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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, 1997
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
WINTON FINANCIAL CORPORATION
(Name of small business issuer in its charter)
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Ohio 31-1303854
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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5511 Cheviot Road, Cincinnati, Ohio 45247
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (513) 385-3880
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Securities registered pursuant to Section 12(b) of the Exchange Act:
None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Shares, without par value
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(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
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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: $25.9 million
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Based upon the last sale price quoted by The American Stock Exchange, Inc. as of
December 16, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, on that date was $12.1 million.
At December 19, 1997, there were 2,006,152 of the Registrant's Common Shares
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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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,
1997, in Exhibit 13.
Part III of Form 10-KSB: Proxy Statement for 1998 Annual Meeting of Shareholders in Exhibit 20.
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Transitional Small Business Disclosure Format Yes No X
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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, in connection with
the holding company reorganization of Winton. As a unitary savings and loan
holding company, WFC, through Winton, is engaged in the savings and loan
business.
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.
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, 1993, have been previously 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.
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 Federal Home Loan Bank ("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, Gallatin 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 FHLB of Cincinnati.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-KSB, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimated,"
"projected," or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in Winton's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in Winton's market area and competition, that could cause actual results
to differ materially from historical earnings and those presently anticipated or
projected. Factors listed above could affect WFC's financial performance and
could cause WFC's actual results for future periods to differ materially from
any statements expressed with respect to future periods. See Exhibit 99 hereto
"Safe Harbor Under the Private Securities Litigation Reform Act of 1995," which
is incorporated herein by reference.
WFC does not undertake, and specifically disclaims any obligation, to
publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
LENDING ACTIVITIES
GENERAL. Winton's principal lending activity is the origination of
conventional fixed-rate and variable-rate mortgage loans for the acquisition or
construction of one- to four-family residences located in Winton's primary
market area. Loans
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secured by multi-family properties, including construction and permanent
mortgage loans on condominiums, multi-unit and nonresidential properties, are
also offered by Winton. Winton also originates loans insured by the Federal
Housing Administration and guaranteed by the Veterans Administration, both of
which it sells into the secondary market. Loans secured by nonresidential
properties, including retail, office and other types of business facilities, are
also originated by Winton. In addition to residential and nonresidential real
estate lending, Winton originates consumer loans, including passbook,
automobile, secured, unsecured, home improvement and home equity line of credit
loans. Winton's portfolio of loans, loans held for sale and mortgage-backed
securities totaled approximately $296.0 million, in the aggregate, at September
30, 1997, and represented 91% of total assets.
LOAN AND MORTGAGE-BACKED SECURITIES MATURITY SCHEDULE. The following
table sets forth certain information, as of September 30, 1997, 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.
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Due over Due over
3 years to 5 years to
Due in Due in Due in 5 years after 10 years after Due over
1998 1999 2000 9/30/97 9/30/97 10 years Totals
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(In thousands)
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Real estate mortgage loans $ 6,164 $6,676 $7,232 $16,316 $54,251 $173,358 $263,997
Mortgage-backed securities -
held to maturity - - - 3 26 14,585 14,614
Mortgage-backed securities -
available for sale - - - - - 799 799
Construction and land
loans (1) 17,968 1,670 1,823 - - - 21,461
Consumer and other loans 2,910 1,483 610 - - - 5,003
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Total loans and
mortgage-backed securities $27,042 $9,829 $9,665 $16,319 $54,277 $188,742 $305,874
======= ====== ====== ======= ======= ======== ========
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<FN>
(1) Includes construction loans for which Winton has committed to a permanent end-loan.
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The following table sets forth, at September 30, 1997, the dollar amount
of all loans and mortgage-backed securities, before net items, which have
predetermined interest rates and floating or adjustable interest rates:
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Predetermined Floating or
rates adjustable rates
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(In thousands)
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Real estate mortgage loans $143,704 $137,561
Loans held for sale 4,210 -
Consumer and other loans (1) 4,986 -
Mortgage-backed securities - held to maturity 35 14,579
Mortgage-backed securities - held for sale - 799
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Total $152,935 $152,939
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<FN>
(1) Includes lines of credit in the aggregate amount of $1.6 million made
to businesses which are secured by assets other than real estate.
