Possible Change in the Offering Range

 

RP Financial, LC will update its appraisal before we complete the offering.  If, as a result of demand for the shares, or changes in market conditions, RP Financial, LC determines that our pro forma market value has increased, we may sell up to 1,851,500 shares in the offering without further notice to you.  If our pro forma market value at that time is either below $12.3 million or above $18.9 million, then, after consulting with the Office of Thrift Supervision,   or the Federal Reserve Board as its successor, we may:

 

●

terminate the stock offering and promptly return all funds;

 

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set a new offering range and give all subscribers the opportunity to confirm, modify or rescind their purchase orders for shares of West End Indiana Bancshares, Inc.’s common stock; or

 

●

take such other actions as may be permitted, to the extent such permission is required, by the Office of Thrift Supervision or the Federal Reserve Board as its successor, and the Securities and Exchange Commission.

 

Possible Termination of the Offering

 

We may terminate the offering at any time prior to the special meeting of members of West End Bank, MHC that is being called to vote upon the conversion and to approve the establishment and funding of the charitable foundation, and at any time after member approval with the approval, to the extent such approval is required, of the Office of Thrift Supervision, or the Federal Reserve Board, as its successor.

 

We must sell a minimum of 1,190,000 shares to complete the offering. If we terminate the offering because we fail to sell the minimum number of shares (not counting shares that we will contribute to the charitable foundation) or for any other reason, we will promptly return your funds with interest at our statement savings rate and we will cancel deposit account withdrawal authorizations.

 

Purchases by Officers and Directors

 

We expect our directors and officers, together with their associates, to subscribe for 70,750 shares of common stock in the offering, or 5.9% of the shares to be sold at the minimum of the offering range.  See “Subscriptions by Directors and Officers.”

 

Benefits to Management and Potential Dilution to Stockholders Following the Conversion

 

We expect our tax-qualified employee stock ownership plan to purchase 8% of the total number of shares of common stock that we sell in the offering (including shares contributed to our charitable foundation), or 131,840 shares of common stock, assuming we sell the maximum of the shares proposed to be sold.

 

 

We also intend to implement one or more stock-based benefit plans no earlier than six months after completion of the conversion.  Stockholder approval of these plans will be required, and the stock-based benefit plans cannot be implemented until at least six months after the completion of the conversion pursuant to applicable regulations. We have not yet determined whether we will present these plans for stockholder approval within 12 months following the completion of the conversion or more than 12 months after the completion of the conversion.  If presented more than 12 months after the completion of the conversion, these plans would require the approval of our stockholders by a majority of votes cast; otherwise, they would require the approval of our stockholders by a majority of votes eligible to be cast.  Further, there are a number of restrictions that would apply to these plans if adopted within one year of the conversion, including limits on awards to non-employee directors and officers and vesting.  See “Management of West End Indiana Bancshares, Inc. – Stock-Based Benefit Plans.”  For example, if adopted within 12 months following the completion of the conversion, the stock-based benefit plans will reserve a number of shares of common stock equal to not more than 4% of the shares sold in the offering (including shares contributed to our charitable foundation) for restricted stock awards to key employees and directors, at no cost to the recipients, and will also reserve a number of stock options equal to not more than 10% of the shares of common stock sold in the offering (including shares contributed to our charitable foundation ) for key employees and directors.

 

If 4% of the shares of common stock sold in the offering (including shares contributed to our charitable foundation) are awarded under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of up to approximately 3.8% in their ownership interest in West End Indiana Bancshares, Inc.  If 10% of the shares of common stock sold in the offering (including shares contributed to our charitable foundation) are issued upon the exercise of options granted under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of approximately 9.1% in their ownership interest in West End Indiana Bancshares, Inc.

 

In connection with the conversion, we expect to enter into employment agreements with certain of our executive officers.  See “Management of West End Indiana Bancshares, Inc.—Executive Officer Compensation” and “Risk Factors – We have entered into employment agreements that may increase our compensation costs” for a further discussion of these agreements, including their terms and potential costs, as well as a description of other benefits arrangements.

 

 

		Number of Shares to be Granted or Purchased(3)												Dilution Resulting From Issuance of Shares for Stock Benefit Plans				Value of Grants (1)
		At Minimum of Offering Range				At Maximum of Offering Range				As a Percentage of Common Stock to be Issued (2)								At Minimum Offering Range				At Maximum Offering Range
																		(Dollars in thousands)
Employee stock ownership plan			98,240				151,160				8.00	%			—			$	982			$	1,512
Stock awards			49,120				75,580				4.00				3.8	%			491				756
Stock options			122,800				188,950				10.00				9.1	%			365				561
Total			270,160				415,690				22.00	%			12.3	%		$	1,838			$	2,829

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Share Price				49,120 Shares Awarded at Minimum of Offering Range				57,520 Shares Awarded at Midpoint of Offering Range				65,920 Shares Awarded at Maximum of Offering Range				75,580 Shares Awarded at Maximum of Offering Range, As Adjusted
(In thousands, except share price information)
$	8.00			$	392,960			$	460,160			$	527,360			$	604,640
	10.00				491,200				575,200				659,200				755,800
	12.00				589,440				690,240				791,040				906,960
	14.00				687,680				805,280				922,880				1,058,120

