<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ______________to___________________
Commission File Number: 0-18993
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WINTON FINANCIAL CORPORATION
----------------------------
(Name of small business issuer in its charter)
Ohio 31-1303854
---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5511 Cheviot Road, Cincinnati, Ohio 45247
-----------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (513) 385-3880
---------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
----
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Shares, without par value
--------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year: $22.2 million
--------------
Based upon the last sale price quoted by The Nasdaq Stock Market as of November
25, 1996, the aggregate market value of the voting stock held by non-affiliates
of the Registrant, on that date was $13,878,933.
At December 13, 1996, there were 1,986,152 of the Registrant's Common Shares
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part I of Form 10-KSB: Safe Harbor Under the Private Securities Litigation
Reform Act of 1995 in Exhibit 99.
Part II of Form 10-KSB: Portions of the 1996 Annual Report to Shareholders for
the fiscal year ended September 30, 1996, in Exhibit 13.
Part III of Form 10-KSB: Proxy Statement for 1997 Annual Meeting of
Shareholders in Exhibit 20.
Transitional Small Business Disclosure Format Yes No X
--- ---
Index to Exhibits is on page 39.
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Winton Financial Corporation ("WFC") was incorporated as an Ohio
corporation in 1989 and, in 1990, acquired all of the issued and outstanding
common shares of The Winton Savings and Loan Co. ("Winton"), a savings and loan
association incorporated under the laws of the State of Ohio. On January 5,
1996, Blue Chip Savings Bank ("Blue Chip") merged with and into Winton (the
"Merger"). As a result of the Merger, Winton acquired $33.9 million in assets,
$27.3 million in deposits and a downtown Cincinnati branch. As a unitary savings
and loan holding company, WFC, through Winton, is engaged in the savings and
loan business.
The Merger was accounted for as a pooling of interests. Therefore, all
financial information for WFC or Winton at, or for the years ended, September
30, 1995 through September 30, 1992, have been restated to include Blue Chip.
WFC's activities have been limited primarily to holding the common shares of
Winton. Consequently, the following discussion focuses primarily on the business
of Winton.
In addition to the historical financial information included herein, the
disclosures contain forward-looking statements that involve risks and
uncertainties. Economic circumstances, WFC's operations and its actual results
could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and WFC's general market area. See Exhibit 99,
"Safe Harbor Under the Private Securities Litigation Reform Act of 1995," which
is incorporated herein by reference.
Winton is principally engaged in the business of making first mortgage
loans to finance the purchase, construction or improvement of one- to
four-family residential real estate or other real property located in Winton's
primary market area. Loan funds are obtained primarily from savings deposits,
which are insured up to applicable limits by the Federal Deposit Insurance
Corporation (the "FDIC") in the Savings Association Insurance Fund ("SAIF"),
loan repayments and FHLB advances. Interest earned on such loans is Winton's
primary source of revenue. In addition to originating loans, Winton invests in
U.S. Government and agency obligations, interest-bearing deposits in other
financial institutions and mortgage-backed securities.
Winton conducts business from its five full-service offices in Hamilton
County, Ohio, and serves a market area which includes the Ohio counties of
Hamilton, Butler, Clinton, Clermont, Montgomery, Brown, Adams, Franklin and
Warren, the Indiana counties of Ripley, Franklin, Union and Dearborn and the
Kentucky counties of Boone, Campbell, Galatin and Kenton. Winton is authorized
to originate loans in the States of Indiana and Kentucky.
As a savings and loan holding company, WFC is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of the Treasury (the "OTS"). As a savings and loan association
incorporated under the laws of the State of Ohio, Winton is subject to
regulation, supervision and examination by the OTS, the FDIC and the Ohio
Division of Financial Institutions (the "Division"). Winton is also a member of
the Federal Home Loan Bank of Cincinnati (the "FHLB").
Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS and Winton may be
regulated under federal law as a bank or may be required to change its charter.
Such change in regulation or charter would likely change the range of activities
in which Winton may engage and would probably subject Winton to more regulation
by the FDIC.
In addition, WFC might become subject to a different form of holding
company regulation which may limit the activities in which WFC may engage and
subject WFC to other additional regulatory requirements, including separate
capital requirements. WFC cannot predict when or whether Congress may actually
pass legislation regarding WFC's and Winton's regulatory requirements or
charter. Although such legislation may change the activities in which either WFC
and Winton may engage, it is not anticipated that the current activities of
either WFC and Winton will be materially affected by those activity limits.
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<PAGE> 3
LENDING ACTIVITIES
GENERAL. Winton's lending activities include the origination of
conventional fixed-rate and variable-rate mortgage loans for the acquisition or
construction of single family homes located in Winton's primary market area.
Construction and permanent mortgage loans on condominiums, multi-unit and
nonresidential properties are also offered by Winton. Winton does not make
loans guaranteed by the Veterans Administration. In addition to mortgage
lending, Winton originates consumer loans, including passbook, automobile,
secured, unsecured, home improvement and home equity line of credit loans. To a
very limited extent, Winton also originates commercial loans secured by real
estate. Winton's portfolio of loans, loans held for sale and mortgage-backed
securities totaled approximately $269.8 million at September 30, 1996, and
represented 92% of total assets.
LOAN AND MORTGAGE-BACKED SECURITIES MATURITY SCHEDULE. The following
table sets forth certain information, as of September 30, 1996, regarding the
dollar amount of loans and mortgage-backed securities maturing in Winton's
portfolio based on their contractual terms to maturity, before giving effect to
net items. See "Mortgage-Backed Securities" for more information regarding
Winton's portfolio of mortgage-backed securities. Demand loans, loans having no
stated schedule of repayments or without stated maturity and overdrafts are
reported as due in one year or less.
<TABLE>
<CAPTION>
Due over Due over
3 years to 5 years to
Due in Due in Due in 5 years after 10 years after Due over
1997 1998 1999 9/30/96 9/30/96 10 years Totals
------- ------ ----- ---------- ----------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans $6,356 $6,901 7,493 $16,975 $41,188 $161,425 $240,338
Mortgage-backed securities -
held to maturity 301 320 341 747 2,328 12,377 16,414
Mortgage-backed securities -
available for sale 2,060 13 15 31 97 726 2,942
Construction and land
loans (1) 17,930 573 623 388 -- -- 19,514
Consumer and other loans 767 818 820 -- -- -- 2,405
------- ------ ----- ---------- ----------- ------------ ----------
Total loans and
mortgage-backed securities $27,414 $8,625 $9,292 $18,141 $43,613 $174,528 $281,613
======= ====== ====== ======= ======= ======== ========
<FN>
- -----------------------------
(1) Includes construction loans for which Winton has committed to a permanent
end-loan.
</TABLE>
The following table sets forth, at September 30, 1996, the dollar amount
of all loans and mortgage-backed securities, before net items, which have
predetermined interest rates and floating or adjustable interest rates:
<TABLE>
<CAPTION>
Floating or
Predetermined adjustable
rates rates
------------- ----------
(In thousands)
<S> <C> <C>
Real estate mortgage loans $138,085 $119,032
Loans held for sale 2,735 --
Consumer and other loans 2,405 --
Mortgage-backed securities - held to maturity 54 16,360
Mortgage-backed securities - held for sale -- 2,942
------------- ----------
Total $143,279 $138,334
============= ==========
</TABLE>
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<PAGE> 4
LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITION. The
following table sets forth certain information concerning the composition of
Winton's loan and mortgage-backed securities portfolio at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------
1996 1995 1994
----- ----- ----
Amount % Amount % Amount %
--------- -------- --------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of loan or investment:
Conventional real estate loans:
One- to four-family
Interim construction $ 15,049 5.6% $ 13,224 5.9% $ 12,809 5.8%
First mortgages on existing properties 144,306 53.5 120,124 53.3 119,299 54.3
Loans held for sale 2,735 1.0 1,079 .5 769 .4
Multifamily
Interim construction 2,475 .9 1,400 .6 300 .1
Loans on existing properties 55,507 20.6 44,298 19.6 40,587 18.5
Developed building lots 2,326 .9 1,910 .8 3,112 1.4
Nonresidential real estate loans
Interim construction 450 .1 1,486 .7 1,655 .8
Loans on existing properties 37,001 13.7 28,603 12.7 26,025 11.9
Mortgage-backed securities - held
to maturity 16,414 6.1 17,960 8.0 20,624 9.4
Mortgage-backed securities - available
for sale 2,942 1.1 1,482 .6 -- --
Mobile home loans 3 -- 7 -- 15 --
Consumer and other loans 2,405 .9 3,755 1.7 3,428 1.6
--------- -------- --------- ------- -------- -------
281,613 104.4 235,328 104.4 228,623 104.2
Less:
Loans in process (10,150) (3.8) (8,331) (3.7) (7,211) (3.3)
Deferred loan origination fees (760) (.3) (937) (.4) (1,300) (.6)
Allowance for loan losses (857) (.3) (654) (.3) (609) (.3)
--------- -------- --------- ------- -------- -------
Total loans and mortgage-backed
securities $269,846 100.0% $225,406 100.0% $219,503 100.0%
======== ====== ======== ====== ======== ======
Type of security:
Residential
One- to four-family $159,355 59.1% $133,348 59.2% $132,108 60.2%
Multifamily residential 57,982 21.5 45,698 20.3 40,887 18.6
Loans held for sale 2,735 1.0 1,079 .5 769 .4
Nonresidential real estate 37,451 13.8 30,089 13.4 27,680 12.6
Developed building lots 2,326 .9 1,910 .8 3,112 1.4
Mortgage-backed securities 19,356 7.2 19,442 8.6 20,624 9.4
Deposit accounts 389 .1 329 .1 361 .2
Other 2,019 .8 3,433 1.5 3,082 1.4
--------- -------- --------- ------- -------- -------
281,613 104.4% 235,328 104.4% 228,623 104.2%
Less:
Loans in process (10,150) (3.8) (8,331) (3.7) (7,211) (3.3)
Deferred loan origination fees (760) (.3) (937) (.4) (1,300) (.6)
Allowance for loan losses (857) (.3) (654) (.3) (609) (.3)
--------- -------- --------- ------- -------- -------
Total loans and mortgage-backed securities $269,846 100.0% $225,406 100.0% $219,503 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
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<PAGE> 5
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of Winton has been the origination of conventional loans for the
acquisition or construction of single-family residences, located within Winton's
primary market area. Winton also originates loans on two- to four-family
dwellings and condominiums. Each of such loans is secured by a mortgage on the
underlying real estate and improvements thereon. At September 30, 1996, 60.1% of
Winton's total outstanding loans and mortgage-backed securities consisted of
loans secured by, respectively first and second mortgage loans and home equity
lines of credit secured by one- to four-family residential real estate,
including loans held for sale. Second mortgages and home equity lines of credit
are subject to a higher degree of risk than first mortgage loans, because, in
the event of default or foreclosure, amounts due on first mortgages have a prior
claim to available funds. Most of the second mortgages and home equity lines of
credit made by Winton are secured by property on which it holds the first
mortgage.
OTS regulations and Ohio law limit the amount which Winton may lend in
relationship to the appraised value of the real estate and improvements thereon
at the time of loan origination. In accordance with such regulations, Winton
makes loans on single-family residences up to 95% of the value of the real
estate and improvements (the "Loan-to-Value Ratio" or "LTV"). Winton also makes
loans over the 95% LTV; though most of those loans are sold in the secondary
market. Winton requires private mortgage insurance and charges premium interest
rates for loans over the 80% LTV.
Winton offers adjustable-rate mortgage loans ("ARMs") with interest rate
adjustment periods of generally one or three years. The interest rates initially
charged on ARMs and the new rate at each adjustment date are determined by
adding a stated margin to the one-year or three-year United States Treasury bill
rate at the time the loan is originated. The initial interest rate for a
three-year ARM is set slightly higher than for the one-year ARM to compensate
Winton for the increased exposure to risk resulting from interest-rate
fluctuations during the adjustment period. The maximum adjustment at each
adjustment date for one-year ARMs is usually 2%, with a maximum adjustment of 6%
over the term of the loan. The maximum adjustment on three-year ARMs presently
originated by Winton is 2% at each adjustment date, with a maximum adjustment of
6% over the life of the loan. None of Winton's ARMs have negative amortization
features.
Residential mortgage loans offered by Winton are usually for terms of 10
to 30 years. Due to the general long-term nature of an investment in mortgage
loans, such loans could have an adverse effect upon the earnings spread of an
association if such loans do not reprice as quickly as the association's cost of
funds. To minimize such effect, Winton emphasizes the origination of ARMs.
Furthermore, experience during recent years reveals that, as a result of
prepayments in connection with refinancings and sales of the underlying
properties, residential loans generally remain outstanding for periods which are
substantially shorter than the maturity of such loans.
ARMs were popular with consumers during the periods of high interest
rates in fiscal 1981 through fiscal 1986, reemerging again in popularity during
fiscal 1994. Consumer demand for fixed-rate loans tends to increase during
periods of low or decreasing interest rates. Of the total mortgage loans
originated by Winton during the fiscal year ended September 30, 1996, 31.4% were
ARMs and 68.6% were fixed-rate.
MULTIFAMILY RESIDENTIAL REAL ESTATE LOANS. In addition to loans on one-
to four-family properties, Winton makes adjustable- and fixed-rate loans secured
by multifamily properties containing over four units. Multifamily loans
generally have terms of up to 25 years and a maximum LTV of 75%, although a
higher LTV occasionally is approved for an established borrower. Such loans are
currently made with the same adjustment schedules, indexes and caps as for one-
to four-family residential ARMs, at adjustable interest rates with a margin of
3% over the index.
Multifamily lending is generally considered to involve a higher degree
of risk because the loan amounts are larger and the borrower typically depends
upon income generated by the project to cover operating expenses and debt
service. The profitability of a project can be affected by economic conditions,
government policies and other factors beyond the control of the borrower. Winton
attempts to reduce the risk associated with multifamily lending by evaluating
the credit-worthiness of the borrower and the projected income from the project
and by obtaining personal guarantees on loans made to corporations and
partnerships. Winton requires that the borrower agrees to submit rent rolls and
financial statements annually to enable Winton to monitor the loan.
At September 30, 1996, loans secured by multifamily properties
(excluding construction loans) totaled approximately $55.5 million, or 20.6% of
total loans and mortgage-backed securities. None of Winton's multifamily
residential real estate loans was delinquent at September 30, 1996. Multifamily
loans constituted $16.8 million, or 13.9%, of the $121.4 million in loans
originated in fiscal 1996.
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<PAGE> 6
DEVELOPED BUILDING LOTS. Winton originates loans to individuals and to
builders secured by mortgages on unimproved developed real estate upon which
residential properties will be constructed. The $2.3 million in land loans
outstanding at September 30, 1996, consisted of loans to a large residential
subdivision developer, and loans to individuals and builders used for the
acquisition of residential building lots. Developed building lot loans are
generally made for a five-year term with a balloon payment of principal due upon
expiration of the loan term. Such loans comprised approximately .9% of the total
loans and mortgage-backed securities portfolio at September 30, 1996. Winton had
no non-performing loans secured by unimproved developed real estate at September
30, 1996.
Loans on unimproved developed real estate are generally considered to be
subject to a higher degree of risk because the borrower typically depends on a
sale of the property or the later improvement of the property to cover debt
service. The ability to sell or develop unimproved real estate is affected by
economic conditions, government policies and other factors beyond the control of
the borrower. These risks are increased if the unimproved real estate is for an
entire subdivision rather than a single residential lot. Winton reviews the
viability of the unimproved real estate for improvement and sale and evaluates
the credit-worthiness of the borrowers for these loans.
NONRESIDENTIAL REAL ESTATE LOANS. In recent years, nonresidential real
estate loans have been made primarily on an adjustable-rate basis, with loan
terms generally up to a maximum of 25 years, although Winton has made a limited
number of fixed-rate nonresidential real estate loans during that period. These
loans are typically made at a maximum 75% LTV, although a higher Loan-to-Value
Ratio is occasionally approved for established borrowers. Adjustable-rate
nonresidential real estate loans have the same adjustment schedules, index and
caps as the residential ARMs described above.
Winton has several nonresidential real estate loans in its portfolio,
all in its primary market area, including loans secured by retail, office and
other types of business facilities. The largest nonresidential real estate loan
outstanding at September 30, 1996, was a $1.2 million loan. Nonresidential
permanent loans comprised 13.8% of total loans and mortgage-backed securities
and 12.8% of total assets at September 30, 1996.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. Winton has endeavored to reduce such risk by
evaluating the credit history and past performance of the borrower, the location
of the real estate, the quality of the management constructing and operating the
property, the debt service ratio, the quality and characteristics of the income
stream generated by the property and appraisals supporting the property's
valuation. At September 30, 1996, Winton had nonperforming loans totaling
$239,000 in its nonresidential loan portfolio.
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its capital. At September 30, 1996,
Winton's nonresidential permanent mortgage loans totaled 184% of Winton's
capital.
CONSTRUCTION LOANS. Winton offers residential construction loans both to
owner-occupants and to builders for loans being built under contract with
owner-occupants. To a very limited extent, Winton also makes construction loans
to persons constructing projects for investment purposes. At September 30, 1996,
a total of $18.0 million, or approximately 6.6%, of Winton's total loans and
mortgage-backed securities, and 6.2% of total assets consisted of construction
loans.
Generally, construction loans have terms ranging from 6 to 12 months at
fixed rates of interest over the construction period. Residential construction
loans and nonresidential construction loans are interim loans which are replaced
by permanent loans at the end of the construction period. Such permanent loans
may or may not be obtained from Winton.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developments, developers,
managers and builders. In addition, such loans are more difficult to evaluate
and monitor. Loan funds are advanced upon the security of the project under
construction, which is more difficult to value before the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, it is relatively difficult to evaluate accurately the LTVs
and the total loan funds required to complete a project. In the event a default
on a construction loan occurs and foreclosure follows, Winton would have to take
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<PAGE> 7
control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project. Almost all of Winton's
construction loans are secured by property in Hamilton County; the other Ohio
counties of Clinton, Clermont, Warren, Butler, Montgomery, Brown, Adams and
Franklin; the Indiana counties of Ripley, Franklin, Union and Dearborn; and the
Kentucky counties of Boone, Campbell, Galatin and Kenton. The economy of such
lending area has been relatively stable over the three years ended September 30,
1996.
MOBILE HOME LOANS. To a very limited extent, Winton originates loans on
both new and used mobile homes. Such loans are generally made at fixed rates of
interest, with the rate charged on loans for used mobile homes generally set
higher than for new mobile homes. The maximum term of mobile home loans is 10
years for new homes and seven years for used homes. Winton usually obtains a
security interest in the mobile home to which the loan pertains.
Federal regulations permit an association to invest without limitation
in mobile home loans. At September 30, 1996, the aggregate outstanding principal
balance of mobile home loans in Winton's portfolio was approximately $3,000, or
less than one-tenth of 1.0% of total loans and mortgage-backed securities.
CONSUMER AND OTHER LOANS. Winton makes various types of consumer loans,
including loans made to depositors on the security of their savings deposits,
automobile loans, commercial loans, loans secured by stock of entities other
than WFC and unsecured personal loans. Consumer loans are generally made at
fixed rates of interest tied to the prime rate, generally for terms of from 90
days to five years. The risk of default on consumer loans is greater than for
residential mortgage loans, especially during periods of economic recession. At
September 30, 1996, consumer and other loans constituted .9% of Winton's total
loans and mortgage-backed securities and .8% of total assets. Although Winton
has not had significant delinquencies on consumer loans, no assurance can be
provided that delinquencies will not increase.
MORTGAGE-BACKED SECURITIES. In recent years, Winton has purchased
mortgage-backed securities insured or guaranteed by government agencies in order
to improve Winton's asset portfolio yield by profitably investing excess funds.
Winton intends to continue to purchase such mortgage-backed securities when
conditions favor such a portfolio investment. At September 30, 1996,
mortgage-backed securities totaled approximately $19.4 million, or 7.2% of total
loans and mortgage-backed securities. All but $2.9 million of Winton's
mortgage-backed securities at September 30, 1996, were designated as being held
to maturity. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, those mortgage-backed securities designated as being held to
maturity are carried on Winton's balance sheet at cost. The market value of the
$16.4 million in mortgage-backed securities held to maturity at September 30,
1996 was $16.0 million. The remaining $2.9 million in mortgage-backed securities
at September 30, 1996, was designated as available for sale. In accordance with
SFAS No. 115, the mortgage-backed securities available for sale are carried on
Winton's balance sheet at market value, with unrealized gains or losses carried
as an adjustment to shareholders' equity, net of applicable taxes.
Winton maintains a significant portfolio of mortgage-backed pass-through
securities in the form of Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA") participation certificates. Mortgage-backed pass-through
securities generally entitle Winton to receive a portion of the cash flows from
an identified pool of mortgages and gives Winton an interest in that pool of
mortgages. FHLMC, FNMA and GNMA securities are each guaranteed by their
respective agencies as to principal and interest. Winton has also invested in
collateralized mortgage obligations ("CMOs"), which are secured by
mortgage-backed securities. CMOs are mortgage derivative products, secured by an
underlying pool of mortgages. Winton has no ownership interest in those
mortgages, except to the extent they serve as collateral. In CMOs, payment
streams from the mortgages are reconfigured with varying terms and timing of
payment to the CMO investor. Though they can be used for hedging and investment,
CMOs can expose investors to higher risk of loss than direct investments in
mortgage-backed pass-through securities, particularly with respect to price
volatility and the lack of a broad secondary market in such securities. The OTS
has deemed certain CMOs and other mortgage derivative products to be
"high-risk." None of Winton's CMOs are in such "high-risk" category.
Although mortgage-backed securities and CMOs generally yield less than
individual loans originated by Winton, they present less credit risk, because
mortgage-backed securities are guaranteed as to principal repayment by the
issuing agency and CMOs are guaranteed by the underlying collateral, which is
government-backed securities. Because CMOs and other mortgage-backed securities
have a lower yield relative to current market rates, retention of such
investments could adversely affect Winton's earnings, particularly in a rising
interest rate environment. Although CMOs and other mortgage-backed securities
designated as available for sale are a potential source of liquid funds for loan
originations and deposit
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<PAGE> 8
withdrawals, the prospect of a loss on the sale of such investments limits the
usefulness of these investments for liquidity purposes.
In addition, Winton has purchased adjustable-rate mortgage-backed
securities and CMOs as part of its effort to reduce its interest rate risk. In a
period of declining interest rates, Winton is subject to prepayment risk on such
adjustable-rate mortgage-backed securities and CMOs. Winton attempts to mitigate
this prepayment risk by purchasing mortgage-backed securities at or near par. If
interest rates rise in general, the interest rates on the loans backing the
mortgage-backed securities and CMOs will also adjust upward, subject to the
interest rate caps in the underlying adjustable-rate mortgage loans. However,
Winton is still subject to interest rate risk on such securities if interest
rates rise faster than the 1% to 2% maximum annual interest rate adjustments on
the underlying loans.
At September 30, 1996, $19.3 million, or 99.7%, of Winton's
mortgage-backed securities and CMOs had adjustable rates. Although
adjustable-rate securities generally have a lower yield at the time of
origination than fixed-rate securities, the interest rate risk associated with
adjustable-rate securities is lower. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset/Liability Management."
The following table sets forth certain information regarding Winton's investment
in mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
At September 30, 1996 At September 30, 1995
----------------------------------------------- ----------------------------------------------
(In thousands)
Gross Gross Gross Gross
Amortized unrealized unrealized Estimated Amortized unrealized unrealized Estimated
cost gains losses fair value cost gains losses fair value
---- ----- ------ ---------- ---- ----- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgaged-backed securities held
to maturity:
FHLMC participation $ 6,213 $31 $(149) $6,095 $7,296 $1 $(146) $ 7,151
certificates
FNMA participation 3,912 4 (90) 3,826 4,273 1 (87) 4,187
certificates
GNMA participation 948 -- -- 948 1,050 -- (14) 1,036
certificates
CMOs 5,341 -- (227) 5,114 5,341 -- (198) 5,143
------- --- ----- ------- ------- -- ----- -------
16,414 35 (466) 15,983 17,960 2 (445) 17,517
Mortgage-backed securities
available for sale:
FNMA participation -- -- -- -- 98 1 -- 99
certificates
GNMA participation 894 -- (6) 888 -- -- -- --
certificates
CMOs 2,058 -- (4) 2,054 1,397 -- (14) 1,383
------- ------ ------ ------- ------- ---- ------- -------
2,952 -- (10) 2,942 1,495 1 (14) 1,482
------- ------ ------- ------- ------- ---- ------ -------
$19,366 $35 $(476) $18,925 $19,455 $3 $(459) $18,999
======= === ====== ======= ======= === ====== =======
</TABLE>
The combined amortized cost of mortgage-backed and related securities
designated as held to maturity or available for sale at September 30, 1996 and
1995, by contractual terms to maturity are shown below. Actual maturities will
differ from contractual maturities because borrowers generally may prepay
obligations without prepayment penalties. Also, the timing of cash flows will be
affected by management's intent to sell securities designated as available for
sale under certain economic conditions.
<TABLE>
<CAPTION>
Amortized cost at Amortized cost at
September 30, 1996 September 30, 1995
------------------- ------------------
(In thousands)
<S> <C> <C>
Due within one year $ 2,417 $ 302
Due after one through three years ------- 359
Due after three years through five years 3 -------
Due after five years through ten years 44 21
Due after ten years through twenty years 7 51
Due after twenty years 16,895 18,722
------- -------
$19,366 $19,455
======= =======
</TABLE>
-8-
<PAGE> 9
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by Winton's directors,
officers and lending staff and walk-in customers. Winton uses loan brokers and
has hired commissioned loan originators.
Loan applications for permanent mortgage loans are taken by loan
personnel. Winton obtains a credit report, verification of employment and other
documentation concerning the credit-worthiness of the borrower. An appraisal of
the fair market value of the real estate which will be given as security for the
loan is generally prepared by an independent fee appraiser approved by the Board
of Directors. An environmental study is conducted only if the appraiser or
management has reason to believe that an environmental problem may exist. For
multifamily and nonresidential mortgage loans, a personal guarantee is required.
Winton also obtains information with respect to prior projects completed by the
borrower. Upon the completion of the appraisal and the receipt of information on
the borrower, the application for a loan is submitted to the Executive Committee
and/or the Board of Directors for approval or rejection. Any loan applications
which do not conform in all respects with Winton's underwriting guidelines are
reviewed and accepted or rejected by the full Board of Directors.
If a mortgage loan application is approved, an attorney's opinion of
title or a title insurance policy is obtained on the real estate which will
secure the mortgage loan. Borrowers are required to carry fire and casualty
insurance and flood insurance, if applicable, and to name Winton as an insured
mortgagee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building plans,
construction specifications and estimates of construction costs. Winton also
evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
Winton's loans carry provisions that the entire balance of the loan is
due upon sale of the property securing the loan.