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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:
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At September 30,
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1997 1996 1995
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Amount % Amount % Amount %
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(Dollars in thousands)
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Type of loan or investment:
Conventional real estate loans:
One- to four-family
Interim construction $ 13,536 4.6% $ 15,049 5.6% $ 13,224 5.9%
Loans on existing properties (1) 145,039 49.0 144,306 53.5 120,124 53.3
Loans held for sale 4,210 1.4 2,735 1.0 1,079 .5
Multifamily
Interim construction 1,500 .5 2,475 .9 1,400 .6
Loans on existing properties 71,798 24.3 55,507 20.6 44,298 19.6
Land and lot loans 5,024 1.7 2,326 .9 1,910 .8
Nonresidential real estate loans
Interim construction 1,401 .5 450 .1 1,486 .7
Loans on existing properties 42,950 14.5 37,001 13.7 28,603 12.7
Mobile home loans 17 -- 3 -- 7 --
Consumer and other loans (2) 4,986 1.7 2,405 .9 3,755 1.7
Mortgage-backed securities - held
to maturity 14,614 4.9 16,414 6.1 17,960 8.0
Mortgage-backed securities - available
for sale 799 .3 2,942 1.1 1,482 .6
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305,874 103.4 281,613 104.4 235,328 104.4
Less:
Loans in process (8,364) (2.8) (10,150) (3.8) (8,331) (3.7)
Deferred loan origination fees (726) (.3) (760) (.3) (937) (.4)
Allowance for loan losses (827) (.3) (857) (.3) (654) (.3)
--------- --------- --------- --------- --------- ---------
Total loans and mortgage-backed
securities $ 295,957 100.0% $ 269,846 100.0% $ 225,406 100.0%
========= ========= ========= ========= ========= =========
Type of security:
Residential
One- to four-family $ 158,575 53.6% $ 159,355 59.1% $ 133,348 59.2%
Multifamily residential 73,298 24.8 57,982 21.5 45,698 20.3
Loans held for sale 4,210 1.4 2,735 1.0 1,079 .5
Nonresidential real estate 44,351 15.0 37,451 13.8 30,089 13.4
Land and lot loans 5,024 1.7 2,326 .9 1,910 .8
Mortgage-backed securities 15,413 5.2 19,356 7.2 19,442 8.6
Deposit accounts 467 .2 389 .1 329 .1
Other 4,536 1.5 2,019 .8 3,433 1.5
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305,874 103.4 281,613 104.4 235,328 104.4
Less:
Loans in process (8,364) (2.8) (10,150) (3.8) (8,331) (3.7)
Deferred loan origination fees (726) (.2) (760) (.3) (937) (.4)
Allowance for loan losses (827) (.3) (857) (.3) (654) (.3)
--------- --------- --------- --------- --------- ---------
Total loans and mortgage-backed securities $ 295,957 100.0% $ 269,846 100.0% $ 225,406 100.0%
========= ========= ========= ========= ========= =========
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<FN>
(1) Includes first and second mortgage loans and home equity lines of credit.
(2) Includes lines of credit in the aggregate amount of $1.6 million made to businesses which are secured by assets
other than real estate.
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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 one- to four-family residential properties,
located within Winton's primary market area. Each of such loans is secured by a
mortgage on the underlying real estate and improvements thereon. At September
30, 1997, 55.0% 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 with recourse. Generally, Winton requires private mortgage insurance
and/or charges premium interest rates for loans over 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 Of the total mortgage loans originated by Winton during the fiscal year
ended September 30, 1997, 30.0% were ARMs and 70.0% were fixed-rate.
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.
At September 30, 1997, Winton had nonperforming loans totaling $263,000
in its one- to four-family portfolio. One- to four-family loans constituted
$73.8 million, or 50.0%, of the $147.7 million of loans originated in fiscal
1997.
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. At September 30, 1997,
loans secured by multifamily properties (excluding construction loans) totaled
approximately $71.8 million, or 24.3% of total loans and mortgage-backed
securities.
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.
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.
At September 30, 1997, Winton had nonperforming loans totaling $28,000
in its multifamily residential portfolio. Multifamily loans constituted $37.0
million, or 25.0%, of the $147.7 million of loans originated in fiscal 1997.
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LAND AND LOT LOANS. Winton originates loans to individuals and to
builders secured by mortgages on unimproved developed real estate upon which
residential properties will be constructed. The $5.0 million in land loans
outstanding at September 30, 1997, consisted of loans to a large residential
subdivision developer, and loans to individuals and builders used for the
acquisition of residential building lots. Such land and lot loans comprised
approximately 1.7% of the total loans and mortgage-backed securities portfolio
at September 30, 1997. The largest land and lot loan outstanding at September
30, 1997, was a $3.2 million loan secured by property to be developed for
multifamily, condominium and single-family dwellings.