Exercise Price				Grant-Date Fair Value Per Option				122,8000 Options at Minimum of Range				143,800 Options at Midpoint of Range				164,800 Options at Maximum of Range				188,950 Options at Maximum of Range, As Adjusted
(In thousands, except share price information)
$	8.00			$	2.38			$	292,264			$	342,244			$	392,224			$	449,701
	10.00				2.97				364,716				427,086				489,456				561,182
	12.00				3.56				437,168				511,928				586,688				672,662
	14.00				4.16				510,848				598,208				685,568				786,032

Market for Common Stock

 

We anticipate that the common stock sold in the offering will be traded and quoted on the OTC Bulletin Board.  See “Market for the Common Stock.”

 

Our Policy Regarding Dividends

 

Our Board of Directors will have the authority to declare dividends on our common stock, subject to statutory and regulatory requirements.  However, no decision has been made with respect to the amount, if any, and timing of any dividend payments.  See “Our Policy Regarding Dividends.”

 

Conditions to Completion of the Conversion and the Offering

 

We cannot complete the conversion and the offering unless:

 

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the plan of conversion and reorganization is approved by at least a majority of votes eligible to be cast by members of West End Bank, MHC. A special meeting of members to consider and vote upon the plan of conversion and reorganization and to vote upon the establishment and funding of the charitable foundation has been set for __________, 2011;

 

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we have received orders to purchase at least the minimum number of shares of common stock offered; and

 

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we receive all required final approvals of the Office of Thrift Supervision and the Federal Reserve Board, as applicable as the successor to the Office of Thrift Supervision, to complete the conversion and the offering.

Material Income Tax Consequences

 

The conversion qualifies as a tax-free reorganization.  Neither West End Indiana Bancshares, Inc., West End Bancshares, Inc., West End Bank, S.B., West End Bank, MHC nor Eligible Account Holders, Supplemental Eligible Account Holders or Other Members will recognize any gain or loss as a result of the conversion. See “—Material Income Tax Consequences” for a complete discussion of the income tax consequences of the transaction.

 

 

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How You Can Obtain Additional Information

 

Our branch office personnel may not, by law, assist with investment-related questions about the offering.  If you have any questions regarding the conversion or the offering, please call our Stock Information Center, toll free, at [SIC phone], Monday through Friday, between 8:30 a.m. and 4:30 p.m., Eastern Time.

 

TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO THE EXPIRATION DATE OF [EXPIRE DATE] IN ACCORDANCE WITH FEDERAL LAW, NO PROSPECTUS WILL BE MAILED OR HAND-DELIVERED ANY LATER THAN FIVE DAYS OR TWO DAYS, RESPECTIVELY, PRIOR TO [EXPIRE DATE].

 

 

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RISK FACTORS

	You should consider carefully the following risk factors in evaluating an investment in our shares of common stock.

 

Risks Related to Our Business

 

Our loan portfolio has greater risk than those of many savings institutions due to the substantial amount of indirect and other consumer loans in our portfolio.

 

Our loan portfolio includes a substantial number of indirect automobile loans which are automobile loans referred to us by participating automobile dealerships, as well as other consumer loans.  At March 31, 2011, our consumer loans totaled $53.4 million, or 34.6% of our total loan portfolio, of which indirect loans totaled $45.7 million, representing 29.6% of total loans.  At March 31, 2011, $13.3 million, or 29.1% of our total indirect loan portfolio, consisted of automobile loans where the borrower’s credit score was 660 or less.  These loans may be considered subprime.

 

As of March 31, 2011, we had $541,000 of consumer loans delinquent 60 days or more, which was 19.4% of total delinquent loans 60 days or more past due, and an additional $285,000 of non-performing consumer loans, which includes non-accrual loans and accruing loans past due 90 days or more. For the quarter ended March 31, 2011 and the year ended December 31, 2010, we had net charge-offs of $59,000 and $343,000, respectively, in our consumer loan portfolio.

 

Consumer loans generally have a greater risk of loss or default than one- to four-family residential real estate loans, particularly in the case of loans that are secured by rapidly depreciable assets, such as automobiles, or loans that are unsecured.  In these cases, we face the risk that any collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Thus, the recovery and sale of such property could be insufficient to compensate us for the principal outstanding on these loans.  Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit our ability to recover on such loans. Finally, because indirect automobile loan applications are originated by automobile dealerships, although we underwrite the loans, we assume the risks associated with a dealership properly complying with federal, state and local laws.  As a result of our relatively large portfolio of consumer loans, it may become necessary to increase our provision for loan losses in the event our losses on these loans increase, which would reduce our profits.

 

We believe that indirect automobile loans and other consumer loans may provide growth opportunities in the future and intend to continue to emphasize the origination of these types of loans consistent with market conditions and risk management considerations.

 

Our loan portfolio has greater risk than those of many savings institutions due to the substantial amount of commercial and multi-family real estate and non-owner-occupied one- to four-family residential real estate loans in our portfolio.