LOAN ORIGINATIONS, PURCHASES AND SALES. Winton has been actively
originating new 30-year and 15-year fixed-rate and adjustable-rate loans.
Virtually all residential fixed-rate loans made by Winton are originated on
documentation which will permit a possible sale of such loans to FHLMC, FNMA or
other secondary mortgage market participants. When mortgage loans are sold to
FHLMC or FNMA, Winton usually retains the servicing on such loans by collecting
monthly payments of principal and interest and forwarding such payments to the
FHLMC or FNMA, net of a servicing fee; though certain loans originated with the
assistance of a loan broker are sold with the servicing rights. Fixed-rate loans
not sold in the secondary market and generally all of the ARMs originated by
Winton are held in Winton's loan portfolio.
Management sold $34.6 million of fixed- and adjustable-rate loans during
fiscal 1996, as compared to sales of $16.6 million of fixed-rate loans in fiscal
1995. Management believes secondary market activities will continue to increase
if interest rates decline.
From time to time, Winton sells participation interests in mortgage
loans originated by Winton or purchases participation interests in loans
originated by other lenders. Winton held participations in loans originated by
other lenders of approximately $2.0 million at September 30, 1996. Loans in
which Winton purchases participation interests must meet or exceed the
underwriting standards for the loans which Winton originates.
-9-
<PAGE> 10
The following table presents Winton's mortgage loan origination,
purchase, sale and principal repayment activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Loans originated(1):
Conventional real estate loans:
One- to four-family
Construction(2) $ 21,013 17.3% $19,199 30.5% $19,995 16.4%
Fixed-rate loans on existing property 50,975 42.0 19,969 31.8 63,059 51.8
Adjustable-rate loans on existing
property 15,127 12.5 5,262 8.4 11,022 9.0
Multifamily
Construction 1,075 0.9 1,400 2.2 -- --
Fixed-rate loans on existing property 1,252 1.0 1,675 2.7 3,484 2.9
Adjustable-rate loans on existing
property 14,509 11.9 6,456 10.3 10,577 8.7
Nonresidential real estate loans
Construction 330 0.3 676 1.1 555 0.4
Fixed-rate loans on existing property 5,021 4.1 3,666 5.8 3,845 3.2
Adjustable-rate loans on existing
property 8,524 7.0 3,235 5.1 7,239 5.9
Consumer and other loans(3) 3,589 3.0 1,332 2.1 2,139 1.7
-------- ----- ------- ----- -------- -----
Total loans originated $121,415 100.0% $62,870 100.0% $121,915 100.0%
======== ===== ======= ===== ======== =====
Loans and mortgage-backed securities
purchased
Mortgage-backed securities $ 3,380 100.0% $ 1,400 100.0% $ 3,166 100.0%
======== ===== ======= ===== ======== =====
Loans and mortgage-backed securities sold:
Loans $ 34,645 96.1% $16,566 100.0% $ 39,080 100.0%
Mortgage-backed securities 1,406 3.9% - -
-------- ----- ------- ----- -------- -----
Total $ 36,051 100.0% $16,566 100.0% $ 39,080 100.0%
======== ===== ======= ===== ======== =====
Principal Repayments:
Loans $ 42,079 95.4% $39,201 94.0% $ 55,825 85.8%
Mortgage-backed securities 2,040 4.6% 2,515 6.0 9,207 14.2
-------- ----- ------- ----- -------- -----
Total $ 44,119 100.0% $41,716 100.0% $ 65,032 100.0%
======== ===== ======= ===== ======== =====
<FN>
- ----------------------------
(1) Excludes home equity lines of credit.
(2) Includes construction loans for which Winton has committed to a permanent
end-loan.
(3) Consists primarily of deposit account, auto and education loans.
</TABLE>
FEDERAL LENDING LIMIT. OTS regulations impose a lending limit on the
aggregate amount that a savings association can lend to one borrower to an
amount equal to 15% of the association's total capital for risk-based capital
purposes plus any loan reserves not already included in total capital (the
"Lending Limit Capital"). A savings association may loan to one borrower an
additional amount not to exceed 10% of the association's Lending Limit Capital,
if the additional amount is fully secured by certain forms of "readily
marketable collateral." Real estate is not considered "readily marketable
collateral." In applying this limit, the regulations require that loans to
certain related or affiliated borrowers be
-10-
<PAGE> 11
aggregated. An exception to this limit permits loans of any type to one borrower
of up to $500,000. In addition, the OTS, under certain circumstances, may permit
exceptions to the lending limit on a case-by-case basis.
Based on the 15% limit, Winton was able to lend approximately $3.1
million to one borrower at September 30, 1996. Winton had no outstanding loans
in excess of such limit at September 30, 1996.
LOAN ORIGINATION AND OTHER FEES. Winton realizes loan origination fee
and other fee income from its lending activities and also realizes income from
late payment charges, application fees, and fees for other miscellaneous
services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with SFAS No. 91 as
an adjustment to yield over the life of the related loan.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. When a
borrower fails to make a required payment on a loan, Winton attempts to cause
the deficiency to be cured by contacting the borrower. In most cases,
deficiencies are cured promptly.
Winton attempts to minimize loan delinquencies through the assessment of
late charges and adherence to its established collection procedures. After a
mortgage loan payment is 15 days delinquent, a late charge of 5% of the amount
of the payment is assessed and Winton will contact the borrower by mail or phone
to request payment. In certain limited instances, Winton may modify the loan or
grant a limited moratorium on loan payments to enable the borrower to reorganize
his financial affairs. If the loan continues in a delinquent status for 90 days
or more, Winton generally will initiate foreclosure proceedings.
Real estate acquired by Winton as a result of foreclosure or by deed in
lieu of foreclosure is classified as "real estate owned" until it is sold. When
property is so acquired, it is recorded at the lower of the loan's unpaid
principal balance or fair value at the date of foreclosure less estimated
selling expenses. Periodically, real estate owned is reviewed to ensure that
fair value is not less than carrying value, and any allowance resulting
therefrom is charged to earnings as a provision for losses on real estate
acquired through foreclosure. All costs incurred from the date of acquisition
are expensed in the period paid.
The following table reflects the amount of loans in delinquent status as
of the dates indicated:
<TABLE>
<CAPTION>
At September 30,
----------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans delinquent
30 to 59 days $3,186 $2,350 $1,905 $2,983 $3,164
60 to 89 days 692 337 348 679 432
90 or more days 923 602 432 1,401 338
-------- -------- -------- -------- --------
Total delinquent loans $4,801 $3,289 $2,685 $5,063 $3,934
====== ====== ====== ====== ======
Ratio of total delinquent loans to total
loans (1) 1.83% 1.52% 1.29% 2.82% 2.17%
===== ===== ===== ===== =====
- -----------------------------
<FN>
(1) Includes loans held for sale.
</TABLE>
All delinquent loans are reviewed on a regular basis and are placed on
non-accrual status when, in the opinion of management, the collection of
additional interest is doubtful or the loans meet the non-accrual criteria
previously established by regulatory authorities. Residential mortgage loans are
placed on non-accrual status when either principal or interest is considered
uncollectible or when the principal balance and accrued interest exceed 90% of
the appraised value of the property at the time of loan origination. Consumer
loans generally are charged off when the loan becomes over 120 days delinquent.
Nonresidential real estate loans are evaluated for non-accrual status when the
loan is 90 days or more past
-11-
<PAGE> 12
due. Interest accrued and unpaid at the time a loan is placed on non-accrual
status is charged against interest income. Subsequent payments are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan. The
amount of interest which would have been earned on nonaccruing loans, had such
loans been current, for the year ended September 30, 1996, is approximately
$53,000.
The following table sets forth information with respect to Winton's
nonperforming assets for the periods indicated. During the periods shown, Winton
had no restructured loans within the meaning of SFAS No. 15. In addition, as of
September 30, 1996, Winton had no loans which were not reflected in the table as
non-accrual, 90 days past due or restructured, which may become so in the near
future because management has concerns as to the ability of the borrowers to
comply with repayment terms.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
non-accrual basis:(1)
Real estate:
Construction $ -- $ -- $ -- $262 $ --
Residential 548 130 311 472 192
Nonresidential 57 448 -- 223 --
Consumer and other -- -- -- 185 53
---- ---- ---- ------ ----
Total 605 578 311 1,142 245
Accruing loans which are
contractually past due 90 days or
more:
Real estate:
Residential 132 -- 114 199 75
Nonresidential 182 24 -- 42 --
Consumer and other 4 -- 7 18 18
---- ---- ---- ------ ----
Total 318 24 121 259 93
---- ---- ---- ------ ----
Total of non-accrual and 90 days
past due loans $923 $602 $432 $1,401 $338
==== ==== ==== ====== ====
Percentage of total loans 0.35% 0.28% 0.21% 0.78% 0.19%
===== ===== ===== ===== =====
Other nonperforming assets(2) $561 $343 $206 $209 $468
==== ==== ==== ==== ====
- ----------------------------
<FN>
(1) Non-accrual status denotes loans on which, in the opinion of management,
the collection of additional interest is unlikely, or loans that meet
non-accrual criteria as established by regulatory authorities. Payments
received on a non-accrual loan are either applied to the outstanding
principal balance or recorded as interest income, depending on management's
assessment of the collectibility of the loan.
(2) Consists of real estate acquired through foreclosure which is carried at
the lower of cost or fair value less estimated selling expenses.
</TABLE>
During fiscal 1993, nonperforming assets were at a higher level than in fiscal
1992 and 1994, due to an overall increase in loan delinquencies. The 39%
increase in nonperforming assets to $602,000 at the end of fiscal 1995 was
primarily attributable to one delinquent commercial loan of approximately
$448,000 which was paid current in October 1995. The 53% increase in
nonperforming loans at the end of fiscal 1996 is the result of the increased
size of the loan portfolio and increased loan delinquencies.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are
-12-
<PAGE> 13
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. "Doubtful" assets have
the same weaknesses as "substandard" assets, with the additional characteristics
that (i) the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable and (ii) there is a
high possibility of loss. An asset classified "loss" is considered uncollectible
and of such little value that its continuance as an asset of the institution is
not warranted. The regulations also contain a "special mention" category,
consisting of assets which do not currently expose an institution to a
sufficient degree of risk to warrant classification but which possess credit
deficiencies or potential weaknesses deserving management's close attention.
Generally, Winton classifies as "substandard" all loans that are
delinquent more than 60 days, unless management believes the delinquency status
is short-term due to unusual circumstances. Loans delinquent fewer than 60 days
may also be classified if the loans have the characteristics described above
rendering classification appropriate.
The aggregate amount of Winton's classified assets at September 30, 1996
was as follows:
<TABLE>
<CAPTION>
At September 30, 1996
---------------------
(In thousands)
<S> <C>
Substandard $1,898
Doubtful ----
Loss ----
----------
Total classified assets $1,898
----------
</TABLE>
Federal examiners are authorized to classify an association's assets. If
an association does not agree with an examiner's classification of an asset, it
may appeal this determination to the Central Regional Director of the OTS.
Winton had no disagreements with the examiners regarding the classification of
assets at the time of the last examination.
OTS regulations require that Winton establish prudent general allowances
for loan losses for any loan classified as substandard or doubtful. If an asset,
or portion thereof, is classified as loss, the association must either establish
specific allowances for losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount.
ALLOWANCE FOR LOAN LOSSES. The Board of Directors reviews on a
quarterly basis the allowance for loan losses as it relates to a number of
relevant factors, including, but not limited to, trends in the level of
nonperforming assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience and possible losses
arising from specific problem assets. To a lesser extent, management also
considers loan concentrations to single borrowers and changes in the composition
of the loan portfolio. While the Board of Directors believes that it uses the
best information available to determine the allowance for loan losses,
unforeseen market conditions could result in adjustments, and net earnings could
be significantly affected if circumstances differ substantially from the
assumptions used in making the final determination. At September 30, 1996,
Winton's allowance for loan losses totaled $857,000.
-13-
<PAGE> 14
The following table sets forth an analysis of Winton's allowance for
losses on loans for the periods indicated.
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $654 $582 $742 $502 $193
Charge-offs:
One- to four-family (28) (18) (84) (13) (94)
Multifamily and
nonresidential real estate (12) (104) (36) -- --
Construction -- -- -- -- --
Consumer (10) -- (143) (16) (45)
---- ---- ---- ---- ----
Total (50) (122) (263) (29) (139)
Total recoveries -- 106 58 21 6
---- ---- ---- ---- ----
Net charge-offs (50) (16) (205) (8) (133)
Provision for loan losses 253 88 45 248 442
---- ---- ---- ---- ----
Balance at end of period $857 $654 $582 $742 $502
==== ==== ==== ==== ====
Ratio of net charge-offs during
the period to average loans
outstanding during the period(1) .02% -- .11% -- .08%
==== ==== ==== ==== ====
-------------------------------
<FN>
(1) During the respective periods there were $225.2 million, $202.8 million,
$184.8 million, $173.8 million and $184.9 million in average loans
outstanding.
</TABLE>
-14-
<PAGE> 15
The following table provides an allocation of Winton's allowance for
possible loan losses as of each of the following dates:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Specific allowances
One- to four-family $ 80 $ -- $ -- $ -- $ 9
Multi-family and
nonresidential real estate -- -- -- 36 --
Construction and development -- -- -- -- --
Consumer -- -- -- -- --
Commercial business 25 -- -- -- --
---- ---- ---- ---- ----
Total specific allowances 105 -- -- 36 9
General allowances
One- to four-family 308 268 204 266 251
Multi-family and
nonresidential real estate 339 308 276 280 100
Construction and development -- -- -- -- --
Consumer 100 75 100 157 139
Commercial business 5 3 2 3 3
---- ---- ---- ---- ----
Total general allowances 752 654 582 706 493
---- ---- ---- ---- ----
Total allowance for
possible loan losses $857 $654 $582 $742 $502
==== ==== ==== ==== ====
</TABLE>
Winton increased its allowance for loan losses from $654,000 at September 30,
1995, to $857,000 at September 30, 1996, due primarily to growth in the loan
portfolio and to current and anticipated economic conditions. Because the loan
loss allowance is based on estimates, it is monitored regularly on an ongoing
basis and adjusted as necessary to provide an adequate allowance.
INVESTMENT ACTIVITIES
OTS regulations require that Winton maintain a minimum amount of liquid
assets, which may be invested in U. S. Treasury obligations, securities of
various federal agencies, certificates of deposit at insured banks, bankers'
acceptances and federal funds. Winton is also permitted to make investments in
certain commercial paper, corporate debt securities rated in one of the four
highest rating categories by one or more nationally recognized statistical
rating organizations, and mutual funds, as well as other investments permitted
by federal regulations. In recent periods, Winton has maintained liquid assets
on a monthly average basis in an amount between 5.24% and 7.25% of total assets.
See "Regulation - Office of Thrift Supervision -- Liquidity" and Item 6,
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
-15-
<PAGE> 16
The following table presents the amortized cost and market values of
Winton's investment securities, including those designated as available for
sale, at the dates indicated:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------------
1996 1995 1994
--------------------- ----------------------- ------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
U.S. government and agency
obligations $ 9,593 $ 9,623 $10,007 $10,101 $9,125 $8,958
Corporate equity securities -- -- -- -- 191 438
------- ------- ------- ------- ------ ------
9,593 9,623 10,007 10,101 9,316 9,396
Available for sale:
U.S. government and agency
obligations 2,098 2,120 2,604 2,655 -- --
Corporate equity securities 189 461 189 418 -- --
------- ------- ------- ------- ------ ------
2,287 2,581 2,793 3,073 -- --
------- ------- ------- ------- ------ ------
Total $11,880 $12,204 $12,800 $13,174 $9,316 $9,396
======= ======= ======= ======= ====== ======
</TABLE>
The following table presents the contractual maturities or terms to
repricing of investment securities at carrying value and the weighted-average
yields at September 30, 1996:
<TABLE>
<CAPTION>
Maturing within Maturing within
one year after one to five years
September 30, 1996 after September 30, 1996 Total
---------------------- ------------------------ -----------------------
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to maturity $1,488 5.10% $8,105 6.55% $ 9,593 6.33%
Available for sale 1,502 7.33% 596 7.10% 2,098 7.27%
------ ----- ------ ----- ------- -----
Total $2,990 6.22% $8,701 6.59% $11,691 6.50%
====== ===== ====== ===== ======= =====
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of
Winton's funds for use in lending and other investment activities. In addition
to deposits, Winton derives funds from interest payments and principal
repayments on loans and mortgage-backed securities, advances from the FHLB,
income on earning assets, service charges and gains on the sale of assets. Loan
payments are a relatively stable source of funds, while deposit inflows and
outflows fluctuate more in response to general interest rates and money market
conditions. FHLB advances are used on a short-term basis to compensate for
reductions in the availability of funds from other sources or on a longer term
basis for general business purposes.
DEPOSITS. Deposits are attracted principally from within Winton's
primary market area through the offering of a broad selection of deposit
instruments, including negotiable order of withdrawal ("NOW") accounts, regular
passbook savings accounts, Christmas Club accounts, term certificate accounts
and individual retirement accounts. Interest rates paid, maturity terms, service
fees and withdrawal penalties for the various types of accounts are established
periodically by management of Winton based on Winton's liquidity requirements,
growth goals and interest rates paid by competitors. Winton does not use brokers
to attract deposits. In a rising interest rate environment, Winton attempts to
manage its interest rate risk by lengthening the term to maturity or repricing
of more of its deposit liabilities.
-16-
<PAGE> 17
At September 30, 1996, Winton's certificates of deposit totaled $159.7
million, or 72.1% of total deposits. Of such amount, approximately $92.4 million
in certificates of deposit mature within one year. Based on past experience and
Winton's prevailing pricing strategies, management believes that a substantial
percentage of such certificates will renew with Winton at maturity. If there is
a significant deviation from historical experience, Winton can utilize
borrowings from the FHLB as an alternative to this source of funds.
During fiscal 1995 and 1996, Winton offered certificates of deposits
with terms from 18 months to five years at rates which adjust monthly with
designated market indices, which were the prime rate or the three-year Treasury
rate. Approximately $10 million of these certificates of deposit were
outstanding at September 30, 1996. Because these certificates of deposit are
market rate sensitive, they increase Winton's interest rate risk. See
"Asset/Liability Management."
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Winton at September 30, 1996:
<TABLE>
<CAPTION>
Percent
of total
Amount deposits
------ --------
<S> <C> <C>
Transaction accounts:
Passbook accounts(1) $ 49,446 22.3%
Club accounts(2) 205 0.1
NOW accounts(3) 12,187 5.5
-------- -----
Total transaction accounts 61,838 27.9
Certificates of deposit(4):
2.00 - 3.99% 1,004 0.4
4.00 - 5.99% 86,346 39.0
6.00 - 7.99% 71,791 32.4
8.00 - 9.99% 554 0.3
-------- -----
Total certificates of deposit 159,695 72.1
-------- -----
Total deposits $221,533 100.0%
======== =====
<FN>
- -----------------------------
(1) Winton's weighted average rate on passbook accounts fluctuates with the
general movement of interest rates. The weighted average interest rate on
passbook accounts was 3.55% at September 30, 1996.
(2) Winton's weighted average interest rate paid on Christmas Club accounts
fluctuates with the general movement of interest rates. At September 30,
1996, the weighted average rate on club accounts was 3.00%.
(3) Winton's weighted average interest rate paid on NOW accounts fluctuates
with the general movement of interest rates. At September 30, 1996, the
weighted average rate on NOW accounts was 1.70%.
(4) Includes Individual Retirement Accounts and jumbo certificates of deposits
(those with balances in excess of $100,000). Terms of certificates of
deposit range from 30 days to 15 years, with the average accounts ranging
from 90 days to 5 years.
</TABLE>
-17-
<PAGE> 18
The following table shows rate and maturity information for Winton's
certificates of deposit as of September 30, 1996:
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
---- -------- ------- ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
2.00 - 3.99% $ 1,004 $ -- $ -- $ -- $ 1,004
4.00 - 5.99 60,285 16,113 9,275 673 86,346
6.00 - 7.99 31,034 24,172 7,619 8,966 71,791
8.00 - 9.99 100 100 144 210 554
------- ------- ------- ------ --------
Total certificates of
deposit $92,423 $40,385 $17,038 $9,849 $159,695
======= ======= ======= ====== ========
</TABLE>
The following table presents the amount of Winton's certificates of
deposit of $100,000 or more each, by the time remaining until maturity at
September 30, 1996:
<TABLE>
<CAPTION>
Maturity At September 30, 1996
-------- ---------------------
(In thousands)
<S> <C>
Three months or less $ 4,312
Over 3 months to 6 months 5,358
Over 6 months to 12 months 11,112
Over twelve months 18,580
-------
Total $39,362
=======
</TABLE>
BORROWINGS. The Federal Home Loan Bank System functions as a central
reserve bank providing credit for its member institutions and certain other
financial institutions. See "Regulation - Federal Home Loan Bank." As a member
in good standing of the FHLB, Winton is authorized to apply for advances from
the FHLB, provided certain standards of creditworthiness have been met. Under
current regulations, an association must meet certain qualifications to be
eligible for FHLB advances. The extent to which an association is eligible for
such advances will depend upon whether it meets the Qualified Thrift Lender Test
(the "QTL test"). See "Regulation -- Office of Thrift Supervision -- Qualified
Thrift Lender Test." If an association meets the QTL test, it will be eligible
for 100% of the advances it would otherwise be eligible to receive. If an
association does not meet the QTL test, it will be eligible for such advances
only to the extent it holds specified QTL test assets. At September 30, 1996,
Winton was in compliance with the QTL test.
During the year ended September 30, 1996, Winton's only borrowings were
FHLB advances. The following table sets forth the maximum amount of Winton's
FHLB advances outstanding at any month-end, during the periods shown, and the
average aggregate balances of FHLB advances for such periods:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Maximum amount of FHLB advances $46,376 $37,253 $33,671
======= ======= =======
Average amount of FHLB advances outstanding during
period $35,292 $31,312 $25,039
======= ======= =======
- ------------------------------
</TABLE>
-18-
<PAGE> 19
The following table sets forth certain information as to Winton's FHLB
advances at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
FHLB advances $46,376 $29,830 $33,671
======= ======= =======
Weighted average interest cost of FHLB advances during
period based on month end balances 5.66% 5.98% 5.00%
===== ===== =====
</TABLE>
ASSET/LIABILITY MANAGEMENT. Winton's earnings depend primarily upon its
net interest income, which is the difference between its interest income on its
interest-earning assets, such as mortgage loans, investment securities and
mortgage-backed securities, and its interest expense paid on its
interest-bearing liabilities, consisting of deposits and borrowings. As market
interest rates change, asset yields and liability costs do not change
simultaneously. Due to maturity, repricing and timing differences of
interest-earning assets and interest-bearing liabilities, earnings will be
affected differently under various interest rate scenarios. Winton has sought to
limit these net income fluctuations and manage interest rate risk by originating
adjustable-rate loans and purchasing relatively short-term and variable-rate
investments and securities.
-19-
<PAGE> 20
The following table sets forth certain information relating to Winton's
average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the years indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of interest-earning assets or
interest-bearing liabilities, respectively, for the years presented. Average
balances are derived from month-end balances, which include nonaccruing loans in
the loan portfolio, net of the allowance for losses on loans. Management does
not believe that the use of month-end balances instead of daily balances has
caused any material differences in the information presented.
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ------------------------------ ------------------------------
Average Interest Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate balance paid rate
------------ ---- ---- ------------ ---- ---- ----------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $225,164 $18,911 8.40% $202,844 $17,031 8.40% $184,824 $15,436 8.35%
Mortgage-backed securities -
available for sale 2,400 113 4.71 606 34 5.61 -- -- --
Mortgage-backed securities - held
to maturity 17,311 1,070 6.18 18,946 1,016 5.36 22,573 1,063 4.71
Investment securities - held to
maturity 9,927 636 6.41 9,936 632 6.36 9,809 519 5.29
Investment securities - available
for sale 3,228 185 5.73 1,030 56 5.44 -- -- --
Other interest-earning assets 3,049 199 6.53 4,215 173 4.10 4,304 169 3.93
-------- -------- ---- --------- -------- ---- --------- -------- ----
Total interest-earning assets 261,079 21,114 8.09 237,577 18,942 7.97 221,510 17,187 7.76
Non-interest-earning assets 7,283 6,816 6,801
-------- -------- --------
Total assets $268,362 $244,393 $228,311
======== ======== ========
Interest-bearing liabilities:
Deposits $209,879 10,700 5.10% $191,870 9,085 4.73% $183,673 7,878 4.29%
FHLB advances 35,292 1,996 5.66 31,312 1,874 5.98 25,039 1,252 5.00
-------- -------- ---- -------- ------- ---- --------- ------- ----
Total interest-bearing
liabilities 245,171 12,696 5.18 223,182 10,959 4.91 208,712 9,130 4.37
-------- ------- ---- -------- ------ ---- --------- ------- ----
Non-interest-bearing liabilities 2,349 1,473 1,166
-------- -------- ---------
Total liabilities 247,520 224,655 209,878
Shareholders' equity 20,842 19,738 18,433
-------- -------- ---------
Total liabilities and
shareholders' equity $268,362 $244,393 $228,311
======== ======== ========
Net interest income/
Interest rate spread $8,418 2.91% $7,983 3.06% $8,057 3.39%
====== ===== ====== ===== ====== =====
Net interest margin (net interest
income as a percent of average
interest-earning assets) 3.22% 3.36% 3.64%
===== ===== =====
Average interest-earning assets to
interest-bearing liabilities 106.49% 106.45% 106.13%
======= ======= =======
<FN>
- ---------------------------
(1) Includes loans held for sale and non-accrual loans.
</TABLE>
-20-
<PAGE> 21
The table below describes the extent to which changes in interest rates
and changes in volume of interest-earning assets and interest-bearing
liabilities have affected Winton's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by prior year volume) and (iii) total
changes in rate and volume. The combined effects of changes in both volume and
rate, which cannot be separately identified, have been allocated proportionately
to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
--------------------------- --------------------------
Increase (Decrease) Increase (Decrease)
due to due to
--------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable
to:
Loans receivable(1) $1,880 $ -- $1,880 $1,511 $84 $1,595
Mortgage-backed securities-
available for sale 83 (4) 79 34 -- 34
Mortgage-backed securities-
held to maturity (113) 167 54 (215) 168 (47)
Investment securities -
available for sale (1) 5 4 7 106 113
Investment securities -
held to maturity 126 3 129 56 -- 56
Other interest-earning
assets(2) (98) 124 26 (4) 8 4
------ ------ ------ ------ ------ ------
Total interest-earning assets $1,877 $295 $2,172 $1,389 $366 $1,755
====== ==== ====== ====== ==== ======
Interest expense attributable
to:
Deposits $ 883 $ 732 $1,615 $ 363 $ 844 $1,207
FHLB advances and other
borrowings 207 (85) 122 345 277 622
------ ------ ------ ------ ------ ------
Total interest-bearing
liabilities $1,090 $647 $1,737 $708 $1,121 $1,829
====== ==== ====== ====== ==== ======
Increase (decrease) in net
interest income $ 435 $ (74)
====== ======
<FN>
- ------------------------------
(1) Includes loans held for sale.