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.
Developed building lot loans are generally made for a 20-year term with
a five-year balloon payment of principal due upon expiration of the loan term
and generally a maximum LTV of 75%.
Winton had no nonperforming loans secured by unimproved developed real
estate at September 30, 1997. Land and lot loans constituted $4.2 million, or
2.9%, of the $147.7 million of loans originated in fiscal 1997.
NONRESIDENTIAL REAL ESTATE LOANS. At September 30, 1997, Winton has
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, 1997, was a $2.0 million loan secured by an office building. Nonresidential
permanent loans comprised 15.0% of total loans and mortgage-backed securities
and 13.7% of total assets at September 30, 1997.
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.
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 in "One- to Four-family Residential Real Estate Loans."
At September 30, 1997, Winton had nonperforming loans totaling $179,000
in its nonresidential loan portfolio. Nonresidential loans constituted $14.7
million, or 9.9%, of the $147.7 million of loans originated in fiscal 1997.
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its capital. At September 30, 1997,
Winton's nonresidential permanent mortgage loans totaled 199% 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, 1997,
a total of $16.4 million, or approximately 5.6%, of Winton's total loans and
mortgage-backed securities, and 5.1% of total assets, consisted of construction
loans.
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
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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 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
properties 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, Gallatin and Kenton. The economy of such lending area has been
relatively stable over the three years ended September 30, 1997.
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 fixed- or adjustable-rate loans at the end of the construction
period. Such permanent loans may or may not be obtained from Winton.
At September 30, 1997, none of Winton's construction loans were
nonperforming. Construction loans constituted $25.7 million, or 17.4%, of the
$147.7 million of loans originated in fiscal 1997.
MOBILE HOME LOANS. To a very limited extent, Winton originates loans on
both new and used mobile homes. At September 30, 1997, the aggregate outstanding
principal balance of mobile home loans in Winton's portfolio was approximately
$17,000, or less than 1.0% of total loans and mortgage-backed securities.
Consumer loans, particularly consumer loans that are unsecured or are
secured by rapidly depreciating assets such as automobiles, may entail greater
risk than residential loans. Repossessed collateral for a defaulted consumer
loan may not provide an adequate source of repayment of the outstanding loan
balance. The risk of default on consumer loans increases during periods of
recession, high unemployment and other adverse economic conditions. 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.
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, lines of credit to businesses secured by non-real estate assets and
unsecured personal loans. At September 30, 1997, consumer and other loans
constituted 1.7% of Winton's total loans and mortgage-backed securities and 1.5%
of total assets.
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. Consumer loans,
particularly consumer loans that are unsecured or are secured by rapidly
depreciating assets such as automobiles, may entail greater risk than
residential loans. Repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance. The
risk of default on consumer loans increases during periods of recession, high
unemployment and other adverse economic conditions.
Although Winton has not had significant delinquencies on consumer loans,
no assurance can be provided that delinquencies will not increase. At September
30, 1997, Winton had nonperforming loans totaling $2,000 in its consumer loan
portfolio. Consumer loans constituted $18.0 million, or 12.2%, of the $147.7
million of loans originated in fiscal 1997.
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, 1997,
mortgage-backed securities totaled approximately $15.4 million, or 5.2% of total
loans and mortgage-backed securities. All but $799,000 of Winton's
mortgage-backed securities at September 30, 1997, 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
$14.6 million in mortgage-backed securities held to maturity at September 30,
1997 was $14.3 million. The remaining $799,000 in mortgage-backed securities at
September 30, 1997, 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.