 

At March 31, 2011, $28.1 million, or 18.2%, of our total loan portfolio, consisted of commercial and multi-family real estate loans. In addition, at March 31, 2011, $14.4 million, or 9.3% of our total loan portfolio, consisted of non-owner-occupied one- to four-family residential real estate loans. Commercial and multi-family real estate loans and non-owner-occupied one- to four-family residential real estate loans generally have more risk than the owner-occupied one- to four-family residential real estate loans that we originate.  Because the repayment of commercial and multi-family real estate loans and non-owner- occupied loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy.  Additionally, commercial and multi-family real estate loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers.  A downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the amount of our nonperforming loans.

 

 

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We are not in a high-growth market area, and continued adverse economic conditions, especially affecting our market area, could adversely affect our financial condition and results of operations. Additionally, the United States economy remains weak and unemployment levels are high.

 

Our market area consists primarily of Union and Wayne Counties, Indiana. Union County has experienced a limited population growth of 2.27% from 2000 through 2010, and Wayne County’s population has declined during that same time period by (3.07)%. Additionally, as of December 2010, the unemployment rates in Union County and Wayne County were 9.5% and 11.1%, respectively, in each case higher than the 9.4% Indiana unemployment rate and the 8.9% national unemployment rate at this date.

 

During the last several years, economic conditions within our market area have declined significantly and local real estate values have declined significantly.  We believe that such conditions have contributed to increases in recent years in our non-performing assets as well as increases in our loan charge-offs and our provisions for loan losses.  Nonperforming assets and troubled debt restructuring, as a percent of total assets were 1.73% at March 31, 2011 compared to 1.52% at December 31, 2009.  Net charge-offs totaled $(264,000) for the three months ended March 31, 2011 compared to $(180,000) for the three months ended March 31, 2010 and net charge-offs increased from $(331,000) for 2008 to $(1.2 million) and $(708,000), for 2009 and 2010, respectively.  The provision for loan losses totaled $350,000 for the three months ended March 31, 2011 compared to $370,000 for the three months ended March 31, 2010.  At March 31, 2011, the allowance for loan losses totaled $1.8 million, or 1.16% of total loans, compared to $1.1 million, or 0.77% of total loans at December 31, 2009.

 

More generally, the United States experienced a severe economic recession in 2008 and 2009, the effects of which have continued.  Recent growth has been slow and unemployment remains at high levels; as a result, economic recovery is expected to be slow.  Loan portfolio quality has remained poor at many financial institutions reflecting, in part, the weak United States economy and high unemployment rates.  In addition, the value of real estate collateral supporting many commercial loans and home mortgages throughout the United States has declined.  The real estate downturn also has resulted in reduced demand for the construction of new housing and increased delinquencies in construction, residential and commercial mortgage loans in many markets across the United States.

 

We believe that the unfavorable economic conditions of the past several years will continue to have an unfavorable impact on our operations as long as they persist.

 

Future changes in interest rates could reduce our profits.

 

Future changes in interest rates could impact our financial condition and results of operations.

 

Net income is the amount by which net interest income and non-interest income exceeds non-interest expense and the provision for loan losses. Net interest income makes up a majority of our income and is based on the difference between:

 

●

interest income earned on interest-earning assets, such as loans and securities; and

 

●

interest expense paid on interest-bearing liabilities, such as deposits and borrowings.

 

 

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We are vulnerable to changes in interest rates including the shape of the yield curve because of a mismatch between the terms to repricing of our assets and liabilities.  Historically, our liabilities repriced more quickly than our assets, which made us vulnerable to increases in interest rates.  For the years ended December 31, 2010 and 2009, our net interest margin was 3.53% and 3.61%, respectively. Our Asset/Liability Management Committee utilizes a computer simulation model to provide an analysis of estimated changes in net interest income in various interest rate scenarios. At March 31, 2011, in the event of an immediate 100 basis point decrease in interest rates, our model projects a decrease in our net interest income of (1.93)%, and in the event of an immediate 200 basis point increase in interest rates, our model projects an increase in our net interest income of 4.35%. A rising rate environment over a 24-month period shows a less favorable increase to our net interest income than the correlating rate change over a 12-month period.

 

Changes in interest rates can affect the average life of loans and mortgage-backed and related securities.  A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans.

 

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

 

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.  In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions.  If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance.  While our allowance for loan losses was 1.16% of total loans at March 31, 2011, future additions to our allowance could materially decrease our net income.

 

In addition, the Federal Deposit Insurance Corporation and the Indiana Department of Financial Institutions periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs.  Any increase in our allowance for loan losses or loan charge-offs as required by regulatory authorities might have a material adverse effect on our financial condition and results of operations.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

 

 

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Certain provisions of the Dodd-Frank Act are expected to have a near term effect on us. For example, the new law provides that the Federal Reserve Board will supervise and regulate all savings and loan holding companies that were formerly regulated by the Office of Thrift Supervision, including West Bank, MHC and West End Bancshares, Inc. and, upon consummation of the conversion, West End Indiana Bancshares, Inc.

 

The Dodd-Frank Act also eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse effect on our interest expense.