(2) Includes interest-bearing deposits and certificates of deposit in other
financial institutions.
</TABLE>
Winton's interest rate spread is the principal determinant of income.
The interest rate spread, and therefore net interest income, can vary
considerably over time because asset and liability repricing do not coincide.
Moreover, the long-term or cumulative effect of interest rate changes can be
substantial. Interest rate risk is defined as the sensitivity of an
institution's earnings and net asset values to changes in interest rates. The
management and Board of Directors of Winton attempt to manage Winton's exposure
to interest rate risk in a manner to maintain the projected four-quarter
percentage change in net interest income and the projected change in the market
value of portfolio equity within the limits established by the Board of
Directors, assuming a permanent and instantaneous parallel shift in interest
rates.
As a part of its effort to monitor its interest rate risk, Winton
reviews the reports of the OTS which set forth the application of the "net
portfolio value" ("NPV") methodology, adopted by the OTS as part of its capital
regulations, to the assets and liabilities of Winton. Although Winton is not
currently subject to the NPV regulation, because its
-21-
<PAGE> 22
implementation has been delayed by the OTS, the application of the NPV
methodology may illustrate Winton's level of interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing liabilities. The application of the methodology attempts to
quantify interest rate risk as the change in the NPV which would result from a
theoretical 200 basis point (100 basis point equals 1%) change in market
interest rates. Both a 200 basis point increase in market interest rates and a
200 basis point decrease in market interest rates are considered. If the NPV
would decrease more than 2% of the present value of the institution's assets
with either an increase or a decrease in market rates, the institution would
have to deduct 50% of the amount of the decrease in excess of such 2% in the
calculation of the institution's risk-based capital, if the regulations were in
effect. Even before the regulation is in effect, OTS could increase Winton's
risk-based capital requirement on an individualized basis to address excess
interest rate risk. See "Regulation -- Office of Thrift Supervision --
Regulatory Capital Requirements."
At September 30, 1996, 2% of the present value of Winton's assets was
approximately $5.9 million. Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate risk
of a 200 basis point decrease) was $9.0 million at September 30, 1996, Winton
would have been required to deduct $1.6 million (50% of the approximate $3.1
million difference) from its capital in determining whether Winton met its
risk-based capital requirement, if the regulation had been in effect for Winton.
Regardless of such reduction, however, Winton's risk-based capital at September
30, 1996, would still have exceeded the regulatory requirement by approximately
$4.7 million.
Presented below, as of September 30, 1996, is an analysis of Winton's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis points in market interest rates.
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------------------------
Change in Interest Rate $ Change % Change
(Basis Points) In NPV in NPV
-------------- ------ ------
(Dollars in thousands)
<S> <C> <C>
+300 $(13,908) (57)%
+200 ( 9,005) (37)
+100 ( 4,306) (18)
0 -- --
-100 3,459 14
-200 5,698 23
-300 7,783 32
</TABLE>
As illustrated in the table, NPV is more sensitive to rising rates than
declining rates. Such difference in sensitivity occurs principally because, as
rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when
interest rates are declining. Thus, in a rising interest rate environment, the
amount of interest Winton would receive on its loans would increase relatively
slowly as loans are slowly prepaid and new loans at higher rates are made.
Moreover, the interest Winton would pay on its deposits would increase rapidly
because Winton's deposits generally have shorter periods to repricing.
Assumptions used in calculating the amounts in this table are OTS assumptions.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
In the event that interest rates rise, Winton's net interest income
could be expected to be negatively affected. Moreover, rising interest rates
could negatively affect Winton's earnings due to diminished loan demand.
-22-
<PAGE> 23
The following table sets forth, for the years and at the date indicated,
the weighted average yields earned on Winton's interest-earning assets, the
weighted average interest rates paid on interest-bearing liabilities, the
interest rate spread and the net interest margin on interest-earning assets.
<TABLE>
<CAPTION>
At September 30,
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on loan portfolio 8.01% 8.24% 7.82%
Weighted average yield on mortgage-backed
securities 6.07 6.36 5.22
Weighted average yield on investment
securities 6.55 6.51 6.09
Weighted average yield on other
interest-earning assets 6.92 4.99 4.27
Weighted average yield on all
interest-earning assets 7.87 7.95 7.52
Weighted average interest rate paid on
deposits 5.16 5.13 3.99
Weighted average rate paid on borrowings 6.15 6.11 5.54
Weighted average interest rate paid on all
interest-bearing liabilities 5.33 5.26 4.22
Interest rate spread (spread between
weighted average interest rate on all
interest-earning assets and all
interest-bearing liabilities) 2.54 2.69 3.30
Net yield (net interest income as a
percentage of average interest-earning
assets) 3.22 3.36 3.64
</TABLE>
COMPETITION
Winton competes for deposits with other savings associations, commercial
banks and credit unions and with the issuers of commercial paper and other
securities, such as shares in money market mutual funds. The primary factors in
competing for deposits are interest rates and convenience of office location. In
making loans, Winton competes with other savings associations, commercial banks,
consumer finance companies, credit unions, leasing companies and other lenders.
Winton competes for loan originations primarily through the interest rates and
loan fees it charges and through the efficiency and quality of services it
provides to borrowers. Competition is affected by, among other things, the
general availability of lendable funds, general and local economic conditions,
current interest rate levels and other factors which are not readily
predictable.
Due to Winton's size relative to the many other financial institutions
in its market area, management believes that Winton does not have a substantial
share of the deposit and loan markets.
The size of financial institutions competing with Winton is likely to
increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions. Such
increased competition may have an adverse effect upon Winton.
SUBSIDIARY ACTIVITIES
Winton has no subsidiaries. WFC's only subsidiary is Winton.
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<PAGE> 24
PERSONNEL
As of September 30, 1996, Winton had 67 full-time employees and 6
part-time employees. Winton believes that relations with its employees are
excellent. Winton offers health, disability, life and dependent care benefits.
None of the employees of Winton are represented by a collective bargaining unit.
REGULATION
WFC is a savings and loan holding company within the meaning of the Home
Owners Loan Act, as amended (the "HOLA"). Consequently, WFC is subject to
regulation, examination and oversight by the OTS and must submit periodic
reports to the OTS concerning its activities and financial condition. Because
WFC is a corporation organized under Ohio law, WFC is subject to provisions of
the Ohio Revised Code applicable to corporations generally.
As a savings and loan association chartered under the laws of Ohio,
Winton is subject to regulation, examination and oversight by the Superintendent
of the Division of Financial Institutions of the Department of Commerce of the
State of Ohio (the "Ohio Superintendent"). Because Winton's deposits are insured
by the FDIC, Winton also is subject to regulation and examination by the OTS and
regulatory oversight by the FDIC. Winton must file periodic reports with the
Ohio Superintendent and the OTS concerning its activities and financial
condition. Examinations are conducted periodically by these federal and state
regulators to determine whether Winton is in compliance with various regulatory
requirements and is operating in a safe and sound manner. Winton is a member of
the FHLB and is subject to certain regulations promulgated by the Board of
Governors of the Federal Reserve System (the "FRB").
Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS and Winton may be
regulated under federal law as a bank or be required to change its charter. Such
change in regulation or charter would likely change the range of activities in
which Winton may engage and would probably subject Winton to more regulation by
the FDIC. In addition, WFC might become subject to a different scheme of holding
company which may limit the activities in which WFC may engage, and subject WFC
to other additional regulatory requirements, including separate capital
requirements. At this time, WFC cannot predict when or whether Congress may
actually pass legislation regarding WFC's and Winton's regulatory requirements
or charter. Although such legislation may change the activities in which either
WFC and Winton may engage, it is not anticipated that the current activities of
both WFC and Winton will be materially affected by those activity limits.
OHIO CORPORATION LAW
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between such an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination may
not occur unless (1) one of the specified exceptions applies, (2) the holders of
at least two-thirds of the voting shares, and of at least a majority of the
voting shares not beneficially owned by the Interested Shareholder, approve the
business combination at a meeting called for such purpose, or (3) the business
combination meets certain statutory criteria designed to ensure that the issuing
public corporation's remaining shareholders receive fair consideration for their
shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a
-24-
<PAGE> 25
person who became an Interested Shareholder prior to the adoption of such an
amendment as if the amendment had not been adopted. Neither the Articles of
Incorporation of WFC nor Winton opt out of the protection afforded by Chapter
1704.
CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that certain acquisitions of
voting securities which would result in the acquiring shareholder owning 20%,
33-1/3%, or 50% of the outstanding voting securities of WFC (a "Control Share
Acquisition") must be approved in advance by the holders of at least a majority
of the outstanding voting shares represented at a meeting at which a quorum is
present and a majority of the portion of the outstanding voting shares
represented at such a meeting, excluding the voting shares owned by the
acquiring shareholder. The Control Share Acquisition Statute was intended, in
part, to protect shareholders of Ohio corporations from coercive tender offers.
TAKEOVER BID STATUTE. Ohio law also contains a statute regulating
takeover bids for any Ohio corporation, including savings and loan associations.
Such statute provides that no offeror may make a takeover bid unless (i) at
least 20 days prior thereto the offeror announces publicly the terms of the
proposed takeover bid and files with the Ohio Division of Securities (the
"Securities Division") and provides the target company with certain information
in respect of the offeror, his ownership of the company's shares and his plans
for the company, and (ii) within ten days following such filing either (a) no
hearing is required by the Securities Division, (b) a hearing is requested by
the target company within such time but the Securities Division finds no cause
for hearing exists, or (c) a hearing is ordered and upon such hearing the
Securities Division adjudicates that the offeror proposes to make full, fair and
effective disclosure to offers of all information material to a decision to
accept or reject the offer.
The takeover bid statute also states that no offeror shall make a
takeover bid if he owns 5% or more of the issued and outstanding equity
securities of any class of the target company, any of which were purchased
within one year before the proposed takeover bid, and the offeror, before making
any such purchase, failed to announce his intention to gain control of the
target company, or otherwise failed to make full and fair disclosure of such
intention to the persons from whom he acquired such securities. The United
States District Court for the Southern District of Ohio has determined that the
Ohio takeover bid statute is preempted by federal regulation.
OHIO SAVINGS AND LOAN REGULATION
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the laws of
the State of Ohio and imposes assessments on Ohio associations based on their
asset size to cover the cost of supervision and examination. Ohio law prescribes
the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments in real estate, subsidiaries and corporate or government
securities that such associations may make. The ability of Ohio associations to
engage in these state-authorized investments and activities is subject to
oversight and approval by the FDIC, if such investments or activities are not
permissible for a federally chartered savings association. See " - Federal
Deposit Insurance Corporation -- State Association Activities." The Ohio
Superintendent also has approval authority over any mergers involving or
acquisitions of control of Ohio savings and loan associations. The Ohio
Superintendent may initiate certain supervisory measures or formal enforcement
actions against Ohio associations. Ultimately, if the grounds provided by law
exist, the Superintendent may place an Ohio association in conservatorship or
receivership.
In addition to being governed by the laws of Ohio specifically governing
savings and loan associations, Winton is also governed by Ohio corporate law, to
the extent such law does not conflict with the laws specifically governing
savings and loan associations.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office in the Department of the Treasury and is
responsible for the regulation and supervision of all federally chartered
savings associations and all other savings associations, the deposits of which
are insured by the FDIC in the SAIF. The OTS issues regulations governing the
operation of savings associations, regularly examines such associations and
imposes assessments on savings associations based on their asset size to cover
the costs of general supervision and examination. The OTS also may initiate
enforcement actions against savings associations and certain persons affiliated
with them for violations of laws or regulations or for engaging in unsafe or
unsound practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
-25-
<PAGE> 26
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests in its designated service area, with particular emphasis on low- to
moderate-income communities and borrowers in that area. Winton has received a
"satisfactory" examination rating under those regulations.
REGULATORY CAPITAL REQUIREMENTS. Winton is required by OTS regulations
to meet certain minimum capital requirements. The following table sets forth the
amount and percentage level of regulatory capital of Winton at September 30,
1996, and the amount by which it exceeds the minimum requirements. Tangible and
core capital are reflected as a percentage of adjusted total assets. Risk-based
(or total) capital, which consists of core and supplementary capital, is
reflected as a percentage of risk-weighted assets.
<TABLE>
<CAPTION>
At September 30, 1996
--------------------------------------
Amount Percent
------ -------
(In thousands)
<S> <C> <C>
Tangible capital $19,855 6.83%
Requirement 4,362 1.50
------- -----
Excess $15,493 5.33%
======= =====
Core capital $19,855 6.83%
Requirement 8,725 3.00
------- -----
Excess $11,130 3.83%
======= =====
Risk-based capital $20,607 11.50%
Risk-based requirement 14,328 8.00
------- -----
Excess $ 6,279 3.50%
======= =====
</TABLE>
Current capital requirements call for tangible capital of 1.5% of
adjusted total assets, core capital (which for Winton consists solely of
tangible capital) of 3.0% of adjusted total assets and risk-based capital (which
for Winton consists of core capital and general valuation allowances) of 8% of
risk-weighted assets (assets and certain off-balance sheet items are weighted at
percentage levels ranging from 0% to 100% depending on their relative risk). The
OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the association's examination rating and overall risk. Winton
does not anticipate that it will be adversely affected if the core capital
requirement regulation is amended as proposed. Winton's current core capital
ratio is 6.8%.
OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to that requirement a savings association would have to
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio as determined under the methodology of the OTS. If
the measured interest rate risk is above the level deemed normal under the
regulation, the association will be required to deduct one-half of such excess
exposure from its total capital when determining its risk-based capital. In
general, an association with less than $300 million in assets and a risk-based
capital ratio in excess of 12% will not be subject to the interest rate risk
component. Winton currently qualifies for such exemption. Pending implementation
of the interest rate risk component, the OTS has the authority to impose a
higher individualized capital requirement on any savings association it deems to
have excess interest rate risk. The OTS also may adjust the risk-based capital
requirement on an individualized basis to take into account risks due to
concentrations of credit and non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. The OTS has defined
these capital levels as follows: (1) well-capitalized associations must have
total risk-based capital of at least 10%, core risk-based capital (consisting
only of items that qualify for inclusion in core capital) of at least 6% and
core capital of at least 5%; (2) adequately capitalized associations are those
that meet the regulatory minimum of total risk-based capital of 8%, core
risk-based capital of 4% and
-26-
<PAGE> 27
core capital of 4% (except for associations receiving the highest examination
rating, in which case the level is 3%) but are not well-capitalized; (3)
undercapitalized associations are those that do not meet regulatory limits, but
that are not significantly undercapitalized; (4) significantly undercapitalized
associations have total risk-based capital of less than 6%, core risk-based
capital of less than 3% or core capital of less than 3%; and (5) critically
undercapitalized associations are those with tangible capital of 2% or less of
total assets. In addition, the OTS generally can downgrade an association's
capital category, notwithstanding its capital level, if, after notice and
opportunity for hearing, the association is deemed to be engaging in an unsafe
or unsound practice because it has not corrected deficiencies that resulted in
it receiving a less than satisfactory examination rating on matters other than
capital or it is deemed to be in an unsafe or unsound condition. All
undercapitalized associations must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such associations will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. Furthermore, critically undercapitalized institutions
must be placed in conservatorship or receivership within 90 days of reaching
that capitalization level, except under limited circumstances. Winton's capital
at September 30, 1996, met the standards for a well-capitalized institution.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the association's total assets at the
time the institution became undercapitalized or (b) the amount that is necessary
to bring the association into compliance with all capital standards applicable
to such association at the time the association fails to comply with its capital
restoration plan.
LIQUIDITY. OTS regulations require that savings associations maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each association to maintain an average daily
balance of short-term liquid assets of not less than 1% of the total of its net
withdrawable savings accounts and borrowings payable in one year or less.
Monetary penalties may be imposed upon associations failing to meet these
liquidity requirements. The eligible liquidity of Winton at September 30, 1996,
was approximately $15.5 million, or 6.8%, and exceeded the then applicable 5.0%
liquidity requirement by approximately $3.3 million.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, there was only one QTL test which
required savings associations to maintain a specified level of investments in
assets that are designated as qualifying thrift investments ("QTI"), which are
generally related to domestic residential real estate and manufactured housing
and include credit card, student and small business loans, stock issued by any
FHLB, the FHLMC or the FNMA. Under this test 65% of an institution's "portfolio
assets" (total assets less goodwill and other intangibles, property used to
conduct business and 20% of liquid assets) must consist of QTI on a monthly
average basis in 9 out of every 12 months. Congress created a second QTL test,
effective September 30, 1996, pursuant to which a savings association may also
meet the QTL test under the Internal Revenue Code of 1986, as amended (the
"Code"), for thrift institution status. According to the test under the Code, at
least 60% of the institution's assets (on a tax basis) must consist of specified
assets (generally loans secured by residential real estate or deposits,
educational loans, cash and certain governmental obligations). The OTS may grant
exceptions to the QTL test under certain circumstances. If a savings association
fails to meet the QTL test, the association and its holding company become
subject to certain operating and regulatory restrictions. A savings association
that fails to meet the QTL test will not be eligible for new FHLB advances. At
September 30, 1996, Winton met the QTL test.
LENDING LIMIT. OTS regulations generally limit the aggregate amount that
a savings association can lend to one borrower to an amount equal to 15% of the
association's Lending Limit Capital. A savings association may loan to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." Certain types of loans are not subject to this limit. In
applying this limit, the regulations require that loans to certain related
borrowers be aggregated. Notwithstanding the specified limits, an association
may lend to one borrower up to $500,000, for any purpose. At September 30, 1996,
Winton was in compliance with this lending limit. See "Lending Activities -
Federal Lending Limit."
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<PAGE> 28
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's Lending Limit Capital (or 200% of
Lending Limit Capital for qualifying institutions with less than $100 million in
assets). Most loans to directors, executive officers and principal shareholders
must be approved in advance by a majority of the "disinterested" members of the
board of directors of the association with any "interested" director not
participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public or as offered to all employees
in a company-wide benefit program, and loans to executive officers are subject
to additional limitations. Winton was in compliance with such restrictions at
September 30, 1996.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. WFC is an
affiliate of Winton. Generally, Sections 23A and 23B of the FRA (i) limit the
extent to which a savings association 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, (ii) limit the aggregate of all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as those
provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. Winton was in
compliance with these requirements and restrictions at September 30, 1996.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS imposes various restrictions
or requirements on the ability of associations to make capital distributions,
including dividend payments. An association is prohibited from declaring or
paying any dividends or from repurchasing any of its stock if, as a result, the
net worth of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its mutual
to stock conversion. OTS regulations also establish a system limiting capital
distributions according to ratings of associations based on their capital level
and supervisory condition.
The first rating category is Tier 1, consisting of associations that,
before and after the proposed distribution, meet their fully phased-in capital
requirements. Associations in this category may make capital distributions
during any calendar year equal to the greater of 100% of net income, current
year-to-date, plus 50% of the amount by which the lesser of the association's
tangible, core or risk-based capital exceeds its fully phased-in capital
requirement for such capital component, as measured at the beginning of the
calendar year, or the amount authorized for a Tier 2 association. A Tier 1
association deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 association. Winton meets the requirements
for a Tier 1 association and has not been notified of any need for more than
normal supervision.
The second category, Tier 2, consists of associations that before and
after the proposed distribution meet their current minimum, but not fully
phased-in, capital requirements. Associations in this category may make capital
distributions of up to 75% of net income over the most recent four quarters.
Tier 3 associations do not meet current minimum capital requirements and must
obtain OTS approval of any capital distribution. Tier 2 associations that
propose to make a capital distribution in excess of the noted safe harbor level
must also obtain OTS approval. Tier 2 associations proposed to make a capital
distribution within the safe harbor provisions and Tier 1 associations proposing
to make any capital distribution need only submit written notice to the OTS 30
days prior to such distribution.
As a subsidiary of WFC, Winton is required to give the OTS 30 days'
notice prior to declaring any dividend on its stock. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
Winton paid dividends of $904,000 to WFC during fiscal 1996.
In December 1995, the OTS issued a proposal to amend the capital
distribution limits. Under that proposal, associations which are not owned by a
holding company and which have a CAMEL examination rating of 1 or 2 could make a
capital distribution without notice to the OTS, if they remain adequately
capitalized, as described above, after the
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distribution is made. Any other association seeking to make a capital
distribution that would not cause the association to fall below the capital
levels to qualify as adequately capitalized or better would have to provide
notice to the OTS. Except under limited circumstances and with OTS approval, no
capital distributions would be permitted if it caused the association to become
undercapitalized or worse.
HOLDING COMPANY REGULATION. WFC is a savings and loan holding company
within the meaning of the HOLA. As such, WFC has registered with the OTS and
will be subject to OTS regulations, examination, supervision and reporting
requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling by
proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
As a unitary savings and loan holding company, WFC is generally subject
to no restrictions on its activities, and such companies are the only financial
institution holding companies which may engage in any commercial, securities and
insurance activities without restriction. Congress is considering legislation
which may limit WFC's ability to engage in these activities and cannot predict
if and in what form these proposals might become law. However such limits would
not impact WFC's current activities, which consist solely of holding stock of
Winton. The broad latitude to engage in activities under current law can be
restricted, if the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings association, the OTS may impose such restrictions as
deemed necessary to address such risk, including limiting (i) payment of
dividends by the savings association, (ii) transactions between the savings
association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL test, then such unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At September 30, 1996, Winton met both those tests.
If WFC were to acquire control of another savings institution, other
than through a merger or other business combination with Winton, WFC would
become a multiple savings and loan holding company. Unless the acquisition is an
emergency thrift acquisition and each subsidiary savings association meets the
QTL test, the activities of WFC and any of its subsidiaries (other than Winton
or other subsidiary savings associations) would thereafter be subject to
activity restrictions. The HOLA provides that, among other things, no multiple
savings and loan holding company or subsidiary thereof that is not a savings
institution shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof, any
business activity other than (i) furnishing or performing management services
for a subsidiary savings institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing or liquidating assets owned by or
acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by federal regulation as of March 5, 1987, to be engaged in by
multiple holding companies, or (vii) those activities authorized by the FRB as
permissible for bank holding companies, unless the OTS by regulation prohibits
or limits such activities for savings and loan holding companies. Those
activities described in (vii) above must also be approved by the OTS prior to
being engaged in by a multiple holding company.
The OTS may approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state, only if the multiple savings and loan holding company
involved controls a savings association that operated a home or branch office in
the state of the association to be acquired as of March 5, 1987, or if the laws
of the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions). As under prior law, the OTS may approve an acquisition resulting
in a multiple savings and loan holding company controlling savings associations
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in more than one state in the case of certain emergency thrift acquisitions.
Bank holding companies have had more expansive authority to make interstate
acquisitions than savings and loan holding companies since August 1995.
FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF WFC AND WINTON. In
addition to the Ohio law limitations on the merger and acquisition of Winton and
WFC previously discussed, federal limitations generally require regulatory
approval of acquisitions at specified levels. Under pertinent federal law and
regulations, no person, directly or indirectly, or acting in concert with
others, may acquire control of Winton or WFC without 60 days prior notice to the
OTS. "Control" is generally defined as having more than 25% ownership or voting
power; however, ownership or voting power of more than 10% may be deemed
"control" if certain factors are in place. If the acquisition of control is by a
company, the acquiror must obtain approval, rather than give notice, of the
acquisition as a savings and loan holding company.
In addition, any merger of Winton must be approved by the OTS as well
as the Superintendent. Further, any merger of WFC in which WFC is not the
resulting company must also be approved by both the OTS and the Superintendent.
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE AND ASSESSMENTS. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and thrifts and safeguards the safety and soundness of
the banking and thrift industries. The FDIC administers two separate insurance
funds, the Bank Insurance Fund ("BIF") for commercial banks and state savings
banks and the SAIF for savings associations. The FDIC is required to maintain
designated levels of reserves in each fund. Prior to October 1, 1996, the
reserves of the SAIF were below the level required by law, because a significant
portion of the assessments paid into the fund have been and are being used to
pay the cost of prior thrift failures, while the reserves of the BIF met the
level required by law in May 1995. This has resulted in a significant disparity
between BIF and SAIF assessments during 1996.
Winton is a member of the SAIF and its deposit accounts are insured by
the FDIC, up to the prescribed limits. The FDIC has examination authority over
all insured depository institutions, including Winton, and has authority to
initiate enforcement actions against federally insured savings associations, if
the FDIC does not believe the OTS has taken appropriate action to safeguard
safety and soundness and the deposit insurance fund.
The FDIC is authorized to establish separate annual assessment rates for
deposit insurance each for members of the BIF and the SAIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
time and may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
this system, assessments vary based on the risk the institution poses to its
deposit insurance fund. The risk level is determined based on the institution's
capital level and the FDIC's level of supervisory concern about the institution.
Because of the differing reserve levels of the funds, deposit insurance
assessments paid by healthy savings associations were reduced significantly
below the level paid by healthy savings associations effective in mid-1995.
Assessments paid by healthy savings associations exceeded those paid by healthy
commercial banks by approximately $.19 per $100 in deposits in late 1995. Such
excess equalled approximately $.23 per $100 in deposits beginning in 1996. This
premium disparity had a negative competitive impact on Winton and other
institutions in the SAIF.
Federal legislation, which was effective September 30, 1996, provided
for the recapitalization of the SAIF by means of a special assessment of $.657
per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Certain banks holding SAIF deposits are
required to pay the same special assessment on 80% of deposits at March 31,
1995. In addition, the cost of prior thrift failures will be shared by both the
SAIF and the BIF. As a result of such cost sharing, BIF assessments for healthy
banks in 1997 will be $.013 per $100 in deposits and SAIF assessments for
healthy institutions in 1997 will be $.064 per $100 in deposits.
Winton had $195.6 million in deposits at March 31, 1995. Winton paid a
special assessment of $1.3 million on November 27, 1996, which was accounted for
and recorded as of September 30, 1996. This assessment is tax-deductible, but
has reduced earnings for the year ended, and capital at, September 30, 1996.