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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 the 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"). CMOs are mortgage derivative products, secured by an underlying pool
of mortgages. Winton has no ownership interest in the mortgages, except to the
extent they serve as collateral. Payment streams from the mortgages serving as
collateral 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 secured by the underlying collateral. 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 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, 1997, $15.3 million, or 99.8%, 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 Item 6, 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, 1997 At September ******96
------------------------------------------ -----------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Estimated Amortized unrealized unrealized Estimated
cost gains losses fair value cost gains losses fair value
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgaged-backed securities held to
maturity:
FHLMC participation $ 5,371 $ 34 $ (92) $ 5,313 $ 6,213 $ 31 $ (149) $ 6,095
certificates
FNMA participation 3,449 5 (63) 3,391 3,912 4 (90) 3,826
certificates
GNMA participation 811 25 -- 836 948 -- -- 948
certificates
CMOs 4,983 -- (178) 4,805 5,341 -- (227) 5,114
-------- -------- -------- -------- -------- -------- -------- --------
14,614 64 (333) 14,345 16,414 35 (466) 15,983
Mortgage-backed securities available for
sale:
GNMA participation 782 17 -- 799 894 -- (6) 888
certificates
CMOs -- -- -- -- 2,058 -- (4) 2,054
-------- -------- -------- -------- -------- -------- -------- --------
782 17 -- 799 2,952 -- (10) 2,942
-------- -------- -------- -------- -------- -------- -------- --------
$ 15,396 $ 81 $ (333) $ 15,144 $ 19,366 $ 35 $ (476) $ 18,925
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
-8-
<PAGE> 9
The combined amortized cost of mortgage-backed and related securities
designated as held to maturity or available for sale at September 30, 1997 and
1996, 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, 1997 September 30, 1996
------------------- ------------------
(In thousands)
<S> <C> <C>
Due within one year - $ 2,417
Due after one through three years - -
Due after three years through five years 3 3
Due after five years through ten years 26 44
Due after ten years through twenty years 1,841 7
Due after twenty years 13,526 16,895
-------- --------
$15,396 $19,366
======= =======
</TABLE>
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from a
number of sources, including commissioned loan originators, loan brokers,
continuing business with depositors, other borrowers and real estate developers,
solicitations by Winton's directors, officers and lending staff and walk-in
customers.
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 generally
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 either
to the Loan Committee and/or the Board of Directors or to the secondary market
for approval or rejection. Any loan applications which are not accepted by the
secondary market are reviewed and accepted or rejected by the Loan Committee.
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, 20-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 or
other secondary mortgage market participants. When mortgage loans are sold to
FHLMC or other secondary mortgage market participants, Winton generally retains
the servicing on such loans by collecting monthly payments of principal and
interest and forwarding such payments to the FHLMC or other secondary mortgage
market participants, net of a servicing fee; though certain loans originated
with the assistance of loan brokers are sold with the servicing rights released.
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.
-9-
<PAGE> 10
Management sold $42.4 million of fixed- and adjustable-rate loans during
fiscal 1997, as compared to sales of $34.6 million of fixed-rate loans in fiscal
1996. 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. During the fiscal years ended September 30, 1997,
1996 and 1995, Winton sold participation in interests in loans totaling $11.4
million, $1.7 million and $1.1 million, respectively. Winton held participations
in loans originated by other lenders of approximately $1.7 million at September
30, 1997. Loans in which Winton purchases participation interests must meet or
exceed the underwriting standards for the loans which Winton originates.
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,
-------------------------------------------------------------------------
1997 1996 1995
------------------- ----------------------------- ---------------------
Amount % Amount % Amount %
-------- --------- -------------- ------------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans originated:
Conventional real estate loans:
One- to four-family
Construction (1) $ 22,877 15.5% $ 21,013 17.3% $ 19,199 30.5%
Fixed-rate loans on existing property 38,268 25.9 50,975 41.9 19,969 31.7
Adjustable-rate loans on existing
property 12,645 8.6 15,127 12.5 5,262 8.3
Multifamily
Construction 1,500 1.0 1,075 0.9 1,400 2.2
Fixed-rate loans on existing property 11,564 7.8 1,252 1.0 1,675 2.7
Adjustable-rate loans on existing
property 23,957 16.2 14,637 12.0 6,608 10.5
Nonresidential real estate, land and
lot loans
Construction 1,367 0.9 330 0.3 676 1.1
Fixed-rate loans on existing property 9,801 6.6 5,021 4.1 3,666 5.8
Adjustable-rate loans on existing
property 7,682 5.2 8,524 7.0 3,235 5.1
Consumer and other loans (2) 18,003 12.2 3,589 3.0 1,332 2.1
-------- -------- -------- -------- -------- --------
Total loans originated $147,664 100.0% $121,543 100.0% $ 63,022 100.0%
======== ======== ======== ======== ======== ========
Loans and mortgage-backed securities
purchased
Mortgage-backed securities $ -- --% $ 3,380 100.0% $ 1,400 100.0%
======== ======== ======== ======== ======== ========
Loans and mortgage-backed securities sold:
Loans $ 42,413 78.8% $ 34,645 91.7% $ 16,566 93.9%
Participations 11,385 21.2% 1,732 4.6 1,074 6.1
Mortgage-backed securities -- -- 1,406 3.7 -- --
-------- -------- -------- -------- -------- --------
Total $ 53,798 $ 100.0% $ 37,783 100.0% $ 17,640 100.0%
======== ======== ======== ======== ======== ========
Principal Repayments:
Loans $ 63,990 96.1% $ 40,475 95.2% $ 38,279 93.8%
Mortgage-backed securities 2,615 3.9 2,040 4.8 2,515 6.2
-------- -------- -------- -------- -------- --------
Total $ 66,605 100.0% $ 42,515 100.0% $ 40,794 100.0%
======== ======== ======== ======== ======== ========
<FN>
(1) Includes construction loans for which Winton has committed to a permanent end-loan.