 

The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators.  The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

 

Finally, the Dodd-Frank Act includes provisions which would limit the amount charged on debit card swipe fees which could reduce potential fee income.

 

It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on us. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.

 

Strong competition within our market areas may limit our growth and profitability.

 

Competition in the banking and financial services industry is intense.  In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere.  Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide.  In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain profitable on a long-term basis.  Our profitability depends upon our continued ability to successfully compete in our market area.  If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected.  For additional information see “Business of West End Bank–Market Area and Competition.”

 

The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

 

 

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We depend on our management team, including our indirect automobile lenders, to implement our business strategy and execute successful operations and we could be harmed by the loss of their services.

 

We are dependent upon the services of our senior management team.  Our strategy and operations are directed by the senior management team.  We have benefited from consistency within our senior management team, with our top three executives averaging over seven years of service with West End Bank, S.B. and over a combined 60 years of financial institution experience.  Any loss of the services of the president and chief executive officer or other members of our senior management team, as well as the senior loan officers who are responsible for our indirect automobile lending and whose expertise in this product line area could be hard to replace in our market area, could impact our ability to implement our business strategy, and have a material adverse effect on our results of operations and our ability to compete in our markets. See “Management of West End Indiana Bancshares, Inc. –Benefit Plans and Agreements–Employment Agreement.”

 

We will need to implement additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements.  This will increase our operating expenses.

 

In connection with the stock offering, we will become a public company.  The federal securities laws and regulations of the Securities and Exchange Commission require that we file annual, quarterly and current reports and that we maintain effective disclosure controls and procedures and internal control over financial reporting.  We expect that the obligations of being a public company, including substantial public reporting obligations, will require significant expenditures and place additional demands on our management team.  These obligations will increase our operating expenses and could divert our management’s attention from our operations.  The corresponding upgrade to our accounting systems will increase our operating costs.  In addition, such requirements may cause us to hire additional accounting, internal audit and/or compliance personnel.

 

We are in the process of formalizing our internal control over financial reporting, the finalization of which could identify deficiencies that may need to be remediated.

 

As we convert from a mutual holding company structure into a public holding company structure, we are in the process of formalizing certain internal controls over financial reporting and upgrading our accounting systems and processes, as required by the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the Securities and Exchange Commission.  As a relatively small savings bank, our current controls were not as formalized as would be expected for a public company.  As we formalize our internal control structure and realign duties to achieve better segregation of duties among our personnel, we may identify additional deficiencies in internal control that may need to be remediated.

 

We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

 

We are subject to extensive regulation, supervision, and examination by the Federal Deposit Insurance Corporation, the Indiana Department of Financial Institutions, and, with respect to our holding companies, the Office of Thrift Supervision.  In addition, when the operations of the Office of Thrift Supervision terminate on or about July 21, 2011, the regulation of West End Indiana Bancshares, Inc. will be transferred to the Federal Reserve Board. Such regulators govern the activities in which we may engage, primarily for the protection of depositors.  These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a financial institution, the classification of assets by a financial institution, and the adequacy of a financial institution’s allowance for loan losses.  Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on us and our operations.  Because our business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change.  Laws, rules and regulations may be adopted in the future that could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.

 

 

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Changes in accounting standards could affect reported earnings.

 

The accounting standard setters, including the Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.

 

Future legislative or regulatory actions responding to perceived financial and market problems could impair our rights against borrowers.

 

There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. If proposals such as these, or other proposals limiting our rights as a creditor, are implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor.

 

Risks Related to this Stock Offering

 

Our stock price may decline when trading commences.

 

If you purchase shares in the offering, you may not be able to sell them at or above the $10.00 purchase price.  After the shares of our common stock begin trading, the trading price of the common stock will be determined by the marketplace, and will be influenced by many factors outside of our control, including prevailing interest rates, investor perceptions, securities analyst research reports and general industry, geopolitical and economic conditions.  Publicly traded stocks, including stocks of financial institutions, often experience substantial market price volatility.  These market fluctuations might not be related to the operating performance of particular companies whose shares are traded.

 

The capital we raise in the stock offering will reduce our return on equity.  This could negatively affect the trading price of our shares of common stock.

 

Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of a financial institution to its peers.  For the year ended December 31, 2010, we had a return on equity of 2.88%.  Following the stock offering, we expect our consolidated equity to increase from $17.4 million at March 31, 2011 to between $26.7 million at the minimum of the offering range and $32.5 million at the adjusted maximum of the offering range.  Based upon our earnings for the year ended December 31, 2010, and these pro forma equity levels, we anticipate that our return on equity will be 1.87% and 1.53% at the minimum and adjusted maximum of the offering range, respectively. We expect our return on equity to remain relatively low until we are able to leverage the additional capital we receive from the stock offering.  Although we anticipate  increasing net interest income using proceeds of the stock offering, our return on equity will be reduced by the capital raised in the stock offering, higher expenses from the costs of being a public company, and added expenses associated with our employee stock ownership plan and the stock-based benefit plan we intend to adopt.  Until we can increase our net interest income and non-interest income, our return on equity may reduce the value of our shares of common stock.

 

 

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The contribution to the charitable foundation will dilute your ownership interest and adversely affect net income in 2011.