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STATE-CHARTERED ASSOCIATION ACTIVITIES. The ability of state-chartered
associations to engage in any state-authorized activities or make any
state-authorized investments is limited if such activity is conducted or
investment is made in a manner different than that permitted for, or subject to
different terms and conditions than those imposed on, federally chartered
savings associations. Engaging as a principal in any such activity or investment
not permissible for a federal association is subject to approval by the FDIC.
Such approval will not be granted unless certain capital requirements are met
and there is not a significant risk to the FDIC insurance fund. All of Winton's
activities and investments at September 30, 1996, were permissible for a federal
association.
FRB RESERVE REQUIREMENTS
FRB regulations currently require savings associations to maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $49.3
million of such accounts (subject to an exemption of up to $4.4 million), and of
10% of net transaction accounts in excess of $49.3 million. At September 30,
1996, Winton was in compliance with this reserve requirement.
FEDERAL HOME LOAN BANKS
The Federal Home Loan Banks provide credit to their members in the form
of advances. Winton is a member of the FHLB and must maintain an investment in
the capital stock of the FHLB in an amount equal to the greater of 1.0% of the
aggregate outstanding principal amount of Winton's residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each year,
or 5% of its advances from the FHLB. Winton is in compliance with this
requirement with an investment in stock of the FHLB of $2.4 million at September
30, 1996.
Upon the origination or renewal of a loan or advance, the FHLB is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully disbursed, whole first mortgage loans
on improved residential property or securities representing a whole interest in
such loans; securities issued, insured or guaranteed by the United States
government or an agency thereof; deposits in any Federal Home Loan Bank; or
other real estate related collateral (up to 30% of the member association's
capital) acceptable to the FHLB, if such collateral has a readily ascertainable
value and the FHLB can perfect its security interest in the collateral.
The FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by the FHLB must be made only to provide funds for
residential housing finance. The FHLB has established an "Affordable Housing
Program" to subsidize the interest rate of advances to member associations
engaged in lending for long-term, low- and moderate-income, owner-occupied and
affordable rental housing at subsidized rates. The FHLB reviews and accepts
proposals for subsidies under that program twice a year. Winton has participated
in this program.
TAXATION
FEDERAL TAXATION. WFC and Winton are both subject to the federal tax
laws and regulations which apply to corporations generally. Prior to the
enactment of the Small Business Jobs Protection Act (the "Act"), which was
signed into law on August 21, 1996, certain thrift institutions, such as Winton,
were allowed deductions for bad debts under methods more favorable than those
granted to other taxpayers. Qualified thrift institutions could compute
deductions for bad debts using either the specific charge off method of Section
166 of the Code or the reserve method of Section 593 of the Code.
Under Section 593, a thrift institution annually could elect to deduct
bad debts under either (i) the "percentage of taxable income" method applicable
only to thrift institutions, or (ii) the "experience" method that also was
available to small banks. Under the "percentage of taxable income" method, a
thrift institution generally was allowed a deduction for an addition to its bad
debt reserve equal to 8% of its taxable income (determined without regard to
this deduction and with additional adjustments). Under the experience method, a
thrift institution was generally allowed a deduction for an addition to its bad
debt reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1995 and 1994,
Winton used
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the percentage of taxable income method because such method provided a higher
bad debt deduction than the experience method.
Section 1616(a) of the Act repealed the Section 593 reserve method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method. The percentage of taxable income method of
accounting for bad debts is no longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like Winton, the amount of
the institution's applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential or church property and certain mobile
homes), but only to the extent that the loan is made to the owner of the
property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which requires recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by Winton to WFC is deemed paid out of its pre-1988
reserves under these rules, the pre-1988 reserves would be reduced and Winton's
gross income for tax purposes would be increased by the amount which, when
reduced by the income tax, if any, attributable to the inclusion of such amount
in its gross income, equals the amount deemed paid out of the pre-1988 reserves.
As of September 30, 1996, Winton's pre-1988 reserves for tax purposes totaled
approximately $1.4 million. Winton believes it had approximately $12.0 million
of accumulated earnings and profits for tax purposes as of September 30, 1996,
which would be available for dividend distributions, provided regulatory
restrictions applicable to the payment of dividends are met. No representation
can be made as to whether Winton will have current or accumulated earnings and
profits in subsequent years.
In addition to the regular income tax, WFC and Winton are subject to a
minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20%
on "alternative minimum taxable income" (which is the sum of a corporation's
regular taxable income, with certain adjustments, and tax preference items),
less any available exemption. Such tax preference items include interest on
certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" exceeds its
alternative minimum taxable income computed
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without regard to this preference item and prior to reduction by net operating
losses, is included in alternative minimum taxable income. Net operating losses
can offset no more than 90% of alternative minimum taxable income. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax. Payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years. In addition, for taxable years
after 1986 and before 1996, WFC and Winton are also subject to an environmental
tax equal to 0.12% of the excess of alternative minimum taxable income for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2.0 million.
The tax returns of Winton have been audited or closed without audit
through fiscal year 1992. In the opinion of management, any examination of open
returns would not result in a deficiency which could have a material adverse
effect on the financial condition of Winton.
OHIO TAXATION. WFC is subject to the Ohio corporation franchise tax,
which, as applied to WFC, 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) 0.582% times taxable net worth.
In computing its tax under the net worth method, WFC may exclude 100% of
its investment in the capital stock of Winton after the Conversion, as reflected
on the balance sheet of WFC, in computing its taxable net worth as long as it
owns at least 25% of the issued and outstanding capital stock of Winton. 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, WFC 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
WFC, 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.
Winton is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of Winton's book net
worth determined in accordance with generally accepted accounting principles. As
a "financial institution," Winton is not subject to any tax based upon net
income or net profits imposed by the State of Ohio.
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ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at September 30,
1996, regarding the properties on which the main office and each branch office
of Winton is located:
<TABLE>
<CAPTION>
Owned Date Square Net
Location or leased acquired footage book value(1)
- -------- --------- -------- ------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Main office:
5511 Cheviot Road owned/leased 1967 8,600 $1,103
Cincinnati, Ohio 45247
Branch offices:
601 Main Street leased N/A 4,100 -
Cincinnati, Ohio 45202
4517 Vine Street
Cincinnati, Ohio 45217 owned 1932 2,600 $107
10575 Harrison Avenue
Harrison, Ohio 45030 owned 1981 4,800 $139
7014 Vine Street
Cincinnati, Ohio 45216 owned 1897 3,200 $580
<FN>
- -----------------------------
(1) Net book value amounts are for land, building and improvements.
</TABLE>
Winton also owns furniture, fixtures and various bookkeeping and
accounting equipment. The net book value of Winton's investment in office
premises and equipment totaled $2.7 million at September 30, 1996.
In January 1990, Winton entered into a lease agreement pursuant to which
it leases a building containing approximately 3,750 square feet adjacent to
Winton's main office on Cheviot Road. The initial term of the lease was three
years, renewable for seven successive three year periods. Winton has the right
to purchase the building during the term of the lease. In January 1996 the lease
was renewed for an additional three year period.
ITEM 3. LEGAL PROCEEDINGS
Neither WFC nor Winton is presently involved in any legal proceedings of
a material nature. From time to time, Winton is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by Winton.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders of WFC
during the last quarter of fiscal year ended September 30, 1996.
-34-
<PAGE> 35
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained in those portions of the Annual Report to
Shareholders for the fiscal year ended September 30, 1996 (the "Annual Report"),
which are included in Exhibit 13 hereto under the caption "MARKET PRICE OF
WINTON FINANCIAL'S COMMON SHARES AND RELATED SECURITY HOLDER MATTERS" is
incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in those portions of the Annual Report
included in Exhibit 13 hereto under the caption "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" is incorporated
herein by reference.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements contained in those portions of the
Annual Report included in Exhibit 13 hereto are incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The information contained in the definitive Proxy Statement for the 1996
Annual Meeting of Shareholders of Winton Financial Corporation (the "Proxy
Statement"), which is included in Exhibit 20 hereto, under the captions "BOARD
OF DIRECTORS," "EXECUTIVE OFFICERS" and "VOTING SECURITIES AND OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement, which is included in
Exhibit 20 hereto, under the caption "COMPENSATION OF EXECUTIVE OFFICERS AND
DIRECTORS" is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement, which is included
in Exhibit 20 hereto, under the caption "VOTING SECURITIES AND OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable
-35-
<PAGE> 36
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Item 2 Agreement and Plan of Reorganization
Item 3 Amended Articles of Incorporation and Code of
Regulations
Item 10 Material Contracts
Item 13 Portions of the Annual Report to Shareholders
Item 20 Proxy Statement for 1997 Meeting of Shareholders
Item 21 Subsidiaries of the Registrant
Item 27 Financial Data Schedule
Item 99 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
(b) No current report on Form 8-K was filed by WFC during the
last quarter of the fiscal year covered by this Report.
-36-
<PAGE> 37
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.
WINTON FINANCIAL CORPORATION
By /s/ Robert L. Bollin
----------------------------------
Robert L. Bollin,
President, Chief Executive
Officer and a Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By /s/ Jill M. Burke By /s/ Robert J. Bollin
------------------------------- -----------------------------
Jill M. Burke, Robert J. Bollin,
Principal Financial Officer Director
and Principal Accounting
Officer
Date: December 20, 1996 Date: December 20, 1996
By /s/ Robert E. Hoeweler, By
------------------------------- -----------------------------
Robert E. Hoeweler, Thomas H. Humes,
Director Director
Date: December 20, 1996 Date: December 20, 1996
By /s/ Timothy M. Mooney By /s/ William J. Parchman
------------------------------- -----------------------------
Timothy M. Mooney, William J. Parchman,
Director Director
Date: December 20, 1996 Date: December 20, 1996
By /s/ Henry L. Schulhoff By /s/ J. Clay Stinnett
------------------------------- -----------------------------
Henry L. Schulhoff, J. Clay Stinnett,
Director Director
Date: December 20, 1996 Date: December 20, 1996
-38-
<PAGE> 38
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
<S> <C>
2 Agreement and Plan of Reorganization dated June 15, 1995, Incorporated by Reference to the
by and among Winton Financial Corporation, The Winton Pre-Effective Amendment to the Registration
Savings and Loan Co. and Blue Chip Savings Bank, as Statement on Form S-4 filed by WFC on
amended September 25, 1995 November 6, 1995 with the Securities and
Exchange Commission ("SEC"), Annex A to
Prospectus and Joint Proxy Statement
3.1 Articles of Incorporation, as amended through February 1, Incorporated by reference to the Current
1995, of Winton Financial Corporation Report on Form 8-K dated June 21, 1995 and
filed by WFC (the "8-K") with the SEC,
Exhibit 4a
3.2 Regulations of Winton Financial Corporation Incorporated by reference to the current
annual report on the 8-K filed by WFC with
the SEC, Exhibit 4b
10.1 The Winton Savings and Loan Co. Employee Incorporated by reference to the Form S-4
Stock Ownership Plan Registration Statement filed by WFC with
the SEC on November 30, 1989 (the "1989
Form S-4")
10.2 Amendment No. 1 to the Winton Savings and Incorporated by reference to the Annual
Loan Co. Employee Stock Ownership Plan Report on Form 10-K in the fiscal year
ended September 30, 1990, filed by WFC with
the Securities and Exchange Commission on
December 31, 1990
10.3 Amendment No. 2 to The Winton Savings and Incorporated by reference to the Annual
Loan Co. Employee Stock Ownership Plan Report on Form 10-K in the fiscal year
ended September 30, 1990, filed by WFC with
the SEC on December 31, 1990
10.4 The Winton Savings and Loan Co. 1988 Incorporated by reference to the definitive
Employee Stock Option and Incentive Plan Proxy Statement for the 1995 Annual Meeting
of Shareholders filed by WFC with the SEC
on January 6, 1995
10.5 Employment Agreement between WFC, Winton and Robert L. Incorporated by reference to Quarterly
Bollin, dated May 1, 1996 Report on Form 10-QSB for the quarter ended
June 30, 1996, filed by WFC with the SEC in
August 1996 (the "6/96 10-QSB")
10.6 Employment Agreement between WFC, Winton and Gregory J. Incorporated by reference to the 6/96 10-QSB
Bollin, dated May 1, 1996
10.7 Employment Agreement between WFC, Winton and James M. Incorporated by reference to the 6/96 10-QSB
Brigger, dated May 1, 1996
</TABLE>
-39-
<PAGE> 39
<TABLE>
<S> <C>
10.8 Employment Agreement between WFC, Winton and Jill M. Burke, Incorporated by reference to the 6/96 10-QSB
dated May 1, 1996
10.9 Employment Agreement between WFC, Winton and Mary Ellen Incorporated by reference to the 6/96 10-QSB
Lovett
10.10 Employment Agreement between WFC, Winton and Anthony G. Incorporated by reference to the 6/96 10-QSB
Gerstner, dated May 1, 1996
13 Winton Financial Corporation 1996 Annual Report to
Shareholders
20 Proxy Statement for the 1997 Annual Meeting of Shareholders
of Winton Financial Corporation
21 Subsidiaries of the Registrant.
27 Financial Data Schedule
99 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
</TABLE>
-40-
<PAGE> 1
Exhibit 13
WINTON FINANCIAL CORPORATION
BUSINESS OF WINTON FINANCIAL
Winton Financial Corporation, an Ohio corporation ("Winton Financial"), is a
unitary savings and loan holding company which owns all of the outstanding
common shares of The Winton Savings and Loan Co. ("Winton Savings" or the
"Company").
The activities of Winton Financial have been limited primarily to holding the
stock of Winton Savings. Organized in 1887 under the laws of the state of Ohio
as a mutual savings and loan association, Winton Savings completed its
conversion to stock form in fiscal 1988 and completed a merger with Blue Chip
Savings Bank ("Blue Chip") in January 1996. The merger was accounted for as a
pooling-of-interests and, accordingly, the consolidated financial statements
contained herein have been restated to reflect the business combination as of
October 1, 1991. Winton Savings conducts business from its principal office in
the Monfort Heights area of Cincinnati, Ohio, and its four branch offices in
Hamilton County, Ohio, and is principally engaged in the business of making
first mortgage loans to finance the purchase, construction or improvement of
residential or other real property. Winton Savings also invests in U.S.
government guaranteed mortgage-backed and investment securities issued by the
U.S. government and agencies thereof. Funds for lending and investment are
obtained primarily from savings deposits, loan principal repayments and
borrowings from the Federal Home Loan Bank of Cincinnati (the "FHLB"), of which
Winton Savings is a member.
Winton Financial is subject to regulation, supervision and examination by the
Office of Thrift Supervision of the U.S. Department of Treasury (the "OTS").
Winton Savings is subject to regulation, supervision and examination by the OTS,
the Federal Deposit Insurance Corporation (the "FDIC") and the Ohio Division of
Financial Institutions. Deposits in Winton Savings are insured up to applicable
limits by the FDIC.
MARKET PRICE OF WINTON FINANCIAL'S
COMMON SHARES AND RELATED SECURITY HOLDER MATTERS
As of November 30, 1996, Winton Financial had 1,986,152 common shares
outstanding and held of record by approximately 445 shareholders. The number of
shareholders does not reflect the number of persons or entities who may hold
stock in nominee or "street" name through brokerage firms or others. Winton
Financial's common shares have been listed on The Nasdaq System since April
1993, when it was approved for listing on the SmallCap Market. Presented on the
next page are the high and low sales prices for Winton Financial's common
shares, as well as the amount of cash dividends paid on the common shares for
each quarter of the last three fiscal years. Such sales prices do not include
retail financial markups, markdowns, or commissions. Information relating to
sales prices has been obtained from The Nasdaq System.
1
<PAGE> 2
WINTON FINANCIAL CORPORATION
<TABLE>
<CAPTION>
CASH
FISCAL YEAR ENDING SEPTEMBER 30, HIGH LOW DIVIDENDS
1996
<S> <C> <C> <C>
Quarter ending December 31, 1995 $15.00 $11.00 $.100
Quarter ending March 31, 1996 15.00 11.00 .105
Quarter ending June 30, 1996 14.25 12.00 .105
Quarter ending September 30, 1996 13.75 11.25 .105
1995
Quarter ending December 31, 1994 $15.00 $15.00 $.100
Quarter ending March 31, 1995 15.00 15.00 .100
Quarter ending June 30, 1995 15.00 11.00 .100
Quarter ending September 30, 1995 15.00 11.00 .100
1994
Quarter ending December 31, 1993 $13.00 $11.50 $.100
Quarter ending March 31, 1994 15.00 11.00 .100
Quarter ending June 30, 1994 15.00 11.00 .100
Quarter ending September 30, 1994 15.00 11.00 .100
</TABLE>
The earnings of Winton Financial consist primarily of dividends from Winton
Savings. In addition to certain federal income tax considerations, regulations
issued by the OTS impose limitations on the payment of dividends and other
capital distributions by savings associations. Under the regulations, a savings
association that, immediately prior to, and on a pro forma basis after giving
effect to a proposed capital distribution, has total capital (as defined by OTS
regulations) that is equal to or greater than the amounts of its fully phased-in
capital requirement, is generally permitted, without OTS approval (but
subsequent to 30 days' prior notice of the planned dividend to the OTS) to make
capital distributions during a calendar year in an amount not to exceed the
greater of (1) the sum of 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half of the amount by which its total capital
to assets ratio exceeded its fully phased-in capital to assets ratio at the
beginning of the calendar year or (2) 75% of its net earnings over the most
recent four-quarter period. Savings associations which have total capital in
excess of the fully phased-in capital requirement, and which have been notified
by the OTS that they are in need of more than normal supervision will be subject
to greater restrictions on dividends. In addition, a savings association that
fails to meet current minimum capital requirements is prohibited from making any
capital distributions without the prior approval of the OTS. Winton Savings
currently meets its fully phased-in capital requirements and, unless the OTS
determines that Winton Savings is an institution requiring more than normal
supervision, may pay dividends in accordance with the foregoing provisions of
the OTS regulations.
2
<PAGE> 3
WINTON FINANCIAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth certain information concerning Winton Financial's
consolidated financial position and results of operations at the dates and for
the periods indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
STATEMENT FINANCIAL CONDITION DATA: (1) 1996 1995 1994 1993 1992
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $292,241 $250,180 $239,513 $220,212 $215,629
Interest-bearing deposits in other financial
institutions -- 2,360 1,712 4,914 4,579
Investment securities (2) 12,174 13,080 9,316 7,528 6,995
Mortgage-backed securities (2) 19,356 19,442 20,624 26,791 19,961
Loans receivable, net (3) 250,490 205,964 198,879 171,940 174,951
Deposit accounts 221,533 197,905 185,327 181,950 189,120
FHLB advances 46,376 29,830 33,671 19,229 9,374
Shareholders' equity - net, restricted (4) 20,831 20,397 18,879 17,568 15,716
<CAPTION>
YEAR ENDED SEPTEMBER 30,
STATEMENT OF EARNINGS: (1) 1996 1995 1994 1993 1992
(In thousands)
<S> <C> <C> <C> <C> <C>
Total interest income $ 21,114 $ 18,942 $ 17,187 $ 17,848 $ 20,130
Total interest expense 12,696 10,959 9,130 9,755 12,427
-------- -------- -------- -------- --------
Net interest income 8,418 7,983 8,057 8,093 7,703
Provision for loan losses (253) (88) (45) (247) (442)
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses 8,165 7,895 8,012 7,846 7,261
Other income 1,135 589 407 1,063 873
General, administrative and other expense (7,491) (5,529) (5,497) (5,006) (4,413)
-------- -------- -------- -------- --------
Earnings before income taxes 1,809 2,955 2,922 3,903 3,721
Federal income taxes (628) (994) (971) (1,338) (1,255)
-------- -------- -------- -------- --------
Net earnings $ 1,181 $ 1,961 $ 1,951 $ 2,565 $ 2,466
======== ======== ======== ======== ========
Earnings per share (5) $ .60 $ .99 $ .99 $ 1.30 $ 1.25
======== ======== ======== ======== ========
<CAPTION>
YEAR ENDED SEPTEMBER 30,
OTHER DATA: (1) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Interest rate spread 2.91% 3.06% 3.39% 3.61% 3.32%
Return on equity 5.67 9.94 10.58 15.41 16.71
Return on assets .44 .80 .85 1.19 1.13
Shareholders' equity to assets 7.11 8.15 7.88 7.98 7.29
Number of:
Loans outstanding 5,146 4,604 4,329 3,596 3,577
Deposit accounts 20,735 20,209 19,278 20,119 20,582
Full service offices 5 5 5 5 5
<FN>
(1) The consolidated financial statements as of and for the fiscal years ended
September 30, 1992, through September 30, 1995, inclusive, have been
restated to give effect to the business combination with Blue Chip as if
such merger occurred as of October 1, 1991.
(2) Includes securities designated as available for sale. Winton Financial
adopted Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" as of
October 1, 1994. See Note A-2 of the Consolidated Financial Statements for
additional information regarding SFAS No. 115.
(3) Includes loans held for sale.
(4) Shareholders' equity for fiscal 1992 and fiscal 1993 were previously
restated for a $178,000 charge which reflects retroactive adoption of SFAS
No. 109, as of October 1, 1989. There was no material effect on reported
net earnings for any of the periods subsequent to that date. See Notes H
and J of the Notes to Consolidated Financial Statements regarding
restrictions on equity.
(5) Earnings per share for fiscal 1992 and fiscal 1993 have been restated to
give effect to each one of the distributions in the nature of two-for-one
stock splits in fiscal 1993 and fiscal 1994. Additionally, earnings per
share for fiscal 1992 through 1995, inclusive, have been restated to give
effect to the issuance of 361,952 shares in connection with the Blue Chip
merger.
</TABLE>
3
<PAGE> 4
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
- -------
Since 1990, Winton Financial's activities primarily have been limited to owning
the outstanding common shares of Winton Savings. Therefore, the discussion that
follows focuses on the comparison of Winton Savings' operations in fiscal 1996,
fiscal 1995 and fiscal 1994.
On January 5, 1996, Winton Financial acquired Blue Chip by means of a merger of
Blue Chip, with assets of approximately $34 million, into Winton Savings (the
"Merger"). On the effective date of the Merger, all outstanding shares of Blue
Chip were canceled and extinguished in consideration for 361,952 Winton
Financial shares. Blue Chip had one office in downtown Cincinnati, Ohio, which
became a branch of Winton Savings.
Forward-Looking Statements
- --------------------------
In the following pages, management presents an analysis of Winton Financial's
financial condition as of September 30, 1996, and the results of operations for
fiscal 1996, as compared to prior years. In addition to this historical
information, the following discussion contains forward-looking statements that
involve risks and uncertainties. Economic circumstances, Winton Financial's
operations and Winton Financial's actual results could differ significantly from
those discussed in the forward-looking statements. Some of the factors that
could cause or contribute to such differences are discussed herein but also
include changes in the economy and interest rates in the nation and in Winton
Financial's general market area.
Without limiting the foregoing, some of the forward looking statements included
herein are the statements under the following headings in respect of the
referenced matters:
1. ASSET/LIABILITY MANAGEMENT - Management's expectation that its
asset/liability management efforts have reduced Winton Savings' overall
vulnerability to interest rate risk, and that Winton Savings' results of
operations are sensitive to general changes in interest rates, because
interest-rate-sensitive liabilities exceed interest-rate-sensitive assets.
2. LIQUIDITY AND CAPITAL RESOURCES - Management's belief that Winton Savings'
liquidity position is adequate to meet its needs for funds, and that Winton
Savings' regulatory capital requirements will not increase as a result of
proposed changes in the requirements for all savings associations.
3. CHARTER UNIFICATION LEGISLATION - Legislation changes that may change the
regulatory requirements of Winton Financial and Winton Savings.
4. CHANGES IN FINANCIAL CONDITION - Management's establishment of an allowance
for loan losses, and its statements regarding the adequacy of such
allowance for loan losses.
5. PROVISION FOR LOAN LOSSES - Management's belief that the allowance for loan
losses is adequate.
6. COMPARISON OF RESULTS OF OPERATIONS - GENERAL, ADMINISTRATIVE AND OTHER
EXPENSES - Management's anticipation regarding a rebate of certain deposit
insurance premiums.
4
<PAGE> 5
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset/Liability Management
- --------------------------
Winton Savings' earnings depend primarily upon its net interest income, which is
the difference between its interest income on interest-earning assets, such as
mortgage loans, investment securities and mortgage-backed securities, and its
interest expense paid on interest-bearing liabilities, consisting of deposits
and borrowings. As market interest rates change, asset yields and liability
costs do not change simultaneously. Due to maturity, repricing and timing
differences between such interest-earning assets and such interest-bearing
liabilities, Winton Savings' earnings will be affected differently under various
interest rate scenarios. Management believes that the steps which have been
taken in asset/liability management have reduced the overall vulnerability of
Winton Savings to interest rate risk. For example, Winton Savings has sought to
limit these net earnings fluctuations and manage interest rate risk by
originating adjustable-rate loans and by purchasing relatively short-term and
variable-rate investments and securities. However, in order to better compete
for deposits, Winton Savings has offered market-sensitive certificates of
deposit, which result in increased interest expense in rising rate environments.
At September 30, 1996, approximately $138.3 million, or 46.7%, of Winton
Savings' portfolio of interest-earning assets had adjustable rates.
Winton Savings' principal financial objective is to enhance long-term
profitability while reducing exposure to increases in interest rates. To
accomplish this objective, Winton Savings has formulated an asset and liability
management policy, the principal elements of which are (1) to increase the
interest-rate sensitivity of the assets of Winton Savings by emphasizing the
origination of adjustable-rate mortgage loans, (2) to maintain its investment
portfolio with a relatively short term to maturity, (3) otherwise to shorten
asset maturities, (4) to lengthen the maturities of liabilities to the extent
practicable by marketing longer term certificates of deposit, and (5) to meet
the consumer preference for fixed-rate loans in periods of low interest rates by
selling the preponderance of such loans in the secondary market. Because
interest-rate-sensitive liabilities continue to exceed interest-rate-sensitive
assets, Winton Savings would be negatively affected by a rising or protracted
high interest rate environment and would be beneficially affected by a declining
interest rate environment.
Management and the Board of Directors generally review Winton Savings' interest
rate risk posture monthly and perform a detailed review quarterly on interest
rate risk data provided by the OTS. This interest rate risk data reflects the
degree of change in net interest income and market value of portfolio equity
given an instantaneous and parallel shift in overall interest rates of 100-400
basis points. Management and the Board have formulated what they believe to be
acceptable levels of interest rate risk based on the ongoing analysis of this
data, and Winton Savings has been operated within the targeted operating range
over the last three years. Based on the most recent data provided by the OTS,
Winton Savings' interest rate risk posture at September 30, 1996 indicated that
the market value of portfolio equity would decline by 37% at a 200 basis point
(100 basis points equal one percent) instantaneous increase in interest rates.
