7,607,160 6.00%
Risk-based Capital 23,828,500 31.32% 6,086,640 8.00% 7,608,300 10.00%
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% 5,803,760 8.00% 7,254,700 10.00%
</TABLE>
(16) PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial data for Westwood Homestead Financial Corporation
(Parent company only) at December 31, 1998 and 1997 and for the years
ended December 31, 1998 and 1997 are as follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Assets:
Interest-bearing deposits with banks $ 372,971 26,790
Accrued interest receivable 1,339 164
Investment in subsidiary 23,546,863 29,042,492
Prepaid expenses 55,337 24,910
Due from subsidiary -- 1,051,356
------------- -------------
Total assets $ 23,976,510 30,145,712
============= =============
Liabilities and stockholders' equity:
Stockholder's equity 23,976,510 30,145,712
------------- -------------
Total liabilities and stockholders' equity $ 23,976,510 30,145,712
============= =============
</TABLE>
(Continued)
44
<PAGE> 47
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Interest-bearing deposits with banks $ 40,896 575,745
Non-interest expenses 122,997 160,003
------------- -------------
Income (loss) before income taxes and
equity in earnings of subsidiary (82,101) 415,742
Income tax expense (benefit) (28,000) 141,000
------------- -------------
Income (loss) before equity in earnings
of subsidiary (54,101) 274,742
Equity in undistributed earnings of subsidiary 1,387,888 608,304
------------- -------------
Net income $ 1,333,787 883,046
============= =============
</TABLE>
(Continued)
45
<PAGE> 48
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,333,787 883,046
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Increase in accrued interest receivable (1,175) (164)
Equity in earnings of subsidiary (1,387,888) (608,304)
Increase in prepaid expenses (30,427) (23,511)
(Increase) decrease in due from subsidiary 1,051,356 (1,051,356)
Decrease in accrued expenses -- (37,700)
------------- --------------
Net cash provided by (used in) operating
activities 965,653 (837,989)
------------- --------------
Cash flows from investing activities -
Capital distribution from subsidiary 6,900,000 --
------------- --------------
Net cash provided by investing activities 6,900,000 --
------------- --------------
Cash flows from financing activities:
Purchase treasury stock (6,647,447) --
Payment of quarterly dividend (872,025) --
Payment of return of capital and cash dividends -- (10,747,957)
------------- ---------------
Net cash used in financing activities (7,519,472) (10,747,957)
------------- --------------
Net increase (decrease) in cash and cash equivalents 346,181 (11,585,946)
Cash and cash equivalents at beginning of year 26,790 11,612,736
------------- --------------
Cash and cash equivalents at end of year $ 372,971 26,790
============= ==============
</TABLE>
(Continued)
46
<PAGE> 49
WESTWOOD HOMESTEAD FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for
the years ended December 31, 1998 and 1997 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1998 1998 1998 1998
----------------- ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Total interest income $ 2,525 2,527 2,520 2,647
Total interest expense 1,388 1,379 1,384 1,400
Net interest income 1,137 1,148 1,136 1,247
Provision for loan losses 6 22 3 10
Non-interest income 101 76 330 75
Non-interest expenses and
provision for income taxes 901 922 1,046 1,006
Net income (loss) 331 280 417 306
Basic and diluted earnings per
common share .16 .13 .18 .12
</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 $ 2,782 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>
(Continued)
47
<PAGE> 50
BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
WESTWOOD HOMESTEAD FINANCIAL CORPORATION
and WESTWOOD HOMESTEAD SAVINGS BANK
<TABLE>
<CAPTION>
<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
</TABLE>
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 Manager Information Systems
Catherine A. Armstrong 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
<PAGE> 51
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
CORPORATE OFFICE LEGAL COUNSEL
Westwood Homestead Financial Corp. Ritter & Randolph
3002 Harrison Avenue 105 E. Fourth Street
Cincinnati, OH 45211 Cincinnati, OH 45202
(513) 661-5735
SPECIAL COUNSEL
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, DC 20036
<TABLE>
<CAPTION>
<S> <C>
STOCK TRANSFER AGENT ANNUAL REPORT ON FORM 10-K
Inquiries regarding stock transfer, A copy of the Company's annual report
registration, on lost certificates or Form 10-K, filed with SEC is available without
changes in name and address should be charge by writing:
directed to the stock transfer agent and
registrar by writing:
Theresa Crawford John E. Essen CPA
Stock Transfer Administrator Chief Financial Officer
Firstar Westwood Homestead Financial Corp.
P.O. Box 1118 3002 Harrison Avenue
Cincinnati, OH 45201-1118 Cincinnati, OH 45211
</TABLE>
MARKET MAKERS
- --------------------------------------------------------------------------------
ABN AMRO Securities (USA) Inc Sandler O'Neill & Partners, L.P.
Keefe, Bruyette & Woods, Inc. S. J. Wolfe & Co.
Friedman Billings Ramsey & Co.
As of February 3, 1999
- --------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Stockholders of Westwood Homestead Financial Corporation
will be held on April 12, 1999, 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
<TABLE>
<CAPTION>
Percentage State of
Subsidiaries (1) Owned Incorporation
- ---------------- ----- -------------
<S> <C> <C>
Westwood Homestead Savings Bank 100% United States
</TABLE>
- ----------------
[FN]
(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.
</FN>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 694
<INT-BEARING-DEPOSITS> 1,595
<FED-FUNDS-SOLD> 2,721
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,529
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 118,638
<ALLOWANCE> 294
<TOTAL-ASSETS> 129,871
<DEPOSITS> 87,336
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,104
<LONG-TERM> 17,454
<COMMON> 28
0
0
<OTHER-SE> 23,949
<TOTAL-LIABILITIES-AND-EQUITY> 23,977
<INTEREST-LOAN> 9,704
<INTEREST-INVEST> 127
<INTEREST-OTHER> 388
<INTEREST-TOTAL> 10,219
<INTEREST-DEPOSIT> 4,565
<INTEREST-EXPENSE> 5,552
<INTEREST-INCOME-NET> 4,667
<LOAN-LOSSES> 41
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3187
<INCOME-PRETAX> 2,021
<INCOME-PRE-EXTRAORDINARY> 2,021
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,334
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
<YIELD-ACTUAL> 2.66
<LOANS-NON> 167
<LOANS-PAST> 319
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 266
<CHARGE-OFFS> 14
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 294
<ALLOWANCE-DOMESTIC> 294
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