(2) Consists primarily of auto and line of credit disbursements and change in loans in process.
</TABLE>
-10-
<PAGE> 11
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 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 $3.5
million to one borrower at September 30, 1997. Winton had no outstanding loans
in excess of such limit at September 30, 1997.
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, NON PERFORMING 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,
------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans delinquent
30 to 59 days $1,909 $3,186 $2,350 $1,905 $2,983
60 to 89 days 672 692 337 348 679
90 or more days 472 923 602 432 1,401
------ ------ ------ ------ ------
Total delinquent loans $3,053 $4,801 $3,289 $2,685 $5,063
====== ====== ====== ====== ======
Ratio of total delinquent loans to total
loans (1) 1.05% 1.83% 1.52% 1.29% 2.82%
====== ====== ====== ====== ======
- -------------------------------------
<FN>
(1) Includes loans held for sale.
</TABLE>
-11-
<PAGE> 12
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. Residential mortgage loans are placed on
non-accrual status when either principal or interest is considered
uncollectible. 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 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, 1997, is approximately $26,000.
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, 1997, 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,
------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a
non-accrual
basis:(1)
Real estate:
Construction $ -- $ -- $ -- $ -- $ 262
Residential 214 548 130 311 472
Nonresidential 179 57 448 -- 223
Consumer and other -- -- -- -- 185
------ ------ ------ ------ ------
Total 393 605 578 311 1,142
Accruing loans which are
contractually past due 90 days
or
more:
Real estate:
Residential 77 132 -- 114 199
Nonresidential -- 182 24 -- 42
Consumer and other 2 4 -- 7 18
------ ------ ------ ------ ------
Total 79 318 24 121 259
------ ------ ------ ------ ------
Total of non-accrual and 90 days
past $ 472 $ 923 $ 602 $ 432 $1,401
====== ====== ====== ====== ======
due loans
Percentage of total loans 0.16% 0.35% 0.28% 0.21% 0.78%
====== ====== ====== ====== ======
Other nonperforming assets(2) $ 513 $ 561 $ 343 $ 206 $ 209
====== ====== ====== ====== ======
- --------------------
<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
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 resulted from the increased size of the loan portfolio and
increased loan
-12-
<PAGE> 13
delinquencies. The 49% decline in nonperforming loans during fiscal 1997
resulted primarily from collections on loan accounts acquired through the Blue
Chip merger.
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 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, 1997
was as follows:
<TABLE>
<CAPTION>
At September 30, 1997
---------------------
(In thousands)
<S> <C>
Substandard $1,084
Doubtful -
Loss -
------
Total classified assets $1,084
======
</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 appropriate 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, 1997,
Winton's allowance for loan losses totaled $827,000.