Management is of the opinion that this level of interest rate risk is acceptable
in the current operating environment.
5
<PAGE> 6
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
- -------------------------------
Winton Savings is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
government and agency obligations and other similar investments having
maturities of five years or less. Such investments are intended to provide a
source of relatively liquid funds upon which Winton Savings may rely, if
necessary, to fund deposit withdrawals and for other short-term funding needs.
The required level of such liquid investments is currently 5% of certain
liabilities as defined by the OTS.
The liquidity of Winton Savings, as measured by the ratio of cash, cash
equivalents (not committed, pledged or required to liquidate specific
liabilities) and investment securities to the sum of total deposits, plus
borrowings payable within one year, was 6.8% at September 30, 1996. At September
30, 1996, Winton Savings' "liquid" assets totaled approximately $15.5 million,
which was $3.3 million in excess of the current OTS minimum requirements.
Management has generally strived to maintain excess regulatory liquidity in a
range of 6-8%, or $2.5 million to $6.6 million in excess of the minimum
requirement. Winton Financial believes that the Company's liquidity posture at
September 30, 1996 was adequate to meet outstanding loan commitments and other
cash requirements.
Winton Savings is subject to minimum capital standards promulgated by the OTS.
Such capital standards generally require the maintenance of regulatory capital
sufficient to meet each of the following three requirements: the tangible
capital requirement, the core capital requirement and the risk-based capital
requirement. At September 30, 1996, Winton Savings' tangible capital of $19.9
million, or 6.8% of adjusted total assets, exceeded the 1.5% requirement by
$15.5 million; its core capital of $19.9 million, or 6.8% of adjusted total
assets, exceeded the minimum 3.0% requirement by $11.1 million; and, its
risk-based capital of $20.6 million, or 11.5% of risk-weighted assets, exceeded
the 8% requirement by $6.3 million.
In fiscal 1993, the OTS adopted an amendment to the regulatory risk-based
capital requirement to include an interest rate risk component, though
implementation of the component has been delayed. Additionally, the OTS has
proposed an amendment to the core capital requirement that would increase the
minimum requirement to 4% of adjusted total assets for substantially all savings
associations. Management anticipates no material change to Winton Savings'
excess regulatory capital position due to the interest rate risk component or
the core capital proposal, if it is adopted in its present form.
Impact of Inflation and Changing Prices
- ---------------------------------------
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in relative
purchasing power over time due to inflation.
6
<PAGE> 7
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Impact of Inflation and Changing Prices (continued)
- ---------------------------------------------------
Unlike most industrial companies, virtually all of the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than does the effect of inflation. The liquidity and maturity
structures of Winton Savings' assets and liabilities are critical to the
maintenance of acceptable performance levels.
Charter Unification Legislation
- -------------------------------
The deposit accounts of Winton Savings and other savings associations are
insured up to applicable limits by the FDIC in the Savings Association Insurance
Fund ("SAIF"). Legislation to recapitalize the SAIF was enacted on September 30,
1996. Such legislation provided that the SAIF will be merged into the Bank
Insurance Fund if there are no more savings associations. Such legislation also
requires the Department of Treasury to submit a report to Congress on the
development of a common charter for all financial institutions. In addition, in
September 1996, a bill was introduced to address this charter unification by
eliminating the federal thrift charter and the separate federal regulation of
savings and loan associations.
Pursuant to such legislation, Congress may eliminate the OTS, and Winton Savings
may be regulated under federal law as a bank or may be required to change its
charter. Such change in regulation or charter would likely change the range of
activities in which Winton Savings may engage and would probably subject Winton
Savings to more regulation by the FDIC. In addition, Winton Financial might
become subject to a different form of holding company regulation, which may
limit the activities in which Winton Financial may engage, and subject Winton
Financial to other additional regulatory requirements, including separate
capital requirements. At this time, Winton Financial cannot predict when or
whether Congress may actually pass legislation regarding Winton Financial's and
Winton Savings' regulatory requirements or charter. Although such legislation
may change the activities in which either Winton Financial and Winton Savings
may engage, it is not anticipated that the current activities of both Winton
Financial and Winton Savings will be materially affected by those activity
limits.
Changes in Financial Condition
- ------------------------------
Winton Financial's consolidated assets totaled $292.2 million at September 30,
1996, an increase of $42.1 million, or 16.8%, over September 30, 1995 levels.
The current year's growth followed an increase in assets of $10.7 million, or
4.5%, during fiscal 1995. Winton Financial's growth over the last two years is
generally indicative of management's efforts to sustain net interest income
levels in any rising interest rate environment. Fiscal 1996 growth was primarily
funded by savings deposit growth of $23.6 million and an increase in advances
from the FHLB of $16.5 million.
7
<PAGE> 8
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Changes in Financial Condition (continued)
- ------------------------------
Cash and interest-bearing deposits declined during fiscal 1996 by $2.1 million,
or 58.1%, and totaled $1.5 million at September 30, 1996. Investment securities
totaled $12.2 million at September 30, 1996, a decrease of $906,000, or 6.9%,
from 1995 levels. These declines resulted from management's decision to redeploy
excess liquidity to fund growth in higher yielding loans.
Loans receivable increased $42.9 million, or 20.9%, during fiscal 1996. The
increase is generally indicative of the favorable interest rate spreads that
were available on Winton's portfolio loans during the current fiscal year. Loans
held for sale totaled $2.7 million at September 30, 1996, representing an
increase of $1.6 million over the prior year level of $1.1 million.
The growth in the loan portfolio consisted primarily of $27.7 million of
one-to-four family residential loans, $12.3 million of multi-family residential
loans and $7.4 million of nonresidential real estate loans. At September 30,
1996, the allowance for loan losses of Winton Savings totaled $857,000, an
increase of $203,000 over the level maintained at September 30, 1995. At
September 30, 1996, the allowance represented approximately .33% of the total
loan portfolio and 92.8% of total non-performing loans. At that date, the ratio
of total non-performing loans to total loans amounted to .35%, as compared to
.28% at September 30, 1995. Although management believes that its allowance for
loan losses at September 30, 1996, was adequate based on facts and circumstances
available to it, there can be no assurances that additions to such allowance
will not be necessary in future periods, which could adversely affect Winton
Financial's results of operations.
Deposits totaled $221.5 million at September 30, 1996, an increase of $23.6
million, or 11.9%, over 1995 levels. This increase was comprised of $25.0
million in growth of certificates of deposit, and was partially offset by a $1.3
million decline in transaction accounts. Winton Financial has generally not
engaged in sporadic increases or decreases in interest rates paid, or offered
the highest rates available in its deposit market.
Advances from the FHLB totaled $46.4 million at September 30, 1996, an increase
of $16.5 million, or 55.5%, over the amount outstanding at September 30, 1995.
The increase in such advances was used primarily to fund growth in the loan
portfolio.
Comparison of Results of Operations for the Year Ended September 30, 1996 to the
- --------------------------------------------------------------------------------
Year Ended September 30, 1995
- -----------------------------
General
- -------
Net earnings for fiscal 1996 totaled $1.2 million, a $780,000, or 39.8%,
decrease from the $2.0 million in net earnings recorded in fiscal 1995. The
decline in net earnings resulted primarily from a $2.0 million increase in
general, administrative and other expense. The increase in general,
administrative and other expense was comprised primarily of $615,000 in expenses
related to the Merger and a $1.3 million charge recorded as a result of
legislation enacted to recapitalize the SAIF. Additionally, the decrease in net
earnings was comprised of a $165,000 increase in the provision for losses on
loans, and a $59,000 increase in other operating expenses, which were partially
offset by a $435,000 increase in net interest income, a $546,000 increase in
other income and a $366,000 decrease in the provision for federal income taxes.
8
<PAGE> 9
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Year Ended September 30, 1996 to the
- --------------------------------------------------------------------------------
Year Ended September 30, 1995 (continued)
- -----------------------------------------
Net Interest Income
- -------------------
Total interest income amounted to $21.1 million for fiscal 1996, an increase of
$2.2 million, or 11.5%, over fiscal 1995. The increase resulted primarily from a
$23.5 million, or 9.9%, increase in average interest-earning assets year to
year. Interest income on loans and mortgage-backed securities totaled $20.1
million in fiscal 1996, an increase of $2.0 million, or 11.1%, over fiscal 1995.
This increase resulted primarily from a $22.5 million, or 10.1%, increase in the
average balance outstanding, coupled with an increase in yield, from 8.13% in
1995 to 8.21% in 1996. Interest income on investment securities and
interest-bearing deposits increased by $159,000, or 18.5%, due primarily to a
$1.0 million increase in the average balance outstanding, coupled with a 62
basis point increase in yield, to 6.29% in fiscal 1996.
Interest expense on deposits totaled $10.7 million for fiscal 1996, an increase
of $1.6 million, or 17.8%, over fiscal 1995. The increase resulted primarily
from an $18.0 million increase in the average balance outstanding, coupled with
a 37 basis point increase in the average cost of deposits, to 5.10% in fiscal
1996. Interest expense on borrowings increased by $122,000, or 6.5%, due
primarily to a $4.0 million increase in the average balance outstanding, which
was partially offset by a 32 basis point decline in the average cost of
borrowings year to year.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $435,000, or 5.4%, to a total of $8.4 million
for fiscal 1996, as compared to fiscal 1995. The interest rate spread declined
by 15 basis points, to 2.91% for fiscal 1996, while the net interest margin
declined by 14 basis points, to 3.22% for fiscal 1996, as compared to 3.36% for
fiscal 1995.
Provision for Losses on Loans
- -----------------------------
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Company, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Company's
market area, and other factors related to the collectibility of the Company's
loan portfolio. As a result of such analysis, management recorded a $253,000
provision for losses on loans during the fiscal year ended September 30, 1996.
Such provision was heavily influenced by management's desire to increase Blue
Chip's allowance to a level commensurate with Winton Savings. There can be no
assurance that the allowance for loan losses of the Company will be adequate to
cover losses on nonperforming assets in the future.
Other Income
- ------------
Other income increased by $546,000, or 92.7%, for fiscal 1996, compared to the
same period in fiscal 1995, due primarily to an increase in gain on sale of
loans totaling $492,000, and a $97,000, or 33.8%, increase in other operating
income, resulting primarily from an increase in rental income on a parcel of
real estate acquired through foreclosure and increases in service fees and
charges on loans and deposits.
9
<PAGE> 10
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Year Ended September 30, 1996 to the
- --------------------------------------------------------------------------------
Year Ended September 30, 1995 (continued)
- -----------------------------------------
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $7.5 million for fiscal 1996,
an increase of $2.0 million, or 35.5%, over fiscal 1995. This increase resulted
primarily from the $1.3 million charge recorded in 1996 in connection with the
SAIF recapitalization, coupled with a $615,000 provision for costs related to
the Merger. Other operating expenses increased by $59,000, or 1.1%, during
fiscal 1996, as compared to fiscal 1995, reflecting management's continuing
efforts to control operating overhead.
Legislation to recapitalize the SAIF provided for a special assessment of $.657
per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF
reserves to the level required by law. Winton Savings had $196.0 million in SAIF
deposits at March 31, 1995 (including $11.5 million in deposits acquired in an
acquisition in April 1995 which are attributed to Winton Savings at March 31,
1995), resulting in an assessment of approximately $1.3 million, or $850,000
after tax, which was recorded as a charge in the quarter ended September 30,
1996, and was paid on November 27, 1996. In connection with the
recapitalization, it is anticipated that the FDIC will refund a portion of the
deposit insurance premiums for the calendar fourth quarter in an amount equal to
approximately five basis points of SAIF insured deposits.
In connection with the legislation, the FDIC has reduced premium rates for
healthy savings associations beginning in calendar 1997, to a rate of $.064 per
$100 of SAIF insured deposits, a reduction of $.166 per $100 of SAIF insured
deposits from the rates paid in fiscal 1996.
Federal Income Taxes
- --------------------
The provision for federal income taxes declined by $366,000, or 36.8%, for the
fiscal year ended September 30, 1996, as compared to the same period in 1995.
This decrease resulted primarily from the decline in net earnings before taxes
of $1.1 million, or 38.8%. Winton Financial's effective tax rates amounted to
34.7% and 33.6% for the fiscal years ended September 30, 1996 and 1995,
respectively.
Under separate legislation enacted in August 1996, the Company is required to
recapture as taxable income approximately $850,000 of its bad debt reserve,
which represents the post-1987 additions to the reserve, and will be unable to
utilize the percentage of earnings method to compute its reserve in the future.
The Company has provided deferred taxes for this amount and will be permitted by
such legislation to amortize the recapture of its bad debt reserve over six
years.
10
<PAGE> 11
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Year Ended September 30, 1995 to the
- --------------------------------------------------------------------------------
Year Ended September 30, 1994
- -----------------------------
General
- -------
Net earnings for fiscal 1995 totaled $1,961,000, an increase of $10,000, or .5%,
over the $1,951,000 in net earnings reported for fiscal 1994. The increase in
net earnings was primarily attributable to a $182,000 increase in other income,
which was partially offset by a $74,000 decrease in net interest income, a
$43,000 increase in the provision for losses on loans, a $32,000 increase in
general, administrative and other expense, and a $23,000 increase in the
provision for federal income taxes.
Net Interest Income
- -------------------
Interest on loans and mortgage-backed securities increased during fiscal 1995 by
$1.6 million, or 9.6%. Such growth in interest income during fiscal 1995
resulted from a $15.0 million increase in weighted-average portfolio balances
outstanding year-to-year, as well as a .17% increase in the weighted-average
portfolio yield.
Interest income on investments and interest-bearing deposits increased during
fiscal 1995 by $173,000, or 25.1%, generally reflecting growth in
weighted-average balances outstanding, coupled with an increase in the
weighted-average yield on the portfolio. The increase in yield is indicative of
the higher available yields on liquid investment alternatives in fiscal 1995, as
compared to fiscal 1994.
Interest expense paid on deposits increased during fiscal 1995 by $1.2 million,
or 15.3%, generally reflecting the refinancing of, and growth in, longer term
certificates of deposit at higher weighted average interest rates and the
acquisition of $11.5 million in deposits in April 1995.
Interest expense on FHLB advances increased during fiscal 1995 by $622,000, or
49.7%, due primarily to the growth in weighted-average borrowings outstanding
during fiscal 1995, as compared to fiscal 1994.
As a result of the foregoing, net interest income declined during fiscal 1995 by
$74,000, or .9%. Winton Financial's interest rate spread declined to 3.06% in
1995, compared to 3.39% in 1994, while the net interest margin amounted to 3.36%
in 1995, compared to 3.64% in 1994.
Provision for Losses on Loans
- -----------------------------
The provision for losses on loans during fiscal 1995, totaled $88,000, an
increase of $43,000 over the fiscal 1994 total. The current year provision was
primarily attributable to growth in the loan portfolio during the year.
Nonperforming loans totaled $602,000 at September 30, 1995, representing .3% of
the total loan portfolio at that date. This compares to nonperforming loans of
$432,000, or .2% of the total loan portfolio, at September 30, 1994. Due to
Winton Savings relatively low level of nonperforming loans, the addition or
deletion of one loan can significantly change the nonperforming loan ratios. At
September 30, 1995, the allowance for loan losses totaled $654,000, representing
108.6% of nonperforming loans. This compares to a coverage ratio of the
allowance to nonperforming loans of 134.7% at September 30, 1994. At both
September 30, 1995 and 1994, the allowance for loan losses represented .3% of
the loan portfolio.
11
<PAGE> 12
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Year Ended September 30, 1995 to the
- --------------------------------------------------------------------------------
Year Ended September 30, 1994 (continued)
- -----------------------------------------
Other Income
- ------------
Other income increased during fiscal 1995 by $182,000, or 44.7%. The increase
was primarily attributable to a $145,000 increase in gains on sale of loans,
reflecting a moderation of interest rate levels during the second half of fiscal
1995.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense increased by $32,000, or .6%, during
fiscal 1995. Employee compensation and benefits increased during fiscal 1995 by
$299,000, or 12.5%. The increase was primarily attributable to a $190,000
decline in deferred loan origination costs per SFAS No. 91, coupled with normal
merit increases. The decline in deferred loan origination costs is reflective of
the decline in loan volume in fiscal 1995, as compared to fiscal 1994. The
increase in compensation costs was partially offset by a $267,000 reduction in
all other operating expense categories, reflecting management's continuing
efforts to reduce operating costs.
Federal Income Taxes
- --------------------
The provision for federal income taxes increased during fiscal 1995 by $23,000,
or 2.4%. The effective tax rates amounted to 33.6% and 33.2% for the years ended
September 30, 1995 and 1994, respectively.
Effects of Recent Accounting Pronouncements
- -------------------------------------------
In fiscal 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the entity should
estimate the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the assets, an impairment loss is recognized. Measurement of an impairment loss
for long-lived assets and identifiable intangibles that an entity expects to
hold and use should be based on the fair value of the asset. SFAS No. 121 is
effective for financial statements for fiscal years beginning after December 15,
1995. Earlier application is encouraged. Management adopted SFAS No. 121 on
October 1, 1996, as required, without a material effect on consolidated
financial position or results of operations.
In June 1994, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights", which requires that Winton Financial recognize as separate assets,
rights to service mortgage loans for others, regardless of how those servicing
rights are acquired. An institution that acquires mortgage-servicing rights
through either the purchase or origination of mortgage loans and sells those
loans with servicing rights retained would allocate some of the cost of the
loans to the mortgage-servicing rights. SFAS No. 122 requires that
securitization of mortgage loans be accounted for as sales of mortgage loans and
acquisitions of mortgage-backed securities. Additionally, SFAS No. 122 requires
that capitalized mortgage servicing rights be assessed for
12
<PAGE> 13
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effects of Recent Accounting Pronouncements (continued)
- -------------------------------------------
impairment. Impairment is measured based on fair value. SFAS No. 122 was
required for fiscal years beginning after December 15, 1995, (October 1, 1996,
as to Winton Financial) to transactions in which an entity acquires mortgage
servicing rights and to impairment evaluations of all capitalized mortgage
servicing rights whenever acquired. Retroactive application is prohibited and
earlier adoption was encouraged. Management adopted SFAS No. 122 as of October
1, 1995, which resulted in recognition of pre-tax mortgage servicing rights
totaling $322,000 during fiscal 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", establishing financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages all entities to
adopt a new method of accounting to measure compensation cost of all employee
stock compensation plans based on the estimated fair value of the award at the
date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
earnings and, if presented, earnings per share, as if SFAS No. 123 had been
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management has
determined that the Corporation will continue to account for stock-based
compensation pursuant to Accounting Principles Board Opinion No. 25, and
therefore, the disclosure provisions of SFAS No. 123 will have no effect on its
consolidated financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment of Liabilities", that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, referred to
as the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements, and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets, and all the securitized assets are retained and
classified as held-to-maturity). A servicing asset or liability that is
purchased or assumed is initially recognized at its fair value. Servicing assets
and liabilities are amortized in proportion to and over the period of estimated
net servicing income or net servicing loss and are subject to subsequent
assessments for impairment based on fair value.
13
<PAGE> 14
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effects of Recent Accounting Pronouncements (continued)
- -------------------------------------------------------
SFAS No. 125 provides that a liability is removed from the balance sheet only if
the debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996 (fiscal 1998 as
to Winton Financial), and is to be applied prospectively. Earlier or retroactive
application is not permitted. Management does not believe that adoption of SFAS
No. 125 will have a material adverse effect on the Corporation's consolidated
financial position or results of operations.
14
<PAGE> 15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Winton Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Winton Financial Corporation as of September 30, 1996 and 1995, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the years in the three year period ended September 30, 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Winton Financial
Corporation as of September 30, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Notes A-2 and B, the Corporation changed its method of
accounting for certain investments and mortgage-backed securities as of October
1, 1994.
Also, as more fully discussed in Note A-3, the Corporation changed its method of
accounting for gains on sale of loans during fiscal 1996.
We previously audited and reported on the consolidated statement of financial
condition of Winton Financial Corporation as of September 30, 1995, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for the years ended September 30, 1995 and 1994, prior to the Corporation's
restatement of the 1995 and 1994 consolidated financial statements for the 1996
pooling-of-interests with Blue Chip Savings Bank. The contribution of Blue Chip
Savings Bank to total assets, revenues, and net earnings represented 11.6%,
12.0% and 21.1% of the respective restated 1995 totals. Separate financial
statements of Blue Chip included in the 1995 and 1994 consolidated financial
statements were audited and reported on separately by other auditors.
Cincinnati, Ohio
November 26, 1996
15
<PAGE> 16
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1996 1995
(Restated)
<S> <C> <C>
Cash and due from banks $ 1,504 $ 1,230
Interest-bearing deposits in other financial institutions -- 2,360
-------- --------
Cash and cash equivalents 1,504 3,590
Investment securities available for sale - at market 2,581 3,073
Investment securities - at amortized cost, approximate market
value of $9,623 and $10,101 at September 30, 1996 and 1995 9,593 10,007
Mortgage-backed securities available for sale - at market 2,942 1,482
Mortgage-backed securities - at cost, approximate market
value of $15,983 and $17,517 at September 30, 1996 and 1995 16,414 17,960
Loans receivable - net 247,755 204,885
Loans held for sale - at lower of cost or market 2,735 1,079
Office premises and equipment 2,667 2,776
Real estate acquired through foreclosure 561 343
Federal Home Loan Bank stock - at cost 2,359 2,163
Accrued interest receivable on loans 1,908 1,579
Accrued interest receivable on mortgage-backed securities 126 135
Accrued interest receivable on investments and
interest-bearing deposits 163 187
Prepaid expenses and other assets 409 336
Intangible assets - net of amortization 524 585
-------- --------
TOTAL ASSETS $292,241 $250,180
======== ========
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
(Restated)
<S> <C> <C>
Deposits $221,533 $197,905
Advances from the Federal Home Loan Bank 46,376 29,830
Accounts payable on mortgage loans serviced for others 686 622
Advance payments by borrowers for taxes and insurance 312 289
Other liabilities 2,273 607
Accrued federal income taxes 116 91
Deferred federal income taxes 114 439
-------- --------
Total liabilities 271,410 229,783
Commitments -- --
Shareholders' equity
Preferred stock - 2,000,000 shares without par value authorized;
no shares issued and outstanding -- --
Common stock - 5,000,000 shares without par value authorized;
1,986,152 and 1,624,200 shares issued and outstanding
at September 30, 1996 and 1995 -- --
Additional paid-in capital 6,501 6,444
Retained earnings - restricted 14,142 13,775
Unrealized gains on securities designated as available for sale,
net of related tax effects 188 178
-------- --------
Total shareholders' equity 20,831 20,397
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $292,241 $250,180
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 18
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1996 1995 1994
(Restated) (Restated)
<S> <C> <C> <C>
Interest income
Loans $18,911 $17,031 $15,436
Mortgage-backed securities 1,183 1,050 1,063
Investment securities 821 688 519
Interest-bearing deposits and other 199 173 169
-------- -------- --------
Total interest income 21,114 18,942 17,187
Interest expense
Deposits 10,700 9,085 7,878
Borrowings 1,996 1,874 1,252
------- ------- -------
Total interest expense 12,696 10,959 9,130
------ ------ -------
Net interest income 8,418 7,983 8,057
Provision for losses on loans 253 88 45
-------- --------- ---------
Net interest income after provision for losses on loans 8,165 7,895 8,012
Other income
Gain on sale of mortgage loans 742 250 105
Gain on sale of investments and mortgage-backed securities
designated as available for sale 9 47 -
Gain on sale of real estate acquired through foreclosure - 5 62
Other operating 384 287 240
-------- -------- --------
Total other income 1,135 589 407
General, administrative and other expense
Employee compensation and benefits 2,625 2,698 2,399
Occupancy and equipment 1,154 1,138 1,142
Federal deposit insurance premiums 1,773 425 397
Franchise taxes 254 232 267
Amortization of intangible assets 61 40 69
Advertising 137 143 171
Other operating 872 853 1,052
Merger related costs 615 - -
-------- ------- -------
Total general, administrative and other
expense 7,491 5,529 5,497
------- ------- -------
Earnings before income taxes 1,809 2,955 2,922
Federal income taxes
Current 960 740 801
Deferred (332) 254 170
-------- -------- --------
Total federal income taxes 628 994 971
-------- -------- --------
NET EARNINGS $ 1,181 $ 1,961 $ 1,951
======= ======= =======
EARNINGS PER SHARE $.60 $.99 $.99
==== ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE> 19
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 1996, 1995 and 1994
(In thousands, except share data)
<TABLE>
<CAPTION>
REQUIRED
CONTRIBUTION
ADDITIONAL UNREALIZED FOR SHARES
COMMON PAID-IN GAIN RETAINED ACQUIRED
STOCK CAPITAL (LOSS) EARNINGS BY ESOP TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance as of October 1, 1993, as restated for business
combination (Note A) $- $5,482 $- $12,171 $ (85) $17,568
Proceeds from exercise of stock options - 22 - - - 22
Net earnings for the year ended September 30, 1994 - - - 1,951 - 1,951
Dividends on common stock - - - (747) - (747)
Stock dividend effected in the form of a 2-for-1 split - 812 - (812) - -
Principal payments on loan to ESOP - - - - 85 85
---- ----- ---- ------ ------ -------
Balance at September 30, 1994 - 6,316 - 12,563 - 18,879
Proceeds from exercise of stock options - 128 - - - 128
Net earnings for the year ended September 30, 1995 - - - 1,961 - 1,961
Designation of securities as available for sale upon adoption of
SFAS No. 115, net of related tax effects - - 163 - - 163
Realized gain on sale of securities designated as available for
sale, net of related tax effects - - (13) - - (13)
Unrealized gains on securities designated as available for sale, net
of related tax effects - - 28 - - 28
Dividends on common stock - - - (749) - (749)
---- ----- ---- ------- ---- -------
Balance at September 30, 1995 - 6,444 178 13,775 - 20,397
Proceeds from exercise of stock options - 57 - - - 57
Net earnings for the year ended September 30, 1996 - - - 1,181 - 1,181
Unrealized gain on securities designated as available for
sale, net of related tax effects - - 10 - - 10
Dividends on common stock - - - (814) - (814)
---- ----- --- ------- ---- -------
Balance at September 30, 1996 $- $6,501 $188 $14,142 $- $20,831
=== ===== === ====== == ======
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE> 20
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
(Restated) (Restated)
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the year $ 1,181 $ 1,961 $ 1,951
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Amortization of premiums on investments and
mortgage-backed securities 52 47 133
Amortization of deferred loan origination fees (149) (213) (454)
Depreciation and amortization 355 350 360
Amortization of intangible assets 61 40 69
Gain on sale of mortgage loans (420) (250) (105)
Gain on sale of investment securities designated as
available for sale -- (47) --
Gain on sale of mortgage-backed securities designated
as available for sale (9) -- --
Gain on sale of real estate acquired through foreclosure -- (5) (62)
Provision for losses on loans 253 88 45
Loans disbursed for sale in the secondary market (36,301) (16,876) (34,047)
Proceeds from sale of loans in the secondary market 35,065 16,816 39,185
Federal Home Loan Bank stock dividends (155) (136) (94)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (329) (163) (112)
Accrued interest receivable on mortgage-backed securities 9 (15) 53
Accrued interest receivable on investments 24 (36) (50)
Prepaid expenses and other assets (73) 144 (14)
Accounts payable on mortgage loans serviced for others 64 105 40
Other liabilities 1,666 (87) 53
Federal income taxes
Current 25 117 205
Deferred (332) 254 170
-------- -------- --------
Net cash provided by operating activities 987 2,094 7,326
Cash flows provided by (used in) investing activities:
Proceeds from the sale of investment securities
designated as available for sale -- 579 --
Proceeds from the sale of mortgage-backed securities
designated as available for sale 1,406 -- --
Principal repayments on mortgage-backed securities 2,040 2,515 9,207
Purchase of mortgage-backed securities designated as
available for sale (3,087) (1,400) --
Purchase of mortgage-backed securities designated as held
to maturity (293) -- (3,166)
Proceeds from the maturity of investment securities 2,250 3,570 10,080
Proceeds from the sale of real estate acquired through
foreclosure -- 203 572
Purchase of investment securities designated as held to maturity (1,350) (5,285) (11,875)
Purchase of investment securities designated as available for sale -- (2,291) --
Purchase of Federal Home Loan Bank stock (41) (152) --
Loan principal repayments 42,079 39,201 55,825
Loan disbursements (85,114) (45,994) (87,868)
Purchase and renovation of office premises and equipment (246) (33) (293)
Additions to real estate acquired through foreclosure (157) (192) (27)
Intangible assets arising from branch purchase -- (611) --
-------- -------- --------
Net cash used in investing activities (42,513) (9,890) (27,545)
-------- -------- --------
Net cash used in operating and investing activities
(subtotal carried forward) (41,526) (7,796) (20,219)
-------- -------- --------
</TABLE>
20
<PAGE> 21
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
(Restated) (Restated)
<S> <C> <C> <C>
Net cash used in operating and investing activities
(balance brought forward) $(41,526) $ (7,796) $(20,219)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts, including
purchased deposits 23,628 12,578 3,377
Proceeds from Federal Home Loan Bank advances 65,262 21,500 66,650
Repayment of Federal Home Loan Bank advances (48,716) (25,341) (52,208)
Advances by borrowers for taxes and insurance 23 (3) 116
Proceeds from exercise of stock options 57 128 22
Dividends paid on common stock (814) (749) (747)
-------- -------- --------
Net cash provided by financing activities 39,440 8,113 17,210
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,086) 317 (3,009)
Cash and cash equivalents at beginning of year 3,590 3,273 6,282
-------- -------- --------
Cash and cash equivalents at end of year $ 1,504 $ 3,590 $ 3,273
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 809 $ 640 $ 574
======== ======== ========
Interest on deposits and borrowings $ 12,650 $ 10,924 $ 9,056
======== ======== ========
Supplemental disclosure of noncash investing activities:
Transfer from loans to real estate acquired through
foreclosure $ 61 $ 155 $ 480
======== ======== ========
Transfer of investments and mortgage-backed
securities to an available for sale classification
upon adoption of SFAS No. 115 $ -- $ 2,233 $ --
======== ======== ========
Unrealized gains on securities designated as
available for sale, net of related tax effects $ 10 $ 178 $ --
======== ======== ========
Recognition of mortgage servicing rights in
accordance with SFAS No. 122 $ 322 $ -- $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE> 22
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Winton Financial Corporation ("Winton Financial", or the "Corporation")
conducts a general banking business in southwestern Ohio which consists of
attracting deposits from the general public and applying those funds to the
origination of loans for residential, consumer and nonresidential purposes.