 

We intend to establish and fund a charitable foundation in connection with the conversion and stock offering.  We intend to contribute $125,000 in cash and 38,000 shares ($380,000) for an aggregate contribution of $505,000 to the charitable foundation.  The amount of our contribution will not be dependent upon the amount of the net proceeds raised in the stock offering.

 

The contribution will have an adverse effect on our net income for the quarter and year in which we make the issuance and contribution to the charitable foundation.  The after-tax expense of the contribution will reduce net income in fiscal 2011 by approximately $305,000 million.  We had net income of $498,000 for 2010.  Persons purchasing shares in the stock offering will have their ownership and voting interests in West End Indiana Bancshares, Inc. diluted by up to 3.1% at the minimum of the offering range due to the issuance of shares of common stock to the charitable foundation.

 

Our contribution to the charitable foundation may not be tax deductible, which could reduce our profits.

 

We believe that the contribution to the charitable foundation will be deductible for federal income tax purposes. However, the Internal Revenue Service may disagree with our determination and not grant tax-exempt status to the charitable foundation. If the contribution is not deductible, we would not receive any tax benefit from the contribution.  It is expected that the value of the contribution will be $505,000.  In the event that the Internal Revenue Service does not grant tax-exempt status to the charitable foundation or the contribution to the charitable foundation is otherwise not tax deductible, we would recognize as after-tax expense the full value ( i.e., $505,000) of the entire contribution.

 

In addition, even if the contribution is tax deductible, we may not have sufficient profits to be able to use the deduction fully. Pursuant to the Internal Revenue Code, an entity is permitted to deduct up to 10% of its taxable income (income before income taxes) in any one year for charitable contributions.  Any contribution in excess of the 10% limit may be deducted for federal and state   income tax purposes over each of the five years following the year in which the charitable contribution is made.  Accordingly, a charitable contribution could, if necessary, be deducted over a six-year period.  Our pre-tax income over this period may not be sufficient to fully use this deduction.

 

Our stock-based benefit plans will increase our costs, which will reduce our income.

 

We anticipate that our employee stock ownership plan will purchase 8% of the total shares of common stock sold in the stock offering (including shares contributed to the charitable foundation) with funds borrowed from West End Indiana Bancshares, Inc.  We will record annual employee stock ownership plan expense in an amount equal to the fair value of shares of common stock committed to be released to employees.  If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.

 

 

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We also intend to adopt a stock-based benefit plan after the stock offering that would award participants restricted shares of our common stock (at no cost to them) and/or options to purchase shares of our common stock.  The number of shares of restricted stock or stock options reserved for issuance under any initial stock-based benefit plan may not exceed 4% and 10% (including shares issued to the charitable foundation), respectively, of our total outstanding shares, if these plans are adopted within 12 months after the completion of the conversion.  We may grant shares of common stock and stock options in excess of these amounts provided the stock-based benefit plan is adopted more than one year following the stock offering.  Assuming the market price of the common stock is $10.00 per share; the options are granted with an exercise price of $10.00 per share; the dividend yield on the stock is 0%; the expected option life is 7.5 years; the risk free interest rate is 3.47% (based on the ten-year Treasury rate) and the volatility rate on the shares of common stock is 16.46% (based on an index of publicly traded thrift institutions), the estimated grant-date fair value of the options utilizing a Black-Scholes option pricing analysis is $2.97 per option granted.  Assuming this value is amortized over a five-year vesting period, the corresponding annual pre-tax expense associated with the stock options would be $112,000 at the adjusted maximum.  In addition, assuming that all shares of restricted stock are awarded at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual pre-tax expense associated with restricted stock awarded under the stock-based benefit plan would be $151,000 at the adjusted maximum.  However, if we grant shares of common stock or options in excess of these amounts, such grants would increase our costs further.

 

The shares of restricted stock granted under the stock-based benefit plan will be expensed by us over their vesting period at the fair market value of the shares on the date they are awarded.  If the shares of restricted stock to be granted under the plan are repurchased in the open market (rather than issued directly from authorized but unissued shares by West End Indiana Bancshares, Inc.) and cost the same as the purchase price in the stock offering, the reduction to stockholders’ equity due to the plan would be between $491,000 at the minimum of the offering range and $756,000 at the adjusted maximum of the offering range.  To the extent we repurchase shares of common stock in the open market to fund the grants of shares under the plan, and the price of such shares exceeds the offering price of $10.00 per share, the reduction to stockholders’ equity would exceed the range described above.  Conversely, to the extent the price of such shares is below the offering price of $10.00 per share, the reduction to stockholders’ equity would be less than the range described above.

 

The implementation of stock-based benefit plans may dilute your ownership interest.

 

We intend to adopt one or more stock-based benefit plans, which will allow participants to be awarded shares of common stock (at no cost to them) and/or options to purchase shares of our common stock, following the stock offering.  If these stock-based benefit plans are funded from the issuance of authorized but unissued shares of common stock, stockholders would experience a reduction in ownership interest totaling 12.3%.

 

Although the implementation of the stock-based benefit plan will be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.