-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,
1997 1996 1995 1994 1993
------- ------ ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 857 $ 654 $ 582 $ 742 $ 502
Charge-offs:
One- to four-family (47) (28) (18) (84) (13)
Multifamily and nonresidential
real estate -- (12) (104) (36) --
Construction -- -- -- -- --
Consumer (4) (10) -- (143) (16)
------ ------ ------ ------ ------
Total (51) (50) (122) (263) (29)
Total recoveries 21 -- 106 58 21
------ ------ ------ ------ ------
Net charge-offs (30) (50) (16) (205) (8)
Provision for loan losses -- 253 88 45 248
------ ------ ------ ------ ------
Balance at end of period $ 827 $ 857 $ 654 $ 582 $ 742
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period (1) .01% .02% .01% .11% -%
====== ====== ====== ====== ======
-------------------------------
(1) During the respective periods there were $263.3 million, $225.2 million, $202.8 million, $184.8 million
and $173.8 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,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Specific allowances
One- to four-family $ 40 $ 80 $ - $ - $ -
Multi-family and
nonresidential real estate - - - - 36
Construction and development
- - - - -
Consumer - - - - -
Commercial business 24 25 - - -
--- ------ ----- ----- -----
Total specific allowances 64 105 - - 36
General allowances
One- to four-family 310 308 268 204 266
Multi-family and
nonresidential real estate 346 339 308 276 280
Construction and development
- - - - -
Consumer 100 100 75 100 157
Commercial business 7 5 3 2 3
----- ------ ------- -------- -------
Total general allowances 763 752 654 582 706
---- ---- ----- ----- -----
Total allowance for
possible loan losses $827 $857 $654 $582 $742
==== ==== ==== ==== ====
</TABLE>
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 6.17% and 7.30% 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,
-------------------------------------------------------------------
1997 1996 1995
-------------------- ---------------------- ---------------------
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 $12,585 $12,679 $ 9,593 $ 9,623 $10,007 $10,101
Available for sale:
U.S. government and agency
obligations 3,088 3,149 2,098 2,120 2,604 2,655
Corporate equity securities 103 482 189 461 189 418
------- ------- ------- ------- ------- -------
3,191 3,631 2,287 2,581 2,793 3,073
------- ------- ------- ------- ------- -------
Total $15,776 $16,310 $11,880 $12,204 $12,800 $13,174
======= ======= ======= ======= ======= =======
</TABLE>
The following table presents the contractual maturities or terms to
repricing of U.S. Government and agency obligations at carrying value and the
weighted-average yields at September 30, 1997:
<TABLE>
<CAPTION>
Maturing within Maturing within
one year after one to five years
September 30, 1997 after September 30, 1997
---------------------------------------------------------------------------
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 $ 2,905 6.71% $ 9,680 6.36% $ 12,585 6.44%
Available for sale -- 0.00% 3,088 6.49% 3,088 6.49
-------- -------- -------- -------- -------- --------
Total $ 2,905 6.71% $ 12,768 6.39% $ 15,673 6.45%
======== ======== ======== ======== ======== ========
</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. Historically, deposits have been 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. In the recent past Winton has
utilized the services of deposit brokers to market certificates of deposit. At
September 30, 1997, the total amount of brokered deposits equaled approximately
$16.3 million, or 6.8% of total deposits.
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. 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, 1997, Winton's certificates of deposit totaled $176.1
million, or 73.3% of total deposits. Of such amount, approximately $101.6
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 1997, 1996 and 1995, 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 $20.1 million of these certificates of deposit were
outstanding at September 30, 1997. 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, 1997:
<TABLE>
<CAPTION>
Percent
of total
Amount deposits
--------- ---------
(In thousands)
<S> <C> <C>
Transaction accounts:
Passbook accounts(1) $ 50,433 20.98%
Club accounts(2) 189 .08
NOW accounts(3) 13,575 5.65
--------- ---------
Total transaction accounts 64,197 26.71
Certificates of deposit(4):
2.00 - 3.99% 200 .08
4.00 - 5.99% 85,269 35.48
6.00 - 7.99% 90,179 37.53
8.00 - 9.99% 472 .20
--------- ---------
Total certificates of deposit 176,120 73.29
--------- ---------
Total deposits $ 240,317 100.00%
========= =========
- -----------------------------
<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 3.70% at September 30, 1997.
(2) Winton's weighted average interest rate paid on Christmas Club accounts fluctuates with the general movement of interest
rates. At September 30, 1997, the weighted average rate on club accounts was 3.25%.
(3) Winton's weighted average interest rate paid on NOW accounts fluctuates with the general movement of interest rates. At
September 30, 1997, the weighted average rate on NOW accounts was 1.65%.