The Corporation's profitability is significantly dependent on its net
interest income, which is the difference between interest income generated
from interest-earning assets (i.e. loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e. customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Corporation can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are
outside of management's control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general
accounting practices within the financial services industry. In preparing
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
revenues and expenses during the reporting period. Actual results could
differ from such estimates.
On January 5, 1996, Winton Financial merged Blue Chip Savings Bank with and
into its subsidiary, The Winton Savings and Loan Co. ("Winton Savings", or
the "Company"), in a transaction which was accounted for as a
pooling-of-interests. Accordingly, the consolidated financial statements
have been restated to reflect the effects of the business combination as of
October 1, 1993. Pursuant to the Merger Agreement, Winton Financial issued
361,952 shares of common stock.
The following is a summary of the significant accounting policies which,
with the exception of the policies described in Notes A-2 and A-3, have been
consistently applied in the preparation of the accompanying consolidated
financial statements.
1. Principles of Consolidation
---------------------------
Winton Financial is a unitary savings and loan holding company. Since 1990,
Winton Financial's activities have been limited primarily to holding the
common stock of its subsidiary, Winton Savings.
Future references are made to the Corporation or Company as applicable. The
consolidated financial statements include the accounts of the Corporation
and the Company. Condensed financial statements of the Corporation are
presented in Note K as of September 30, 1996 and 1995 and for the fiscal
years ended September 30, 1996, 1995 and 1994. All significant intercompany
balances and transactions have been eliminated in the accompanying
consolidated financial statements.
22
<PAGE> 23
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
Prior to October 1, 1994, investment securities and mortgage-backed
securities were carried at cost, adjusted for amortization of premiums and
accretion of discounts. Premiums and discounts are amortized and accreted to
operations using the interest method over the estimated life of the
underlying loans collateralizing the securities. Investment securities and
mortgage-backed securities held for portfolio investments were carried at
cost, as it was management's intent, and the Corporation had the ability to
hold the securities until maturity. Investment securities and
mortgage-backed securities which would be held for indefinite periods of
time, or used as part of the Corporation's asset/liability management
strategy, or that may be sold in response to changes in interest rates,
prepayment risk or the perceived need to increase regulatory capital were
classified as held for sale and were carried at the lower of aggregate cost
or market.
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". SFAS No. 115
requires that investments be categorized as held-to-maturity, trading, or
available for sale. Securities classified as held-to-maturity are carried at
cost only if the Corporation has the positive intent and ability to hold
these securities to maturity. Trading securities and securities available
for sale are carried at fair value with resulting unrealized gains or losses
recorded to operations or shareholders' equity, respectively. The
Corporation adopted SFAS No. 115 for the fiscal year beginning October 1,
1994. The effect of initial adoption was to increase shareholders' equity by
approximately $163,000 on October 1, 1994, representing the unrealized fair
value appreciation on investment and mortgage-backed securities designated
as available for sale, net of applicable deferred federal income taxes. At
September 30, 1996 and 1995, the Corporation's shareholders equity reflected
net unrealized gains totaling $188,000 and $178,000, respectively.
Realized gains and losses on the sale of investment and mortgage-backed
securities are recognized using the specific identification method.
3. Loans Receivable
----------------
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees, the allowance for loan losses
and premiums and discounts on loans purchased and sold. Premiums and
discounts on loans purchased and sold are amortized and accreted to
operations using the interest method over the average life of the underlying
loans. Interest is accrued as earned unless the collectibility of the loan
is in doubt. Uncollectible interest on loans that are contractually past due
is charged off, or an allowance is established
23
<PAGE> 24
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
----------------
based on management's periodic evaluation. 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 that cash payments are
received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments has returned to normal, in which
case the loan is returned to accrual status. If the ultimate collectibility
of principal is in doubt, in whole or in part, all payments received on
nonaccrual loans are applied to reduce principal until such doubt is
eliminated.
Loans held for sale are carried at the lower of cost or market, determined
in the aggregate. In computing cost, deferred loan origination fees are
deducted from the principal balances of the related loans. At September 30,
1996 and 1995, loans held for sale were carried at cost.
The Company retains the servicing on loans sold and agrees to remit to the
investor loan principal and interest at agreed-upon rates. In June 1994, the
FASB issued SFAS No. 122 "Accounting for Mortgage Servicing Rights," which
requires that the Corporation recognize as separate assets, rights to
service mortgage loans for others, regardless of how those servicing rights
are acquired. An institution that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells those loans
with servicing rights retained would allocate some of the cost of the loans
to the mortgage servicing rights.
SFAS No. 122 requires that securitizations of mortgage loans be accounted
for as sales of mortgage loans and acquisitions of mortgage-backed
securities. Additionally, SFAS No. 122 requires that capitalized mortgage
servicing rights and capitalized excess servicing receivables be assessed
for impairment. Impairment is measured based on fair value.
SFAS No. 122 is effective for fiscal years beginning after December 15,
1995, (October 1, 1996, as to the Corporation) to transactions in which an
entity acquires mortgage servicing rights and to impairment evaluations of
all capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Retroactive application is prohibited, and
earlier adoption is encouraged. Management adopted SFAS No. 122 as of
October 1, 1995, which resulted in recognition of mortgage servicing rights
totaling $322,000 during fiscal 1996.
4. Loan Origination and Commitment Fees
------------------------------------
The Company accounts for loan origination fees in accordance with the
provisions of SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases". Pursuant to the provisions of SFAS No. 91, origination fees
received from loans, net of certain direct origination costs, are deferred
and amortized to interest income using the interest method, giving effect to
actual loan prepayments. Additionally, SFAS No. 91 generally limits the
definition of loan origination costs to the direct costs attributable to
originating a loan, i.e., principally actual personnel costs. Fees received
for loan commitments that are expected to be drawn upon, based on the
Company's experience with similar commitments, are deferred and amortized
over the life of the related loan using the interest method. Fees for other
commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
24
<PAGE> 25
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses
-------------------------
It is the Company's policy to provide valuation allowances for estimated
losses on loans based on past loss experience, current trends in the level
of delinquent and problem loans, loan concentrations to single borrowers,
changes in the composition of the loan portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral and current and anticipated economic conditions in its
primary lending areas. When the collection of a loan becomes doubtful, or
otherwise troubled, the Company records a charge-off equal to the difference
between the fair value of the property securing the loan and the loan's
carrying value. Major loans, including development projects, and major
lending areas are reviewed periodically to determine potential problems at
an early date. The allowance for loan losses is increased by charges to
earnings and decreased by charge-offs (net of recoveries).
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". SFAS No. 114, which was amended by SFAS No. 118 as to
certain income recognition and financial statement disclosure provisions,
requires that impaired loans be measured based upon the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as an alternative, at the loan's observable market price or fair value
of the collateral. The Corporation adopted SFAS No. 114 effective October 1,
1995, without material effect on consolidated financial condition or results
of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Company considers
its investment in one- to four-family residential loans and consumer
installment loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. With respect to the Company's
investment in impaired nonresidential and multi-family residential real
estate loans, such loans are generally collateral dependent and, as a
result, are carried as a practical expedient at the lower of cost or fair
value.
Collateral dependent loans which are more than ninety days delinquent are
considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at that time.
At September 30, 1996, the Corporation had no loans that would be defined as
impaired under SFAS No. 114.
25
<PAGE> 26
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Office Premises and Equipment
-----------------------------
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation and amortization are provided on the straight-line and
accelerated methods over the useful lives of the assets, estimated to be
thirty to forty years for buildings, five to fifteen years for building
improvements and three to fifteen years for furniture and equipment. An
accelerated depreciation method is used for tax reporting purposes.
7. Real Estate Acquired through Foreclosure
----------------------------------------
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. The loan loss allowance is charged for
any write down in the loan's carrying value to fair value at the date of
acquisition. Real estate loss provisions are recorded if the properties'
fair value subsequently declines below the value determined at the recording
date. In determining the lower of cost or fair value at acquisition, costs
relating to development and improvement of property are considered. Costs
relating to holding real estate acquired through foreclosure, net of rental
income, are charged against earnings as incurred.
8. Federal Income Taxes
--------------------
The Corporation accounts for income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 established financial accounting
and reporting standards for the effects of income taxes that result from the
Corporation's activities within the current and previous years. In
accordance with SFAS No. 109, a deferred tax liability or deferred tax asset
is computed by applying the current statutory tax rates to net taxable or
deductible temporary differences between the tax basis of an asset or
liability and its reported amount in the consolidated financial statements
that will result in net taxable or deductible amounts in future periods.
Deferred tax assets are recorded only to the extent that the amount of net
deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years' earnings,
offset against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that
the value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future taxable
income. Deferred tax liabilities are provided on the total amount of net
temporary differences taxable in the future.
Deferral of income taxes results primarily from different methods of
accounting for deferred loan origination fees, Federal Home Loan Bank stock
dividends, gains on sale of loans utilizing the net yield method, the SAIF
recapitalization assessment, the general loan loss allowance and the
percentage of earnings bad debt deduction. Additionally, a temporary
difference is recognized for depreciation utilizing accelerated methods for
federal income tax purposes.
26
<PAGE> 27
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Amortization of Intangible Assets
---------------------------------
Goodwill and other intangible assets arising from the acquisition of
deposits from another financial institution is being amortized on the
straight-line method over a ten year period.
10. Employee Benefit Plans
----------------------
The Corporation has implemented an Employee Stock Ownership Plan (ESOP)
which provides retirement benefits for substantially all employees who have
completed one year of service. Contributions of $65,000, $48,000 and $69,000
were made to the plan for the years ended September 30, 1996, 1995 and 1994,
respectively. At September 30, 1996, the ESOP held 147,323 shares of the
Corporation's common stock, all of which had been allocated to participants
as of that date.
The Company has a contributory 401(k) plan covering all employees who have
attained the age of 21 and have completed one year of service. Contributions
to the plan are voluntary and are matched at the discretion of the Board of
Directors. Contributions to the plan totaled $23,000, $20,000 and $18,000,
for the years ended September 30, 1996, 1995 and 1994, respectively.
11. Stock Option and Incentive Plan
-------------------------------
The Corporation has a Stock Option and Incentive Plan that provides for the
issuance of 324,840 shares of authorized, but unissued shares. During the
year ended September 30, 1994, 126,000 options were granted at a fair value
of $10.00 per share. During the year ended September 30, 1996, 120,500
options were granted at fair value of $13.31 per share. At September 30,
1996, none of the stock options granted had been exercised.
12. Earnings Per Share
------------------
Earnings per share is based on net earnings divided by 1,985,017, 1,971,294
and 1,970,546 weighted-average shares outstanding for the fiscal years ended
September 30, 1996, 1995 and 1994, respectively. In computing earnings per
share for the years ended September 30, 1995 and 1994, the 361,954 shares
issued to Blue Chip Savings Bank were added to the Corporation's historic
weighted-average share outstanding. Fully diluted earnings per share is not
presented, as there was no material dilutive effect attendant to the
Corporation's Stock Option Plan during any of the years presented.
13. Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks and interest-bearing deposits due from other
financial institutions with original maturities of less than ninety days.
27
<PAGE> 28
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets
and liabilities whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at
September 30, 1996 and 1995:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in the
consolidated statement of financial condition for cash and cash
equivalents are deemed to approximate fair value.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES: For investment and
mortgage-backed securities, fair value is deemed to equal the
quoted market price.
LOANS RECEIVABLE: The loan portfolio has been segregated into
categories with similar characteristics, such as one-to-four
family residential, multi-family residential and nonresidential
real estate. These loan categories were further delineated into
fixed-rate and adjustable-rate loans. The fair values for the
resultant loan categories were computed via discounted cash flow
analysis, using current interest rates offered for loans with
similar terms to borrowers of similar credit quality. For loans
on deposit accounts, and consumer and other loans, fair values
were deemed to equal the historic carrying values. The historical
carrying amount of accrued interest on loans is deemed to
approximate fair value.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in
the consolidated statement of financial condition is deemed to
approximate fair value.
DEPOSITS: The fair value of NOW accounts, passbook and club
accounts, and customer advance payments are deemed to approximate
the amount payable on demand. Fair values for fixed-rate
certificates of deposit have been estimated using a discounted
cash flow calculation using the interest rates currently offered
for deposits of similar remaining maturities.
28
<PAGE> 29
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Fair Value of Financial Instruments (continued)
-----------------------------------
FEDERAL HOME LOAN BANK ADVANCES: The fair value of these
advances is estimated using the interest rates currently
offered for advances of similar remaining maturities or, when
available, quoted market prices.
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. The difference between the fair
value and notional amount of outstanding loan commitments at
September 30, 1996 and 1995, were not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Corporation's financial instruments are as follows at
September 30:
<TABLE>
<CAPTION>
1996 1995
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 1,504 $ 1,504 $ 3,590 $ 3,590
Investment securities designated
as available for sale 2,581 2,581 3,073 3,073
Investment securities - at cost 9,593 9,623 10,007 10,101
Mortgage-backed securities designated
as available for sale 2,942 2,942 1,482 1,482
Mortgage-backed securities - at cost 16,414 15,983 17,960 17,517
Loans receivable - net 250,490 254,244 205,964 205,713
Federal Home Loan Bank stock 2,359 2,359 2,163 2,163
-------- -------- -------- --------
$285,883 $289,236 $244,239 $243,639
======== ======== ======== ========
Financial liabilities
Deposits $221,533 $222,205 $197,905 $198,403
Advances from Federal Home Loan Bank 46,376 46,431 29,830 29,901
Advance payments and amounts due on loans
serviced for others 998 998 911 911
-------- -------- -------- --------
$268,907 $269,634 $228,646 $229,215
======== ======== ======== ========
</TABLE>
15. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 1996
consolidated financial statement presentation.
29
<PAGE> 30
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of investment securities at September 30 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Government and agency
obligations $ 9,593 $ 9,623 $10,007 $10,101
AVAILABLE FOR SALE:
U.S. Government and agency obligations 2,098 2,120 2,604 2,655
Corporate equity securities 189 461 189 418
------- ------- ------- -------
2,287 2,581 2,793 3,073
------- ------- ------- -------
Total investments $11,880 $12,204 $12,800 $13,174
======= ======= ======= =======
</TABLE>
At September 30, 1996, the fair value appreciation of the Corporation's
investment securities in excess of cost totaled $324,000, which was
comprised of gross unrealized gains of $365,000 and gross unrealized losses
of $41,000.
At September 30, 1995, the fair value appreciation of the Corporation's
investment securities in excess of cost totaled $374,000, which was
comprised of gross unrealized gains of $417,000, and gross unrealized losses
of $43,000.
The amortized cost and estimated fair value of U.S. Government and agency
obligations, including those designated as available for sale, at September
30, 1996, by term to maturity are shown below.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
(In thousands)
<S> <C> <C>
Due in one year or less $ 2,990 $ 2,996
Due in one to three years 7,248 7,296
Due in three to five years 1,453 1,451
------- -------
$11,691 $11,743
======= =======
</TABLE>
30
<PAGE> 31
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of mortgage-backed securities at September 30, 1996
and 1995, are shown below.
<TABLE>
<CAPTION>
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
Federal Home Loan Mortgage Corporation
Participation certificates $ 6,213 $ 31 $(149) $ 6,095
Collateralized mortgage obligations 359 - (1) 358
Government National Mortgage Association
Participation certificates 948 - - 948
Federal National Mortgage Association
Participation certificates 3,912 4 (90) 3,826
Collateralized mortgage obligations 1,657 - (50) 1,607
CMC Securities Corporation
Collateralized mortgage obligations 3,137 - (167) 2,970
Residential Funding Corporation
Collateralized mortgage obligations 188 - (9) 179
------- ----- ----- -------
Total mortgage-backed securities
held to maturity 16,414 35 (466) 15,983
AVAILABLE FOR SALE:
Government National Mortgage Corporation
Participation Certificates 894 - (6) 888
Federal Home Loan Mortgage Corporation
Collateralized mortgage obligations 2,058 - (4) 2,054
------- ----- ----- -------
Total mortgage-backed securities
available for sale 2,952 - (10) 2,942
------- ----- ----- -------
Total mortgage-backed securities $19,366 $ 35 $(476) $18,925
======= ===== ===== =======
</TABLE>
31
<PAGE> 32
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
Federal Home Loan Mortgage Corporation
Participation certificates $ 7,296 $ 1 $(146) $ 7,151
Collateralized mortgage obligations 359 - - 359
Government National Mortgage Association
Participation certificates 1,050 - (14) 1,036
Federal National Mortgage Association
Participation certificates 4,273 1 (87) 4,187
Collateralized mortgage obligations 1,657 - (54) 1,603
CMC Securities Corporation
Collateralized mortgage obligations 3,137 - (134) 3,003
Residential Funding Corporation
Collateralized mortgage obligations 188 - (10) 178
------- ----- ----- -------
Total mortgage-backed securities
held to maturity 17,960 2 (445) 17,517
AVAILABLE FOR SALE:
Federal National Mortgage Association
Participation certificates 98 1 - 99
Federal National Mortgage Association
Collateralized mortgage obligations 1,397 - (14) 1,383
------- ----- ----- -------
Total mortgage-backed securities
available for sale 1,495 1 (14) 1,482
------- ----- ----- -------
Total mortgage-backed securities $19,455 $ 3 $(459) $18,999
======= ===== ===== =======
</TABLE>
32
<PAGE> 33
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost of mortgage-backed securities, including those designated
as available for sale at September 30, 1996, by contractual terms to
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may generally prepay obligations without
prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED COST
(In thousands)
<S> <C>
Due within three years $2,417
Due after three years through five years 3
Due after five years through ten years 44
Due after ten years through twenty years 7
Due after twenty years 16,895
------
$19,366
======
</TABLE>
Mortgage-backed securities with an approximate carrying value of $2.7
million were pledged to secure public deposits at September 30, 1996.
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family residential $138,720 $120,124
Multi-family residential 55,507 44,298
Construction 17,524 14,624
Nonresidential real estate and land 39,327 30,513
Nonresidential construction 450 1,486
Consumer and other 7,994 3,762
--------- ---------
259,522 214,807
Less:
Undisbursed portion of loans in process 10,150 8,331
Deferred loan origination fees 760 937
Allowance for loan losses 857 654
--------- ---------
$247,755 $204,885
======= =======
</TABLE>
33
<PAGE> 34
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE C - LOANS RECEIVABLE (continued)
The Company's lending efforts have historically focused on one-to-four
family residential and multi-family residential real estate loans, which
comprise approximately $200.0 million, or 81%, of the total loan portfolio
at September 30, 1996, and $169.1 million, or 83%, of the total loan
portfolio at September 30, 1995. Generally, such loans have been
underwritten on the basis of no more than an 80% loan-to-value ratio, which
has historically provided the Company with adequate collateral coverage in
the event of default. Nevertheless, the Company, as with any lending
institution, is subject to the risk that residential real estate values
could deteriorate in its primary lending area of southwestern Ohio, thereby
impairing collateral values. However, management is of the belief that
residential real estate values in the Company's primary lending area are
presently stable.
As discussed previously, the Company has sold whole loans and participating
interests in loans in the secondary market, retaining servicing on the loans
sold. Loans sold and serviced for others totaled approximately $116.6
million, $104.6 million and $98.8 million at September 30, 1996, 1995 and
1994, respectively.
In the ordinary course of business, the Company has granted loans to some of
the officers, directors and their related business interests. Related party
loans are granted on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions
with unrelated persons and do not involve more than normal risk of
collectibility. Since fiscal 1989, it is the Company's policy to prohibit
lending to officers and directors of the Company. There were no loans to
officers and directors at September 30, 1996.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Beginning balance $654 $582 $742
Provision for loan losses 253 88 45
Charge-off of loans (50) (122) (263)
Recoveries of loan losses - 106 58
---- ---- ----
Ending balance $857 $654 $582
==== ==== ====
</TABLE>
34
<PAGE> 35
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE D - ALLOWANCE FOR LOAN LOSSES (continued)
At September 30, 1996, the Company's allowance for loan losses was comprised
of a specific loan loss allowance totaling $105,000 and a general loan loss
allowance of $752,000, which is includible as a component of regulatory
risk-based capital.
Nonperforming and nonaccrual loans at September 30, 1996, 1995 and 1994,
totaled $923,000, $602,000 and $432,000, respectively. Interest income that
would have been recognized had nonaccrual loans performed pursuant to
contractual terms totaled approximately $53,000, $35,000 and $12,000 for the
years ended September 30, 1996, 1995 and 1994.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment is comprised of the following at September 30:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Land $ 336 $ 336
Office buildings and improvements 2,375 2,402
Furniture, fixtures and equipment 2,277 2,068
------ ------
4,988 4,806
Less accumulated depreciation and
amortization 2,321 2,030
------ ------
$2,667 $2,776
====== ======
</TABLE>
The Company leases part of the main office facility and the adjacent real
property under three-year operating lease agreements at an annual cost of
$33,000 per year. The lease for the main office facility is renewable for
seven additional three-year terms at market rates. The lease for the
adjacent real property is renewable for six additional three-year terms at
market rates. The Company may purchase the land and property at any time
after the first three-year term for total consideration of $500,000 for the
main office facility and adjacent real property. Additionally, a lease was
assumed as part of the Blue Chip Merger. The lease expires on December 1,
1999, with two five year renewal options and has a minimum commitment of
approximately $45,000 for fiscal 1997 and 1998 and $7,000 for fiscal 1999.
35
<PAGE> 36
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-AVERAGE INTEREST RATE 1996 1995
(In thousands)
<S> <C>
NOW accounts and money market deposits
1996 - 1.70% $ 12,187
1995 - 1.98% $ 13,059
Passbook and Club accounts
1996 - 3.55% 49,651
1995 - 3.51% 50,102
-------- --------
Total demand, transaction and passbook deposits 61,838 63,161
Certificates of deposit
Original maturities of:
Less than 12 months
1996 - 5.37% 47,603
1995 - 5.78% 38,592
12 months to 36 months
1996 - 6.20% 70,815
1995 - 6.00% 57,980
More than 36 months
1996 - 6.28% 17,102
1995 - 6.15% 12,337
Individual Retirement and Keogh
1996 - 6.06% 24,175
1995 - 6.25% 25,835
-------- --------
Total certificates of deposit 159,695 134,744
-------- --------
Total deposit accounts $221,533 $197,905
======== ========
</TABLE>
The Corporation had deposit accounts with balances in excess of $100,000
totaling $39.4 million and $24.6 million at September 30, 1996 and 1995,
respectively.