 

We have not determined whether we will adopt stock-based benefit plans more than one year following the stock offering.  Stock-based benefit plans adopted more than one year following the stock offering may exceed regulatory restrictions on the size of stock-based benefit plans adopted within one year, which would increase our costs.

 

 

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If we adopt stock-based benefit plans within one year following the completion of the stock offering, then we may grant shares of common stock or stock options under our stock-based benefit plans for up to 4% and 10%, respectively, of our total outstanding shares including shares held by the charitable foundation.  The amount of stock awards and stock options available for grant under the stock-based benefit plans may exceed these amounts, provided the stock-based benefit plans are adopted more than one year following the stock offering.  Although the implementation of the stock-based benefit plan will be subject to stockholder approval, the determination as to the timing of the implementation of such a plan will be at the discretion of our Board of Directors. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “–Our stock-based benefit plans will increase our costs, which will reduce our income.”  Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “–The implementation of stock-based benefit plans will dilute your ownership interest.”

 

We intend to enter into employment agreements with certain of our executive officers that may increase our compensation costs.

 

Effective as of the consummation date of our Conversion and stock offering, we intend to enter into employment agreements with each of our President and Chief Executive Officer, Senior Vice President and Chief Lending Officer, Senior Vice President and Chief Financial Officer, and one other senior officer.  In the event of involuntary or good reason termination of employment, or certain types of termination following a change in control, the employment agreements provide for cash severance benefits that would cost us approximately $1.68 million in the aggregate based on a change in control and termination occurring as of March 31, 2011. These amounts may be reduced, if necessary, to an amount that would not qualify the payments to be deemed an “excess parachute payment” under Section 280G of the Internal Revenue Code of 1986, as amended. In addition, our President and Chief Executive Officer would be entitled to a contribution to his supplemental executive retirement plan, the present value of which is approximately $107,000. For additional information see “Management of West End Indiana Bancshares, Inc.—Executive Officer Compensation.”

 

We have broad discretion in using the proceeds of the stock offering.  Our failure to effectively use such proceeds could reduce our profits.

 

We will use a portion of the net proceeds to finance the purchase of shares of common stock in the stock offering by the employee stock ownership plan, and may use the remaining net proceeds to pay dividends to stockholders, repurchase shares of common stock, purchase investment securities, deposit funds in West End Bank, S.B., acquire other financial services companies or for other general corporate purposes.  West End Bank, S.B. may use the proceeds it receives to fund new loans, establish or acquire new branches, purchase investment securities, reduce a portion of our borrowings, or for general corporate purposes. We have not identified specific amounts of proceeds for any of these purposes and we will have significant flexibility in determining the amount of net proceeds we apply to different uses and the timing of such applications.  Our failure to utilize these funds effectively could reduce our profitability. We have not established a timetable for the deployment of the proceeds and we cannot predict how long we will require to effectively deploy the proceeds.

 

Our stock value may be negatively affected by federal and state regulations that restrict takeovers.

 

For three years following the stock offering, applicable conversion regulations prohibit any person from acquiring or offering to acquire more than 10% of our common stock without the prior written approval of the Office of Thrift Supervision, or the Federal Reserve Board as its successor.  Applicable regulations also require approval or nonobjection for any acquisition of “control” of the West End Indiana Bancshares, Inc. which may include an acquisition of as little as 10% of our outstanding shares.  See “Restrictions on Acquisition of West End Indiana Bancshares, Inc.” for a discussion of applicable regulations regarding acquisitions.

 

 

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The corporate governance provisions in our articles of incorporation and bylaws, and the corporate governance provisions under Maryland law, may prevent or impede the holders of our common stock from obtaining representation on our board of directors and may impede takeovers of the company that our board might conclude are not in the best interest of West End Indiana Bancshares, Inc. or its stockholders.  In addition, the Indiana Financial Institutions Act and regulations issued thereunder may make takeovers of West End Indiana Bancshares, Inc. more difficult.

 

Provisions in our articles of incorporation and bylaws may prevent or impede holders of our common stock from obtaining representation on our Board of Directors and may make takeovers of West End Indiana Bancshares, Inc. more difficult. For example, our Board of Directors is divided into three staggered classes.  A classified board makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur. Additionally, our bylaws contain residency requirements, limitations on the ability of individuals affiliated with competing institutions to serve as board members of West End Indiana Bancshares, Inc., and integrity provisions which limit individuals with past regulatory orders or sanctions from serving on the Board of Directors. Our articles of incorporation include a provision that no person will be entitled to vote any shares of our common stock in excess of 10% of our outstanding shares of common stock.  This limitation does not apply to the purchase of shares by a tax-qualified employee stock benefit plan established by us.  In addition, our articles of incorporation and bylaws restrict who may call special meetings of stockholders and how directors may be removed from office.  Additionally, in certain instances, the Maryland General Corporation Law requires a supermajority vote of our stockholders to approve a merger or other business combination with a large stockholder, if the proposed transaction is not approved by a majority of our directors.  Furthermore, the acquisition or change of control of West End Indiana Bancshares, Inc. is subject to applicable provisions of the Indiana Financial Institutions Act and regulations issued thereunder, which may make takeovers of West End Indiana Bancshares, Inc. more difficult.  See “Restrictions on Acquisition of West End Indiana Bancshares, Inc.”