36
<PAGE> 37
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE F - DEPOSITS (continued)
Interest expense on deposits at September 30 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Passbook and money market deposit accounts $ 1,735 $1,893 $1,962
NOW accounts 206 181 167
Certificates of deposit 8,759 7,011 5,749
------- ------ ------
$10,700 $9,085 $7,878
======= ====== ======
</TABLE>
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
(In thousands)
<S> <C> <C>
Less than one year $ 92,423 $ 79,140
One year to three years 57,423 45,582
More than three years 9,849 10,022
-------- --------
$159,695 $134,744
======== ========
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1996, by pledges of certain residential mortgage loans totaling $69.6
million, and the Company's investment in Federal Home Loan Bank stock, are
summarized as follows:
<TABLE>
<CAPTION>
MATURING FISCAL
INTEREST RATE YEAR ENDING IN 1996 1995
(In thousands)
<S> <C> <C> <C>
4.40% - 7.20% 1996 $ - $11,454
4.70% - 7.20% 1997 28,000 6,558
5.15% - 7.20% 1998 7,500 5,562
5.67% - 7.20% 1999 6,500 3,067
6.75% - 8.35% 2000 4,000 3,071
7.20% Thereafter 376 118
-------- -------
$46,376 $29,830
======= =======
Weighted-average interest rate 6.15% 6.11%
==== ====
</TABLE>
37
<PAGE> 38
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE H - FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate at September 30 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at statutory rate $615 $1,005 $993
Increase (decrease) in taxes resulting from:
Other 13 (11) (22)
---- ------ ----
Federal income tax provision per consolidated
financial statements $628 $ 994 $971
==== ====== ====
Effective tax rate 34.7% 33.6% 33.2%
==== ==== ====
</TABLE>
The composition of the Corporation's net deferred tax liability at September
30 is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1996 1995
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
General loan loss allowance $ 256 $ 223
Deferred loan origination fees 76 211
SAIF recapitalization assessment 438 -
Stock benefit plans - 34
Amortization of intangible assets 58 53
----- -----
Total deferred tax assets 828 521
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (373) (321)
Difference between book and tax depreciation (147) (135)
Percentage of earnings bad debt deduction (288) (296)
Accrual vs. cash basis of accounting - (88)
Unrealized gains on securities designated as available for sale (96) (89)
Other (38) (31)
----- -----
Total deferred tax liabilities (942) (960)
---- ----
Net deferred tax liability $(114) $(439)
==== ====
</TABLE>
38
<PAGE> 39
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE H - FEDERAL INCOME TAXES (continued)
The Company was allowed a special bad debt deduction generally limited to 8%
of otherwise taxable income, subject to certain limitations based on
aggregate loans and savings account balances at the end of the year. If the
amounts that qualify as deductions for federal income taxes are later used
for purposes other than for bad debt losses, including distributions in
liquidation, such distributions will be subject to federal income taxes at
the then current corporate income tax rate. This percentage of earnings bad
debt deduction had accumulated to approximately $2.0 million as of September
30, 1996. The approximate amount of the unrecognized deferred tax liability
relating to the cumulative bad debt deduction was approximately $400,000 at
September 30, 1996. See Note J for additional information regarding future
percentage of earnings bad debt deductions.
NOTE I - LOAN COMMITMENTS
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 their
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the consolidated statement of financial condition.
The contract or notional amounts of the commitments reflect the extent of
the Company's involvement in such financial instruments.
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 notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At September 30, 1996, the Company had total outstanding commitments of
approximately $10.9 million to originate residential one- to four-family and
multi-family real estate loans on the basis of an 80% loan-to-value ratio,
of which $4.2 million were comprised of adjustable rate loans at rates
ranging from 6.50% to 9.00%, and $6.7 million were comprised of fixed rate
loans at rates ranging from 7.25% to 11.00%. The Company also had total
outstanding commitments of approximately $302,000 to originate
nonresidential real estate and land loans, of which $20,000 were comprised
of adjustable rate loans, at an interest rate of 8.25%, and $282,000 were
comprised of fixed rate loans ranging from 9.00% to 10.00%. Additionally,
the Company had unused lines of credit under home equity loans of $5.9
million and under commercial lines totaling $77,000. In the opinion of
management, all loan commitments equaled or exceeded prevalent market
interest rates as of September 30, 1996, and such commitments have been
underwritten on the same basis as that of the existing loan portfolio.
Management believes that all loan commitments are able to be funded through
cash flow from operations and existing excess liquidity. Fees received in
connection with these commitments have not been recognized in earnings.
39
<PAGE> 40
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE J - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
The Company is subject to minimum regulatory capital standards promulgated
by the Office of Thrift Supervision. The minimum capital standards generally
require the maintenance of regulatory capital sufficient to meet each of
three tests, hereinafter described as the tangible capital requirement, the
core capital requirement and the risk-based capital requirement. The
tangible capital requirement provides for minimum tangible capital (defined
as shareholders' equity less all intangible assets) equal to 1.5% of
adjusted total assets. The core capital requirement provides for minimum
core capital (tangible capital plus certain forms of supervisory goodwill
and other qualifying intangible assets) equal to 3.0% of adjusted total
assets. An OTS proposal, if adopted in present form, would increase the core
capital requirement to a range of 4.0% - 5.0% of adjusted total assets for
substantially all savings associations. In the opinion of management, the
proposed revision to the capital requirement will have no material effect on
the Company's excess regulatory capital position. The risk-based capital
requirement provides for the maintenance of core capital plus general loss
allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted
assets, the Company multiplies the value of each asset on its statement of
financial condition by a defined risk-weighting factor, e.g., one-to-four
family residential loans carry a risk-weighted factor of 50%.
As of September 30, 1996, the Company's regulatory capital exceeded all
minimum capital requirements as shown in the following table:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
TANGIBLE CORE RISK-BASED
CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT
(In thousands)
<S> <C> <C> <C>
Capital under generally
accepted accounting
principles $20,387 $20,387 $ 20,387
Nonallowable assets
Goodwill and other intangibles (524) (524) (524)
Unrealized gains on available for
sale securities (8) (8) (8)
Additional capital items:
General valuation allowances - - 752
------- ------- -------
Regulatory capital computed 19,855 6.8% 19,855 6.8% 20,607 11.5%
Minimum capital requirement (4,362) (1.5) (8,725) (3.0) (14,328) (8.0)
------- --- ------- --- ------ -----
Regulatory capital - excess $15,493 5.3% $11,130 3.8% $ 6,279 3.5%
======= === ======= === ======== =====
</TABLE>
At September 30, 1996, the Company met all regulatory requirements for
classification as a "well-capitalized" institution. A "well-capitalized"
institution must have risk-based capital of 10.0%, and core capital of 5.0%.
The Company's capital exceeded the minimum required amounts for
classification as a "well-capitalized" institution by $2.7 million and $5.2
million, respectively.
40
<PAGE> 41
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE J - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued)
As a condition to regulatory approval of the reorganization to the
holding company form of ownership, Winton Savings has agreed to limit the
amount of dividends payable to the Corporation. Regulations of the Office
of Thrift Supervision ("OTS") impose limitations on the payment of
dividends and other capital distributions by savings associations. Under
such regulations, a savings association that, immediately prior to, and on
a pro forma basis after giving effect to a proposed capital distribution,
has total capital (as defined by OTS regulation) that is equal to or
greater than the amount of its fully phased-in capital requirement is
generally permitted without OTS approval (but subsequent to 30 days prior
notice to the OTS of the planned dividend) to make capital distributions
during a calendar year in the amount of up to the greater of (i) 100% of
its net earnings to date during the year plus an amount equal to one-half
of the amount by which its total capital-to-assets ratio exceeded its fully
phased-in capital to assets ratio at the beginning of the year or (ii) 75%
of its net income for the most recent four quarters. Pursuant to such OTS
dividend regulations, Winton Savings had the ability to pay dividends of
approximately $3.1 million to Winton Financial at September 30, 1996.
The deposit accounts of the Company and of other savings associations are
insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The
reserves of the SAIF were below the level required by law, because a
significant portion of the assessments paid into the fund were used to pay
the cost of prior thrift failures. The deposit accounts of commercial banks
are insured by the FDIC in the Bank Insurance Fund ("BIF"), except to the
extent such banks have acquired SAIF deposits. The reserves of the BIF met
the level required by law in May 1995. As a result of the respective reserve
levels of the funds, deposit insurance assessments paid by healthy savings
associations exceeded those paid by healthy commercial banks by
approximately $.19 per $100 in deposits in 1995. In 1996, no BIF assessments
are required for healthy commercial banks except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provides for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. The Company
had $195.6 million in deposits at March 31, 1995, resulting in an assessment
of approximately $1.3 million, or $850,000 after tax, which was charged to
operations in fiscal 1996.
A component of the recapitalization plan provides for the merger of the SAIF
and BIF on January 1, 1999. Also, the SAIF recapitalization legislation
currently provides for an elimination of the thrift charter or of the
separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. As a result, the Company would be regulated as a bank under
Federal laws which would subject it to the more restrictive activity limits
imposed on national banks. Under separate legislation related to the
recapitalization plan, the Company is required to recapture approximately
$850,000 of its bad debt reserve as taxable income, which represents the
post-1987 additions to the reserve, and will be unable to utilize the
percentage of earnings method to compute its reserve in the future. The
Company has provided deferred taxes for this amount and will be permitted to
amortize the recapture of its bad debt reserve over six years.
41
<PAGE> 42
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE K - CONDENSED FINANCIAL STATEMENTS OF WINTON FINANCIAL
CORPORATION
The following condensed financial statements summarize the financial
position of Winton Financial Corporation as of September 30, 1996 and 1995,
and the results of its operations and cash flows for each of the years
ended September 30, 1996, 1995 and 1994.
WINTON FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
September 30,
<TABLE>
<CAPTION>
ASSETS 1996 1995
(In thousands)
<S> <C> <C>
Cash $ 252 $ 176
Investment in The Winton Savings and Loan Co. 20,387 20,029
Corporate equity securities - at fair value 461 418
Prepaid expenses and other assets 32 14
------- -------
Total assets $21,132 $20,637
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 209 $ 162
Deferred federal income taxes 92 78
------- -------
Total liabilities 301 240
Shareholders' equity
Common stock -- --
Additional paid-in capital 6,501 6,444
Retained earnings 14,142 13,775
Unrealized gain on securities designated as
available for sale, net of related tax effects 188 178
------- -------
Total shareholders' equity 20,831 20,397
------- -------
Total liabilities and shareholders' equity $21,132 $20,637
======= =======
</TABLE>
42
<PAGE> 43
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1996, 1995 and 1994
NOTE K - CONDENSED FINANCIAL STATEMENTS OF WINTON FINANCIAL
CORPORATION (continued)
WINTON FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Year ended September 30,
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Revenue
Interest and dividends on investments $ 17 $ 13 $ 13
Gain on sale of investment securities
designated as available for sale - 20 -
Dividends received from subsidiary 904 425 731
Equity in undistributed earnings of subsidiary 346 1,581 1,291
------ ------ ------
1,267 2,039 2,035
Expenses
General and administrative 86 78 84
------ ------ ------
Net earnings $1,181 $1,961 $1,951
====== ====== ======
</TABLE>
WINTON FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Year ended September 30,
<TABLE>
<CAPTION>
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the year $1,181 $ 1,961 $ 1,951
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Undistributed earnings of consolidated subsidiary (346) (1,581) (1,291)
Gain on sale of investment securities
designated as available for sale - (20) -
Increases (decreases) in cash due to changes in:
Prepaid expenses and other assets (18) 17 12
Other liabilities 47 - 24
------ ------- -------
Net cash provided by operating activities 864 377 696
Cash flows provided by (used in) investing activities:
Purchase of corporate equity securities - (36) (88)
Proceeds from sale of investment securities
designated as available for sale - 58 -
------ -------- -------
Net cash provided by (used in) investing activities - 22 (88)
Cash flows used in financing activities:
Payment of dividends on common stock (788) (650) (650)
------ ------- -------
Net increase (decrease) in cash and cash equivalents 76 (251) (42)
Cash and cash equivalents at beginning of year 176 427 469
----- ------- -------
Cash and cash equivalents at end of year $ 252 $ 176 $ 427
====== ======= ========
</TABLE>
43
<PAGE> 44
WINTON FINANCIAL CORPORATION
SHAREHOLDER SERVICES. The Provident Bank serves as primary transfer agent and as
dividend disbursing agent for the common shares of Winton Financial.
Communications regarding changes of address, transfer of shares, lost
certificates and dividends should be sent to:
The Provident Bank
Capital Management Group
Mail Stop 654D
309 Vine Street
Cincinnati, Ohio 45202
MARKET MAKERS. Herzog, Heine, Geduld, Inc., McDonald & Company Securities, Inc.,
and Ryan Beck & Co., Inc. serve as market makers for Winton Financial's common
shares.
ANNUAL MEETING. The Annual Meeting of Shareholders of Winton Financial will be
held on January 31, 1997, at 10:00 a.m. Eastern Standard Time, at Shuller's
Wigwam, 6210 Hamilton Avenue, Cincinnati, Ohio 45224.
FORM 10-KSB ANNUAL REPORT. A copy of Winton Financial's Annual Report on Form
10-KSB, as filed with the Securities and Exchange Commission, will be available
at no charge to shareholders upon request to:
Winton Financial Corporation
5511 Cheviot Road
Cincinnati, Ohio 45247
Attention: Jill M. Burke, Treasurer
44
<PAGE> 45
WINTON FINANCIAL CORPORATION
<TABLE>
<CAPTION>
WINTON FINANCIAL WINTON SAVINGS
BOARD OF DIRECTORS BOARD OF DIRECTORS
<S> <C>
William J. Parchman William J. Parchman
Chairman of the Board Chairman of the Board
Retired real estate executive
Robert L. Bollin
Robert L. Bollin President
President of Winton Financial and
Winton Savings Robert J. Bollin
Robert J. Bollin Robert E. Hoeweler
Vice President of Winton Savings
Henry L. Schulhoff
Robert E. Hoeweler
President, Hoeweler Group, Inc. Thomas H. Humes
Henry L. Schulhoff Timothy M. Mooney
President, Schulhoff and Company, Inc.
J. Clay Stinnett
Thomas H. Humes
President, Great Traditions Land & DIRECTORS EMERITUS
Development Co. Donald G. Avery*
Clifford B. Hodapp
Timothy M. Mooney Arthur C. Saben
Vice President and Chief Financial Officer
of Kendle Research Associates, Inc.
OFFICERS
J. Clay Stinnett
President, J.R. Concepts, Inc. Robert L. Bollin
President
DIRECTORS EMERITUS
Donald G. Avery* Gregory J. Bollin
Clifford B. Hodapp Executive Vice President
Arthur C. Saben
Mary Ellen Lovett
Senior Vice President/Savings
OFFICERS
Robert J. Bollin
Robert L. Bollin Vice President
President
Jill M. Burke
James W. Brigger Treasurer and Chief Financial Officer
Secretary
James W. Brigger
Jill M. Burke Vice President/Chief Operating Officer/Secretary
Treasurer and Chief Financial Officer
Marianne B. Kenner
Gregory J. Bollin Vice President/Manager of Carthage Office
Vice President
Mary Ellen Lovett
Vice President
<FN>
* Mr. Avery's service as a Director will end effective at the Annual Meeting,
when he will become a Director Emeritus.
</TABLE>
45
<PAGE> 1
Exhibit 20
WINTON FINANCIAL CORPORATION
5511 CHEVIOT ROAD
CINCINNATI, OHIO 45247
(513) 385-3880
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the Annual Meeting of Shareholders of
Winton Financial Corporation ("WFC") will be held at Shuller's Wigwam
Restaurant, 6210 Hamilton Avenue, Cincinnati, Ohio 45224, on January 31, 1997,
at 10:00 a.m., Eastern Standard Time (the "Annual Meeting"), for the following
purposes, all of which are more completely set forth in the accompanying Proxy
Statement:
1. To elect two directors of WFC for terms expiring in 2000;
2. To ratify the selection of Grant Thornton LLP as the auditors of
WFC for the current fiscal year; and
3. To transact such other business as may properly come before the
Annual Meeting or any adjournments thereof. The Board of
Directors is not aware of any other business to come before the
Annual Meeting.
Any action may be taken on the foregoing proposals at the Annual
Meeting on the date specified above or any date or dates to which the Annual
Meeting may be adjourned. Only shareholders of WFC of record at the close of
business on December 13, 1996, will be entitled to receive notice of and to vote
at the Annual Meeting and any adjournments thereof.
Whether or not you expect to attend the Annual Meeting, we urge you to
consider the accompanying Proxy Statement carefully and to SIGN, DATE AND
PROMPTLY RETURN THE ENCLOSED PROXY SO THAT YOUR SHARES MAY BE VOTED IN
ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF A QUORUM MAY BE ASSURED. The
giving of a Proxy does not affect your right to vote in person in the event you
attend the Annual Meeting.
By Order of the Board of Directors
Cincinnati, Ohio
January 3, 1997 James W. Brigger, Secretary
<PAGE> 2
WINTON FINANCIAL CORPORATION
5511 CHEVIOT ROAD
CINCINNATI, OHIO 45247
(513) 385-3880
PROXY STATEMENT
PROXIES
The enclosed Proxy is being solicited by the Board of Directors of
Winton Financial Corporation, an Ohio corporation ("WFC"), for use at the 1997
Annual Meeting of Shareholders of WFC to be held at Shuller's Wigwam Restaurant,
6210 Hamilton Avenue, Cincinnati, Ohio 45224, on January 31, 1997, at 10:00
a.m., Eastern Standard Time, and at any adjournments thereof (the "Annual
Meeting"). Without affecting any vote previously taken, the Proxy may be revoked
by a shareholder before exercise by executing and submitting a later-dated Proxy
or by giving notice of revocation to WFC in writing or in open meeting.
Attendance at the Annual Meeting will not, of itself, revoke a Proxy.
Each properly executed Proxy, which is received prior to the Annual
Meeting and not revoked, will be voted as specified thereon or, in the absence
of specific instructions to the contrary, will be voted:
FOR the reelection of Messrs. Robert L. Bollin and William J. Parchman
as directors of WFC for terms expiring in 2000; and
FOR the ratification of the selection of Grant Thornton LLP ("Grant
Thornton") as the auditors of WFC for the current fiscal year.
Proxies may be solicited by the directors, officers and other employees
of WFC in person or by telephone, telegraph or mail. WFC may reimburse brokerage
firms and other custodians, nominees and fiduciaries for reasonable expenses
incurred by them in sending proxy materials to beneficial owners. The cost of
soliciting proxies will be borne by WFC.
Only shareholders of record at the close of business on December 13,
1996 (the "Voting Record Date"), are eligible to vote at the Annual Meeting and
will be entitled to cast one vote for each common share of WFC (the "Common
Share") owned. WFC's records disclose that, as of the Voting Record Date, there
were 1,986,152 votes entitled to be cast at the Annual Meeting.
This Proxy Statement is first being mailed to shareholders of WFC on or
about January 3, 1996.
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and WFC's Regulations, the nominees receiving the
greatest number of votes will be elected as directors. Common Shares as to which
the authority to vote is withheld are not counted toward the election of
directors or toward the individual nominees specified in the enclosed Proxy. If
the enclosed Proxy is signed and dated by the shareholder, but no vote is
specified thereon, the Common Shares held by such shareholder will be voted FOR
the reelection of the nominees.
<PAGE> 3
RATIFICATION OF SELECTION OF AUDITORS
The affirmative vote of the holders of a majority of the Common Shares
represented in person or by proxy at the Annual Meeting is necessary to ratify
the selection of Grant Thornton as the auditors of WFC for the current fiscal
year. The effect of an abstention is the same as a vote against ratification. If
the enclosed Proxy is signed and dated by the shareholder, but no vote is
specified thereon, the Common Shares held by such shareholder will be voted FOR
the ratification of the selection of Grant Thornton as auditors.
VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
the only persons known to WFC to own beneficially more than five percent of
the Common Shares as of December 13, 1996:
<TABLE>
<CAPTION>
Amount and Nature Percent of Common
Name and Address of Beneficial Ownership(1) Shares Outstanding(2)
- ---------------- -------------------------- ---------------------
<S> <C> <C>
Star Bank, N.A. 147,323 (3) 7.42%
P.O. Box 1118
Cincinnati, Ohio 45201
Daniel P. Randolph 129,754 (4) 6.53%
Suite 700
105 East Fourth Street
Cincinnati, Ohio 45202
Robert E. Hoeweler 110,500 (5) 5.49%
5596 Squirrel Run Lane
Cincinnati, Ohio 45247
Henry L. Schulhoff 120,680 (6) 6.00%
7 West Seventh Street
Cincinnati, Ohio 45202
- -----------------------------
<FN>
(1) A person is the beneficial owner of Common Shares if such person, directly
or indirectly, has sole or shared voting or investment power over such
shares or has the right to acquire such voting or investment power within
60 days. All Common Shares are owned directly with sole voting or
investment power, unless otherwise indicated by footnote. All stock options
outstanding under the Winton Financial Corporation Stock Option and
Incentive Plan, as amended (the "Option Plan"), are currently exercisable.
(2) For each person, assumes a total of 1,986,152 Common Shares outstanding,
plus the number of Common Shares such person may acquire pursuant to the
Option Plan within 60 days, if any.
(3) All Common Shares are held of record for the benefit of Star Bank, N.A., as
trustee under The Winton Financial Corporation Employee Stock Ownership
Plan (the "ESOP").
</TABLE>
(Footnotes continue on next page.)
2
<PAGE> 4
(4) Based on a Schedule 13G filed with the Securities and Exchange Commission
by Daniel P. Randolph. Includes 28,822 Common Shares held by Daniel P.
Randolph in an individual retirement account; 86,482 Common Shares owned as
trustee under a trust for the benefit of R. Irene Randolph; 6,400 Common
Shares owned as trustee under a trust for the benefit of Ronald I. Oldiges;
1,300 Common Shares owned as trustee under a trust for the benefit of Ruth
Randolph; 5,750 Common Shares owned as trustee under a trust for the
benefit of Charles Randolph; and 1,000 Common Shares owned by Ritter &
Randolph, an Ohio partnership of which Mr. Randolph is a partner.
(5) Includes 25,000 Common Shares that may be acquired upon the exercise of
options; 25,000 Common Shares held jointly with Paula Hoeweler, his wife;
19,900 Common Shares owned as trustee under a trust for the benefit of
Brian Hoeweler; 19,900 Common Shares owned as trustee under a trust for the
benefit of Jennifer Hoeweler; and 19,900 Common Shares owned as trustee
under the Robert B. Hoeweler Trust.
(6) Includes 25,000 Common Shares that may be acquired upon the exercise of
options; 8,800 Common Shares owned by Cathleen Schulhoff, wife of Henry L.
Schulhoff, which shares Henry L. Schulhoff disclaims beneficial ownership
of; and 6,800 Common Shares owned by Schulhoff & Company, Inc., a
corporation of which Mr. Schulhoff is a major shareholder.
The following table sets forth certain information with respect to the
number of Common Shares beneficially owned by each director of WFC and by all
directors and executive officers of WFC as a group as of December 13, 1996:
<TABLE>
<CAPTION>
Amount and Nature of Percent of Common
Name and Address(1) Beneficial Ownership(2) Shares Outstanding(3)
- ------------------- ----------------------- ---------------------
<S> <C> <C>
Donald G. Avery 70,640 (4) 3.54%
Robert J. Bollin 46,320 (5) 2.31%
Robert L. Bollin 94,925 (6) 4.68%
Robert E. Hoeweler 110,500 (7) 5.49%
Thomas H. Humes 0 -
Timothy M. Mooney 0 -
William J. Parchman 90,880 (8) 4.53%
J. Clay Stinnett 0 -
Henry L. Schulhoff 20,680 (9) 6.00%
All directors and executive officers
of WFC as a group (13 persons) 689,072 (10) 31.49%
<FN>
(1) Each of the persons listed in this table may be contacted at the address of
WFC, 5511 Cheviot Road, Cincinnati, Ohio 45247.
(2) A person is the beneficial owner of Common Shares if such person, directly
or indirectly, has sole or shared voting or investment power over such
shares directly or indirectly or has the right to acquire such voting or
investment power within 60 days. All Common Shares of directors are owned
directly with sole voting or investment power, unless otherwise indicated
by footnote. All stock options granted under the Option Plan are currently
exercisable.
(3) For each person, assumes a total of 1,986,152 Common Shares outstanding,
plus the number of Common Shares such person may acquire pursuant to the
Option Plan within 60 days of December 13, 1996, if any. For all directors
and executive officers as a group, assumes a total of 2,188,152 Common
Shares outstanding, which includes 202,000 shares which may be acquired by
directors and executive officers under the Option Plan within 60 days of
December 13, 1996.
(Footnotes continue on next page.)
</TABLE>
3
<PAGE> 5
(4) Includes 10,000 Common Shares that may be acquired upon the exercise of
options; 29,820 Common Shares owned solely by Marcella Avery, wife of
Donald G. Avery; and 29,820 Common Shares held jointly with Marcella Avery.
(5) Includes 20,000 Common Shares that may be acquired upon the exercise of
options and 26,320 Common Shares held in the individual retirement account
of Robert J. Bollin, the trustee of which is A. G. Edwards, Inc.
(6) Includes 40,000 Common Shares that may be acquired upon the exercise of
options; 18,270 Common Shares held for the benefit of Robert L. Bollin in
The Winton Savings and Loan Co. Cash and Deferred Plan (the "401(k) Plan"),
the trustees of which are James W. Brigger, Robert L. Bollin and Mary Ellen
Lovett, executive officers of WFC; 15,935 Common Shares held for the
benefit of Robert L. Bollin in the ESOP, the trustee of which is Star Bank,
N.A.; 680 Common Shares held by the individual retirement account of Robert
L. Bollin, the trustee of which is Merrill Lynch; 17,940 Common Shares held
jointly with Elaine Bollin, his wife; 800 and 1,200 Common Shares held by
A.G. Edwards & Sons f.b.o. Robert L. Bollin and Elaine Bollin,
respectively; and 100 Common Shares held by Elaine Bollin as custodian for
Anthony Bollin.
(7) Includes 25,000 Common Shares that may be acquired upon the exercise of
options; 25,800 Common Shares held jointly with Paula Hoeweler, his wife;
19,900 Common Shares owned as trustee under a trust for the benefit of
Brian Hoeweler; 19,900 Common Shares owned as trustee under a trust for the
benefit of Jennifer Hoeweler; and 19,900 Common Shares owned as trustee
under the Robert B. Hoeweler Trust.
(8) Includes 20,000 Common Shares that may be acquired upon the exercise of
options; 57,240 Common Shares held in the individual retirement account of
William J. Parchman, the trustee of which is Alex Brown & Sons, Inc.; and
7,000 Common Shares owned by Yvonne Parchman, wife of William J. Parchman.