 

We have never issued common stock and there is no guarantee that a liquid market will develop.

 

We have never issued capital stock and there is no established market for our common stock.   We expect that our common stock will be quoted on the OTC Bulletin Board, subject to completion of the offering and compliance with certain conditions.  Keefe Bruyette & Woods, Inc. has advised us that it intends to make a market in shares of our common stock following the offering, but it is under no obligation to do so or to continue to do so once it begins. The development of an active trading market depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker.  The number of active buyers and sellers of the shares of common stock at any particular time may be limited.  Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment.   In addition, our public “float,” which is the total number of our outstanding shares less the shares held by our employee stock ownership plan and our directors and executive officers, is likely to be quite limited.  As a result, it is unlikely that an active trading market for the common stock will develop or that, if it develops, it will continue.  Furthermore, we cannot assure you that, if you purchase shares of common stock, you will be able to sell them at or above $10.00 per share.  Purchasers of common stock in this stock offering should have long-term investment intent and should recognize that there will be a limited trading market in the common stock.  This may make it difficult to sell the common stock after the stock offering and may have an adverse impact on the price at which the common stock can be sold.

 

 

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We may take other actions to meet the minimum required sales of shares if we cannot find enough purchasers in the community.

 

If we are not able to reach the minimum of the offering range, we may do any of the following: increase the maximum purchase limitations and allow all maximum purchase subscribers to increase their orders to the new maximum purchase limitations; terminate the offering and promptly return all funds; set a new offering range, notifying all subscribers of the opportunity to confirm, cancel or change their orders; or take such other actions as may be permitted, to the extent such permission is required, by the Office of Thrift Supervision.

 

The distribution of subscription rights could have adverse income tax consequences.

 

If the subscription rights granted to certain depositors of West End Bank, S.B. and certain borrowers of West End Bank, S.B. are deemed to have an ascertainable value, receipt of such rights may be taxable in an amount equal to such value.  Whether subscription rights are considered to have ascertainable value is an inherently factual determination.  We have received an opinion from RP Financial, LC that such rights have no value; however, such opinion is not binding on the Internal Revenue Service.

 

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

The following tables set forth selected historical financial and other data of West End Bank, MHC for the periods and at the dates indicated.  The information at December 31, 2010 and 2009 and for the years ended December 31, 2010 and 2009 is derived in part from, and should be read together with, the audited financial statements and notes thereto of West End Bank, MHC beginning at page F-1 of this prospectus.  The information at December 31, 2008, 2007 and 2006 and for the years then ended is derived in part from audited financial statements that are not included in this prospectus.  The information at March 31, 2011 and for the three months ended March 31, 2011 and 2010 is unaudited and reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented.  The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results to be achieved for the remainder of 2011 or any other period. The following information is only a summary, and should be read in conjunction with our financial statements and notes beginning on page F-1 of this prospectus.

 

		At March 31, 2011				At December 31,
						2010				2009				2008				2007				2006
		(In thousands)
Selected Financial Condition Data:
Total assets		$	217,064			$	215,989			$	190,141			$	177,542			$	173,014			$	161,847
Investment securities			41,695				41,216				24,700				19,521				22,030				22,719
Loans receivable, net			152,526				151,810				144,235				138,343				134,148				123,885
Deposits			176,689				175,371				145,269				126,985				115,233				108,323
Federal Home Loan Bank advances			22,000				22,000				27,200				32,700				41,300				37,400
Total equity			17,406				17,320				16,867				16,553				15,982				15,512

 

		For the Three Months Ended March 31,								For the Years Ended December 31,
		2011				2010				2010				2009				2008				2007				2006
		(Dollars in thousands)
Selected Operating Data:
Interest and dividends		$	2,721			$	2,668			$	10,934			$	10,916			$	10,886			$	10,412			$	9,306
Interest expense			841				1,044				4,045				4,510				5,315				5,950				4,915
Net interest income			1,880				1,624				6,889				6,406				5,571				4,462				4,391
Provision for loan losses			350				370				1,294				1,589				525				215				380
Non-interest income			391				412				1,491				1,399				1,085				982				915
Non-interest expenses			1,690				1,486				6,359				5,821				5,573				4,990				4,779
Income before income taxes			231				180				727				395				558				239				147
Income tax expense (benefit)			80				46				229				68				146				(3	)			18
Net income			151				134				498				327				412				242				129
Performance Ratios:
Return on average assets (annualized)			0.28	%			0.27	%			0.24	%			0.17	%			0.23	%			0.14	%			0.08	%
Return on average equity (annualized)			3.42	%			3.12	%			3.12	%			1.92	%			2.52	%			1.55	%			0.84	%
Interest rate spread (annualized) (1)			3.64	%			3.44	%			3.39	%			3.40	%			3.11	%			2.58	%			2.67	%
Net interest margin (annualized) (2)			3.76	%			3.59	%			3.53	%			3.61	%			3.36	%			2.83	%			2.95	%
Non-interest expense to average assets (annualized)			3.13	%			3.02	%			3.05	%			3.09	%			3.16	%			2.95	%			3.00	%
Efficiency ratio (3)			74.42	%			74.11	%			77.00	%			75.85	%			84.13	%			91.66	%			90.92	%
Average interest-earning assets to average interest-bearing liabilities			107.10	%			106.22	%			106.72	%			108.34	%			107.68	%			106.77	%			108.37	%
Average equity to average assets			8.17	%			8.72	%			8.33	%			9.05	%			9.26	%			9.23	%			9.68	%

 

 

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		For the Three Months Ended March 31,								For the Years Ended December 31,
		2011				2010				2010				2009				2008				2007				2006
		(Dollars in thousands)
Capital Ratios:
Total capital to risk weighted assets			12.9	%			12.7	%			13.0	%			12.7	%			13.7	%			13.7	%			14.7	%
Tier 1 capital to risk weighted assets			11.7	%			11.7	%			11.8	%			11.9	%			13.1	%			13.2	%			14.2	%
Tier 1 capital to average assets			7.9	%			8.5	%			7.9	%			8.6	%			9.2	%			9.1	%			9.6	%
Asset Quality Ratios:
Allowance for loan losses as a percentage of total loans			1.16	%			0.89	%			1.11	%			0.77	%			0.51	%			0.38	%			0.40	%
Allowance for loan losses as a percentage of non-performing loans			63.96	%			65.05	%			65.65	%			50.23	%			29.33	%			83.12	%			556.67	%
Net (charge-offs) recoveries to average outstanding loans during the period			(0.68	)%			(0.50	)%			(0.47	)%			(0.81	)%			(0.24	)%			(0.16	)%			(0.21	)%
Non-performing loans as a percentage of total loans			1.81	%			1.37	%			1.69	%			1.52	%			1.73	%			0.46	%			0.07	%
Non-performing loans as a percentage of total assets			1.29	%			0.99	%			1.20	%			1.17	%			1.36	%			0.36	%			0.06	%
Total non-performing assets and troubled debt restructuring as a percentage of total assets			1.73	%			1.35	%			1.87	%			1.52	%			1.49	%			0.46	%			0.25	%
Other:
Number of offices			4				4				4				4				4				4				4

 

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(1)

Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.

(2)

Represents net interest income as a percentage of average interest-earning assets.

(3)

Represents noninterest expense divided by the sum of net interest income and noninterest income, excluding gains or losses on the sale of securities.

 

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning.  These forward-looking statements include, but are not limited to:

 

●

statements of our goals, intentions and expectations;

 

●

statements regarding our business plans, prospects, growth and operating strategies;

 

●

statements regarding the asset quality of our loan and investment portfolios; and

 

●

estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.  In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.  We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this prospectus.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

●

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

●

competition among depository and other financial institutions;

 

●

our success in continuing to emphasize consumer lending, including indirect automobile lending;

 

●

our ability to improve our asset quality even as we increase our non-residential lending;

 

●

our success in maintaining our commercial and multi-family real estate and our non-owner occupied one- to four-family residential real estate and commercial business lending;

 

●

changes in the interest rate environment that reduce our margins or reduce the fair value of our financial instruments;

 

●

adverse changes in the securities markets;

 

●

changes in laws or government regulations or policies affecting financial institutions, including changes in deposit insurance premiums, regulatory fees and capital requirements, which increase our compliance costs;

 

●

our ability to enter new markets successfully and capitalize on growth opportunities;

 

●

changes in consumer spending, borrowing and savings habits;

 

 

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●

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

●

changes in our organization, compensation and benefit plans;

 

●

loan delinquencies and changes in the underlying cash flows of our borrowers;

 

●

changes in our financial condition or results of operations that reduce capital available to pay dividends; and

 

●

changes in the financial condition or future prospects of issuers of securities that we own.

 

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.  Please see “Risk Factors” beginning on page 13 .

 

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

 

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $10.7 million and $14.9 million, or $17.2 million if the offering range is increased by 15%.

 

We intend to distribute the net proceeds from the stock offering as follows:

 

		Based Upon the Sale at $10.00 Per Share of
		1,190,000 Shares								1,400,000 Shares								1,610,000 Shares								1,851,500 Shares (1)
		Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds				Amount				Percent of Net Proceeds
		(Dollars in thousands)
Stock offering proceeds		$	11,900							$	14,000							$	16,100							$	18,515
Less offering expenses			1,184								1,213								1,242								1,275
Net offering proceeds		$	10,716				100.0	%		$	12,787				100.0	%		$	14,858				100.0	%		$	17,240				100.0	%
Use of net proceeds:
To West End Bank, S.B.		$	5,358				50.0	%		$	6,394				50.0	%		$	7,429				50.0	%		$	8,620				50.0	%
To fund loan to employee stock ownership plan			982				9.2				1,150				9.0				1,318				8.9				1,512				8.8
Proceeds contributed to foundation			125				1.2				125				1.0				125				0.8				125				0.7
Retained by West End Indiana Bancshares, Inc.		$	4,251				39.7	%		$	5,118				40.0	%		$	5,986				40.3	%		$	6,983				40.5	%

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(1)	As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.

 

 

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