(9) Includes 25,000 Common Shares that may be acquired upon the exercise of
options; 8,800 Common Shares owned by Cathleen Schulhoff, wife of Henry L.
Schulhoff, as to which Henry L. Schulhoff disclaims beneficial ownership;
and 6,800 Common Shares owned by Schulhoff & Company, Inc., a corporation
of which Mr. Schulhoff is a major shareholder.
(10) Include 202,000 Common Shares that may be acquired upon the exercise of
options.
BOARD OF DIRECTORS
ELECTION OF DIRECTORS
The Regulations of WFC provides for a Board of Directors consisting of
nine persons, divided into three classes of three directors each. Each class
serves for a three-year period. Each of the directors of WFC is also a director
of The Winton Savings and Loan Co., the wholly owned subsidiary of WFC
("Winton").
The entire Board of Directors of WFC acts as a Nominating Committee for
selecting nominees for election as directors. In accordance with Section 2.03 of
the Regulations of WFC, nominees for election as directors may be proposed only
by the directors or by a shareholder entitled to vote for directors if such
shareholder has submitted a written nomination to the Secretary of WFC by the
later of the February 1st immediately preceding the annual meeting of
shareholders or the sixtieth day before the first anniversary of the most recent
annual meeting of shareholders held for the election of directors. Each such
written nomination must state the name, age, business or residence address of
the nominee, the principal occupation or employment of the nominee, the number
of Common Shares owned either beneficially or of record by each such nominee and
the length of time such Common Shares have been so owned.
4
<PAGE> 6
The Board of Directors proposes the reelection of the following
directors to terms which will expire in 2000:
<TABLE>
<CAPTION>
Name Age(1) Position(s) Held Director Since
---- ------ ---------------- --------------
<S> <C> <C> <C>
William J. Parchman 77 Director 1989
Robert L. Bollin(2) 44 Director and President 1989
<FN>
- -----------------------------
(1) As of December 13, 1996.
(2) Robert J. Bollin, a director of WFC, is the father of Robert L. Bollin, a
director and President of WFC, and Gregory J. Bollin, a Vice President of
WFC.
</TABLE>
If any nominee is unable to stand for election, the Proxies will be voted for
such substitute as the Board of Directors recommends. At this time, the Board of
Directors knows of no reason why any nominee would be unable to serve if
elected. Unless otherwise directed, Proxies received pursuant to this
solicitation will be voted for the foregoing nominees.
Following the reelection of Robert L. Bollin and William J. Parchman at
the Annual Meeting, there will be one vacancy on the Board of Directors in the
class of directors which will stand for election at the Annual Meeting. The
vacancy will arise as a result of the decision of Donald G. Avery not to stand
for reelection. The Board of Directors intends to fill the vacancy with a
suitable candidate in the foreseeable future.
In October 1996, Clifford B. Hodapp resigned as a member of the Board
of Directors of WFC and Winton. In November 1996, the Board of Directors
appointed a new director to fill the vacancy created by Mr. Hodapp's resignation
and two new directors to fill two other vacancies on the Board of Directors.
Thomas H. Humes, information on whom appears below, was appointed to fill a
vacancy in the class which will stand for election in 1998. In addition, Timothy
M. Mooney and J. Clay Stinnett, information on each of whom also appears below,
were appointed to fill vacancies in the class which will stand for election in
1999.
The following directors will continue to serve after the Annual Meeting
for the terms indicated:
<TABLE>
<CAPTION>
Position(s) Director Term
Name Age(1) Held Since Expires
- ---- ------ ---- ----- -------
<S> <C> <C> <C> <C>
Robert J. Bollin(2) 74 Director 1989 1998
Henry L. Schulhoff 52 Director 1989 1998
Thomas H. Humes 47 Director 1996 1998
Robert E. Hoeweler 49 Director 1989 1999
Timothy M. Mooney 49 Director 1996 1999
J. Clay Stinnett 45 Director 1996 1999
- -----------------------------
<FN>
(1) As of December 13, 1996.
(2) Robert J. Bollin, a director of WFC, is the father of Robert L. Bollin, a
director and President of WFC, and Gregory J. Bollin, a Vice President of
WFC.
</TABLE>
In recognition of their many years of service to WFC and Winton,
Messrs. Avery and Hodapp will serve as Directors Emeritus following the Annual
Meeting. As Directors Emeritus, Messrs. Avery and Hodapp will be permitted to
attend meetings of the Board of Directors, but will have no right to vote at
such meetings.
ROBERT J. BOLLIN began his banking career in 1947 as an office manager
for Cincinnati Federal Savings Association in Price Hill. He then moved to the
O'Bryonville Savings and Loan Association, where he served as Assistant
Secretary and Chief Executive Officer. In 1955, Mr. Bollin joined Winton as
Chief Executive Officer. He has since retired
5
<PAGE> 7
from his position as Chief Executive Officer, but still participates in Winton's
business as a Vice President and an appraiser of construction loans. Mr. Bollin
has been active in the McAuley High School Development Board and the LaSalle
High School Advisory Board.
ROBERT L. BOLLIN has been the President of Winton since 1988 and the
President of WFC since its incorporation in November 1989. Mr. Bollin joined
Winton in 1969 and, in 1979, he was promoted to Secretary and Assistant Managing
Officer of Winton, responsible for managing Winton's accounting operations,
developing and implementing Winton's investment policy in consultation with the
Board of Directors and managing the day-to-day operations of Winton.
ROBERT E. HOEWELER was elected to the Board of Directors of Winton in
1988. Mr. Hoeweler is a certified public accountant. Since 1972, Mr. Hoeweler
has been active in the management of a group of family-owned companies which
includes Aluminum Extruded Shapes, Inc.
THOMAS H. HUMES has served as President of Great Traditions Land &
Development Co., a real estate and land development company in Cincinnati, for
the past five years.
TIMOTHY M. MOONEY has served as Vice President and Chief Financial
Officer of Kendle Research Associates, Inc., a clinical research organization in
Cincinnati in 1996. From 1994 to 1995, he served as Vice President, Chief
Financial Officer and Treasurer of The Future Now, Inc., a computer reseller in
Cincinnati. He served as Senior Vice President and Chief Financial Officer of
Hook-SupeRx, Inc., a retail drug store chain, from 1988 to 1994.
WILLIAM J. PARCHMAN has served as a director of Winton for 43 years. He
was admitted to the practice of law in Ohio in 1949. Mr. Parchman was the
founder of Parchman & Oyler Company Realtors which, at its peak, was
Cincinnati's largest residential real estate company. Mr. Parchman served as
National Alumni President of the University of Cincinnati and more recently as
Chairman of the Board of the University of Cincinnati Foundation. He was also a
director of the Cincinnati Metropolitan Housing Authority for 18 years, past
president of the Cincinnati Board of Realtors and President of Clovernook
Country Club. Mr. Parchman was the first recipient of the Carl H. Lindner Medal
for Outstanding Business Achievement presented by the College of Business
Administration Alumni Association, University of Cincinnati.
HENRY L. SCHULHOFF became a director of Winton in February 1988. Since
1976, Mr. Schulhoff has been the president and portfolio manager of Schulhoff
and Company, Inc., a local investment counseling firm.
J. CLAY STINNETT has served since 1993 as President and a director of
J.R. Concepts, Inc., a direct mail advertising company in Cincinnati. Prior to
1993, Mr. Stinnett spent almost twenty years in the banking business, including
serving as President and Chief Operating Officer of PNC Bank, N.A., Ohio
(formerly The Central Trust Co., N.A.) until 1992.
MEETINGS OF DIRECTORS
The Board of Directors of WFC met 12 times for regularly scheduled and
special meetings during the fiscal year ended September 30, 1996. Each director
attended at least 75% of the aggregate of such meetings.
The Board of Directors of Winton met 12 times for regularly scheduled
and special meetings during the fiscal year ended September 30, 1996. Each
director attended at least 75% of the aggregate of such meetings.
COMMITTEES OF DIRECTORS
The Board of Directors of WFC has no standing committees. Nominations
for election of directors are determined by the entire Board of Directors. See
"Election of Directors."
The Board of Directors of Winton has an Audit Committee, an Executive
Committee, a Loan Committee, a CRA Committee, a Compensation Committee, an ESOP
Committee and a Stock Option Committee. Each director serving on each of these
committees attended at least 75% of the aggregate of all meetings of each
committee on which he served as a regular member.
6
<PAGE> 8
The current members of Winton's Audit Committee are Timothy M. Mooney
and William J. Parchman, and a third member will be appointed immediately after
the Annual Meeting. Former director Clifford B. Hodapp served during the fiscal
year ended September 30, 1996. The function of the Audit Committee is to
communicate with Winton's outside auditors and to recommend to the Board of
Directors a firm of accountants to serve as independent auditors for WFC. The
Audit Committee met once during the fiscal year ended September 30, 1996.
The members of the Executive Committee are Robert L. Bollin, Robert E.
Hoeweler, William J. Parchman and Henry L. Schulhoff. The function of the
Executive Committee is to examine, together with management, levels and methods
of investment, to review and evaluate alternative and additional investment
programs and to consider and establish interest rates on the various forms of
savings deposits and mortgage loans. The Executive Committee met 52 times during
the fiscal year ended September 30, 1996.
Winton's Loan Committee is comprised of Robert J. Bollin, William J.
Parchman, and Henry L. Schulhoff. Robert L. Bollin serves as alternate. The
function of the Loan Committee is to approve loan applications and exercise the
authority of the Board of Directors when the Board is not in session, subject to
certain limitations. The Loan Committee met 44 times during the fiscal year
ended September 30, 1996.
Winton's Compensation Committee consists of Robert J. Bollin, Robert L.
Bollin, Robert E. Hoeweler and William J. Parchman. The function of the
Compensation Committee is to confer with management and make recommendations to
the Board of Directors regarding the compensation of Winton's executive officers
and employees. The Compensation Committee met one time during the fiscal year
ended September 30, 1996.
The ESOP is administered by a committee of at least three directors
designated by the Board of Directors. The ESOP committee presently consists of
Robert J. Bollin and Robert E. Hoeweler. Former director Clifford B. Hodapp
served during the fiscal year ended September 30, 1996. The ESOP Committee met
one time during the fiscal year ended September 30, 1996.
The Stock Option Committee is responsible for administering the Option
Plan, including interpreting the Option Plan and awarding options pursuant to
its terms. The Stock Option Committee took action in writing twice during the
fiscal year ended September 30, 1996. The current members of the Stock Option
Committee are Robert L. Bollin, Robert E. Hoeweler and Henry L. Schulhoff.
William J. Parchman also serves on the CRA Committee which is a
management committee of Winton comprised of Mr. Parchman and James W. Brigger,
Chief Operating Officer of Winton. The function of the CRA Committee is to
confer with management and make recommendations to the Board concerning
community investment. The CRA Committee met two times during the fiscal year
ended September 30, 1996.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
current executive officers of WFC:
<TABLE>
<CAPTION>
Name Age(1) Position(s) Held
- ---- ------ ----------------
<S> <C> <C>
Robert L. Bollin 44 President and Director
Gregory J. Bollin 42 Vice President
James W. Brigger 48 Secretary
Jill M. Burke 34 Treasurer and Chief Financial Officer
Mary Ellen Lovett 58 Vice President
- -----------------------------
<FN>
(1) As of December 13, 1996.
</TABLE>
7
<PAGE> 9
GREGORY J. BOLLIN is a Vice President of WFC, a position he has held
since January 1994. Mr. Bollin also serves as Executive Vice President of
Winton, a position he has held since January 1990.
JAMES W. BRIGGER is the Secretary of WFC, a position he has held since
1989. Mr. Brigger also serves as the Chief Operating Officer of Winton, a
position he has held since April 1989.
JILL M. BURKE is the Treasurer and Chief Financial Officer of WFC, a
position she has held since 1989. Ms. Burke also serves as the Treasurer and
Controller of Winton, a position she has held since 1989.
MARY ELLEN LOVETT is a Vice President of WFC, a position she has held
since January 1994. Ms. Lovett also serves as Senior Vice President of Winton, a
position she has held since June 1993. Ms. Lovett served as Vice President of
Winton from 1988 to May 1993.
For biographical information regarding Mr. Robert L. Bollin, see "BOARD
OF DIRECTORS - Election of Directors."
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
WFC does not pay any compensation to its executive officers. Executive
officers of Winton are compensated by Winton for services rendered to Winton.
Except for the President and Executive Vice President of Winton, no director or
executive officer of WFC received more than $100,000 in salary and bonus
payments from Winton during the year ended September 30, 1996. The following
table sets forth certain information with respect to compensation paid to the
President and Executive Vice President of Winton:
<TABLE>
<CAPTION>
Summary Compensation Table
- --------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation Awards
--------------------------------------------------- All Other
Options/SARs Compensation
Name and Principal Position Year Salary($) Bonus($) (#)(1) ($)(2)(3)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert L. Bollin, President 1996 $153,649 $16,000 20,000 $6,929
1995 $142,467 $15,000 0 $9,375
1994 $137,562 $15,000 20,000 $8,443
Gregory J. Bollin, Executive 1996 $ 109,838 $13,000 12,000 $4,791
Vice President 1995 $ 99,893 $12,000 0 $6,683
1994 $ 96,572 $12,000 12,000 $6,410
<FN>
- -----------------------------
(1) These figures represent the number of Common Shares underlying options
granted to the named individuals during the year indicated. Mr. Robert
L. Bollin's and Mr. Gregory J. Bollin's outstanding options at the time
increased in proportion to the two 2-for-1 stock splits effective in
February 1994 and February 1993, but such increases are not considered
a grant of options by WFC. WFC has no restricted stock awards or SARs
("stock appreciation rights") and has no plans to grant such awards or
rights.
</TABLE>
(Footnotes continue on next page.)
8
<PAGE> 10
(2) Consists of cash or stock contributions to the ESOP or the reallocation
of forfeited shares in the ESOP of $4,862, $7,463 and $6,578, allocated
to Mr. Robert L. Bollin's account and $2,067, $1,912 and $1,865 in
matching contributions to the 401(k) Plan for his account for the years
ended September 30, 1996, 1995 and 1994, respectively.
(3) Consists of cash or stock contributions to the ESOP or the reallocation
of forfeited shares in the ESOP of $3,982, $5,768 and $5,125, allocated
to Mr. Gregory J. Bollin's account and $809, $915 and $1,285 in
matching contributions to the 401(k) plan for his account for the years
ended September 30, 1996, 1995 and 1994, respectively.
OPTION PLAN
The following table sets forth information concerning individual grants
of stock options made to the persons listed on the Summary Compensation Table:
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
-------------------------------------
Individual Grants
--------------------------------------------------------
Number of % of Total
Securities Options/
Underlying SARs Granted
Options/ to Employees Exercise or
SARs in Fiscal Base Price Expiration
Name Granted (#) Year ($/Share) Date
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert L. Bollin 20,000 28.6% $13.50 5/1/06
Gregory J. Bollin 12,000 17.1% $13.50 5/1/06
</TABLE>
The following table sets forth information regarding the number and
value of unexercised options held by the persons listed in the Summary
Compensation Table.
<TABLE>
<CAPTION>
Aggregate Option/SAR Exercises in Last Fiscal Year and 9/30/96 Option/SAR Values
--------------------------------------------------------------------------------
Value of Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options/SARs
Options/SARs at 9/30/96(#) at 9/30/96($)(1)
-------------------------- ---------------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized ($) Unexercisable Unexercisable
- ---- -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Robert L. Bollin - - 40,000/0 25,000/0
Gregory J. Bollin - - 24,000/0 15,000/0
<FN>
(1) An option is "in-the-money" if the fair value of the underlying stock
exceeds the market price of the option. Only half of the options held
by each of the persons listed above were "in-the-money" at September
30, 1996. The figure represents the value of such unexercised options,
determined by multiplying the number of unexercised options by the
difference between the exercise price of such options and the $11.25
closing bid price for the Common Shares reported by The Nasdaq System
on September 30, 1996, the last trading day of the quarter.
</TABLE>
9
<PAGE> 11
DIRECTOR COMPENSATION
WFC does not pay directors fees. Each director of Winton receives
$12,000 annually for monthly meetings and $100 for each committee meeting
attended, except for meetings of the Executive Committee for which members
receive $200 per meeting.
CERTAIN TRANSACTIONS WITH WINTON
Some of the directors and officers of WFC and Winton were customers of
and had transactions with Winton in the ordinary course of Winton's business
during the two years ended September 30, 1996. All loans and commitments to loan
included in such transactions were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and, in
the opinion of the management of WFC, do not involve more than a normal risk of
collectibility or present other unfavorable features. Winton had no loans
outstanding to directors and executive officers at December 13, 1996.
EMPLOYMENT AGREEMENTS
WFC and Winton have entered into employment agreements with Robert L.
Bollin, President of WFC and Winton, and Gregory J. Bollin, Vice President of
WFC and Executive Vice President of Winton which expire May 1, 1999. The
employment agreements provide for an annual salary of not less than $152,000 for
Robert L. Bollin and $110,000 for Gregory J. Bollin and an annual salary and
performance review by the Board of Directors. The Employment Agreement requires
the inclusion of Robert L. and Gregory J. Bollin in any formally established
employee benefit, bonus, pension and profit-sharing plans for which senior
management personnel are eligible and also provides for vacation and sick leave.
The employment agreements are terminable by WFC and Winton at any time.
If the employment of either Robert L. Bollin or Gregory J. Bollin is terminated
at any time during such three-year term for any reason other than "just cause"
(as defined in the agreements), he will be entitled to receive his annual
compensation for the remainder of the three-year term of the agreement. If such
employment is terminated, or if the position or responsibilities of the employee
is changed, in connection with or within one year of a change-in-control of WFC
or Winton, such employee will be entitled to receive an amount equal to his then
current annual compensation, multiplied by three, subject to reduction to the
extent necessary to comply with certain provisions of the Internal Revenue Code
of 1986, as amended. Assuming employment termination in connection with such a
change of control, the maximum payment to Robert L. Bollin would be $456,000 and
to Gregory J. Bollin would be $330,000, or the greater of the minimum salary
levels in the agreements or the salary levels for fiscal 1996 reflected in the
Summary Compensation Table above.
SELECTION OF AUDITORS
The Board of Directors has selected Grant Thornton as the auditors of
WFC and its subsidiaries for the current fiscal year and recommends that the
shareholders ratify the selection. Grant Thornton has audited the books of
Winton since 1985. Management expects that a representative of Grant Thornton
will be present at the Annual Meeting, will have the opportunity to make a
statement if he or she so desires and will be available to respond to
appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE SELECTION
OF GRANT THORNTON AS AUDITORS FOR THE CURRENT FISCAL YEAR.
10
<PAGE> 12
PROPOSALS OF SHAREHOLDERS AND OTHER MATTERS
Any proposals of shareholders intended to be included in WFC's proxy
statement for the 1998 Annual Meeting of Shareholders should be sent to WFC by
certified mail and must be received by WFC not later than September 5, 1997.
Management knows of no other business which may be brought before the
Annual Meeting, including matters incident to the conduct of the Annual Meeting.
It is the intention of the persons named in the enclosed Proxy to vote such
Proxy in accordance with their best judgment on any other matters which may be
brought before the Annual Meeting.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO FILL IN, SIGN AND
RETURN THE PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.
By Order of the Board of Directors
Cincinnati, Ohio James W. Brigger, Secretary
January 3, 1997
11
<PAGE> 1
Exhibit 21
----------
Subsidiaries of the Registrant
- ------------------------------
Winton Financial Corporation has only one subsidiary, The Winton
Savings and Loan Co., a savings and loan association chartered under the laws of
the State of Ohio.
<PAGE> 1
Exhibit 99
----------
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
----------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies, so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. Winton
Financial Corporation desires to take advantage of the "safe harbor" provisions
of the Act. Certain information, particularly information regarding future
economic performance and finances and plans and objectives of management,
contained or incorporated by reference in Winton Financial Corporation's Annual
Report on Form 10-KSB for fiscal year 1996 is forward-looking. In some cases,
information regarding certain important factors that could cause actual results
of operations or outcomes of other events to differ materially from any such
forward-looking statement appear together with such statement. In addition,
forward-looking statements are subject to other risks and uncertainties
affecting the financial institutions industry, including, but not limited to,
the following:
Interest Rate Risk
- ------------------
Winton Financial Corporation's operating results are dependent to a
significant degree on its net interest income, which is the difference between
interest income from loans and investments and interest expense on deposits and
borrowings. The interest income and interest expense of Winton Financial
Corporation change as the interest rates on mortgages, securities and other
assets and on deposits and other liabilities change. Interest rates may change
because of general economic conditions, the policies of various regulatory
authorities and other factors beyond Winton Financial Corporation's control. The
interest rates on specific assets and liabilities of Winton Financial
Corporation will change or "reprice" in accordance with the contractual terms of
the asset or liability instrument and in accordance with customer reaction to
general economic trends. In a rising interest rate environment, loans tend to
prepay slowly and new loans at higher rates increase slowly, while interest paid
on deposits increases rapidly because the terms to maturity of deposits tend to
be shorter than the terms to maturity or prepayment of loans. Such differences
in the adjustment of interest rates on assets and liabilities may negatively
affect Winton Financial Corporation income. Moreover, rising interest rates tend
to decrease loan demand in general, negatively affecting Winton Financial
Corporation income.
Possible Inadequacy of the Allowance for Loan Losses
- ----------------------------------------------------
The Winton Savings and Loan Co. maintains an allowance for loan losses
based upon a number of relevant factors, including, but not limited to, trends
in the level of nonperforming assets and classified loans, current and
anticipated economic conditions in the primary lending area, past loss
experience, possible losses arising from specific problem assets and changes in
the composition of the loan portfolio. While the Board of Directors of The
Winton Savings and Loan
<PAGE> 2
Co. believes that it uses the best information available to determine the
allowance for loan losses, unforeseen market conditions could result in material
adjustments, and net earnings could be significantly adversely affected if
circumstances differ substantially from the assumptions used in making the final
determination.
Loans not secured by one- to four-family residential real estate are
generally considered to involve greater risk of loss than loans secured by one-
to four-family residential real estate due, in part, to the effects of general
economic conditions. The repayment of multifamily residential and nonresidential
real estate loans generally depends upon the cash flow from the operation of the
property, which may be negatively affected by national and local economic
conditions that cause leases not to be renewed or that negatively affect the
operations of a commercial borrower. Construction loans may also be negatively
affected by such economic conditions, particularly loans made to developers who
do not have a buyer for a property before the loan is made. The risk of default
on consumer loans increases during periods of recession, high unemployment and
other adverse economic conditions. When consumers have trouble paying their
bills, they are more likely to pay mortgage loans than consumer loans, and the
collateral securing such loans, if any, may decrease in value more rapidly than
the outstanding balance of the loan.
Competition
- -----------
The Winton Savings and Loan Co. competes for deposits with other savings
associations, commercial banks and credit unions and issuers of commercial paper
and other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, The Winton Savings and Loan Co. competes with other
savings associations, commercial banks, consumer finance companies, credit
unions, leasing companies, mortgage companies and other lenders. Competition is
affected by, among other things, the general availability of lendable funds,
general and local economic conditions, current interest rate levels and other
factors which are not readily predictable. The size of financial institutions
competing with The Winton Savings and Loan Co. is likely to increase as a result
of changes in statutes and regulations eliminating various restrictions on
interstate and inter-industry branching and acquisitions. Such increased
competition may have an adverse effect upon Winton Financial Corporation.
Legislation and Regulation that may Adversely Affect The Winton Savings and Loan
- --------------------------------------------------------------------------------
Co.'s Earnings
- --------------
The Winton Savings and Loan Co. is subject to extensive regulation by
the Office of Thrift Supervision (the "OTS") and the Federal Deposit Insurance
Corporation (the "FDIC") and is periodically examined by such regulatory
agencies to test compliance with various regulatory requirements. As a savings
and loan holding company, Winton Financial Corporation is also subject to
regulation and examination by the OTS. Such supervision and regulation of The
Winton Savings and Loan Co. and Winton Financial Corporation are intended
primarily for the protection of depositors and not for the maximization of
shareholder value and may affect the ability of the company to engage in various
business activities. The assessments, filing fees and
<PAGE> 3
other costs associated with reports, examinations and other regulatory matters
are significant and may have an adverse effect on Winton Financial Corporation's
net earnings.
The FDIC is authorized to establish separate annual assessment rates
for deposit insurance of members of the Bank Insurance fund (the "BIF") and the
Savings Association Insurance Fund (the "SAIF"). The FDIC may increase
assessment rates for either fund if necessary to restore the fund's ratio of
reserves to insured deposits to the target level within a reasonable time and
may decrease such rates if such target level has been met. The FDIC has
established a risk-based assessment system for both SAIF and BIF members. Under
such system, assessments may vary depending on the risk the institution poses to
its deposit insurance fund. Such risk level is determined by reference to the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Congress recently enacted a plan to recapitalize the SAIF. The
recapitalization plan also provides for the merger of the SAIF and BIF effective
January 1, 1999, assuming there are no savings associations under federal law.
Congress is considering legislation to eliminate the federal thrift charter and
the separate federal regulation of savings and loan associations, and the
Department of the Treasury is preparing a report for Congress on the development
of a common charter for all financial institutions. As a result, The Winton
Savings and Loan Co. may have to convert to a different financial institution
charter or might be regulated under federal law as a bank. If The Winton Savings
and Loan Co. becomes a bank or is regulated as a bank, it would become subject
to the more restrictive activity limitations imposed on national banks.
Moreover, Winton Financial Corporation might become subject to more restrictive
holding company requirements, including activity limits and capital requirements
similar to those imposed on The Winton Savings and Loan Co. Winton Financial
Corporation cannot predict the impact of the conversion of The Winton Savings
and Loan Co. to, or regulation of The Winton Savings and Loan Co. as, a bank
until any legislation requiring such change is enacted.
Specific References
In addition to the foregoing, some of the matters, which are addressed
in the Form 10-KSB and Forms 10-QSB's filed by Winton Financial Corporation and
contain forward-looking statements, include the following.
1. Pending legislation or proposals regarding changes in charter or
regulation.
2. Management's determination of the amount of the allowance for
loan losses and expectations regarding its adequacy.
3. Management's efforts to reduce the higher degree of risk in
second mortgage, multifamily residential real estate, developed
building lot, nonresidential real estate and construction loans.
4. Management's expectation that secondary market activities will
continue to increase if interest rates decline.
<PAGE> 4
5. Management's efforts to manage deliquencies.
6. Management's efforts to manage interest rate risk.
7. Management's characterization of its competition.
8. Pending regulatory proposals.
9. Levels of deposit insurance assessments.
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