(4) Includes Individual Retirement Accounts and jumbo certificates of deposit (those with balances in excess of $100,000). Terms
of certificates of deposit offered 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, 1997:
<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% $ 200 $ -- $ -- $ -- $ 200
4.00 - 5.99 59,505 19,132 6,328 304 85,269
6.00 - 7.99 41,821 24,061 19,069 5,228 90,179
8.00 - 9.99 101 144 220 7 472
-------- -------- -------- -------- --------
Total certificates of
deposit $101,627 $ 43,337 $ 25,617 $ 5,539 $176,120
======== ======== ======== ======== ========
</TABLE>
The following table presents the amount of Winton's certificates of
deposit of $100,000 or more, by the time remaining until maturity at September
30, 1997:
<TABLE>
<CAPTION>
Maturity At September 30, 1997
-------- ---------------------
(In thousands)
<S> <C>
Three months or less $ 5,185
Over 3 months to 6 months 7,761
Over 6 months to 12 months 14,267
Over twelve months 27,494
--------
Total $54,707
========
</TABLE>
BORROWINGS. During the year ended September 30, 1997, 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,
-------------------------------------
1997 1996 1995
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Maximum amount of FHLB advances $57,897 $46,376 $37,253
======= ======= =======
Average amount of FHLB advances outstanding during
period $51,146 $35,292 $31,312
======= ======= =======
- ------------------------------
</TABLE>
The following table sets forth certain information as to Winton's FHLB
advances at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
FHLB advances $ 57,425 $ 46,376 $ 29,830
========== ========== ==========
Weighted average interest cost of FHLB advances during
period based on month end balances 5.92% 5.66% 5.98%
========== ========== ==========
</TABLE>
-18-
<PAGE> 19
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 earnings 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 loan losses. 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,
----------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $263,344 $ 22,406 8.51% $225,164 $ 18,911 8.40%
Mortgage-backed securities -
available for sale 1,948 119 6.11 2,400 113 4.71
Mortgage-backed securities - held
to maturity 15,552 942 6.06 17,311 1,070 6.18
Investment securities - held to
maturity 11,785 757 6.42 9,927 636 6.41
Investment securities - available
for sale 2,007 122 6.08 3,228 185 5.73
Other interest-earning assets 3,544 207 5.84 3,049 199 6.53
-------- -------- -------- -------- -------- --------
Total interest-earning assets 298,180 24,553 8.23 261,079 21,114 8.09
Non-interest-earning assets 7,970 7,283
-------- --------
Total assets $306,150 $268,362
======== ========
Interest-bearing liabilities:
Deposits $229,708 12,009 5.23 $209,879 10,700 5.10
FHLB advances 51,146 3,027 5.92 35,292 1,996 5.66
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 280,854 15,036 5.35 245,171 12,696 5.18
-------- -------- -------- -------- -------- --------
Non-interest-bearing liabilities 3,275 2,349
-------- --------
Total liabilities 284,129 247,520
Shareholders' equity 22,021 20,842
-------- --------
Total liabilities and
shareholders' equity $306,150 $268,362
======== ========
Net interest income/
Interest rate spread $ 9,517 2.88% $ 8,418 2.91%
======== ======== ======== ========
Net interest margin (net interest
income as a percent of average
interest-earning assets) 3.19% 3.22%
======== ========
Average interest-earning assets to
interest-bearing liabilities 106.17% 106.49%
======== ========
Year ended September 30,
---------------------------------
1995
---------------------------------
Average Interest
outstanding earned/ Yield/
balance paid rate
-------- -------- --------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $202,844 $ 17,031 8.40%
Mortgage-backed securities -
available for sale 606 34 5.61
Mortgage-backed securities - held
to maturity 18,946 1,016 5.36
Investment securities - held to
maturity 9,936 632 6.36
Investment securities - available
for sale 1,030 56 5.44
Other interest-earning assets 4,215 173 4.10
-------- -------- --------
Total interest-earning assets 237,577 18,942 7.97
Non-interest-earning assets 6,816
--------
Total assets $244,393
========
Interest-bearing liabilities:
Deposits $191,870 9,085 4.73
FHLB advances 31,312 1,874 5.98
-------- -------- --------
Total interest-bearing
liabilities 223,182 10,959 4.91
-------- -------- --------
Non-interest-bearing liabilities 1,473
--------
Total liabilities 224,655
Shareholders' equity 19,738
--------
Total liabilities and
shareholders' equity $244,393
========
Net interest income/
Interest rate spread $ 7,983 3.06%
======== ========
Net interest margin (net interest
income as a percent of average
interest-earning assets) 3.36%
========
Average interest-earning assets to
interest-bearing liabilities 106.45%
========
- -------------------------------------
<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>
1997 vs. 1996 1996 vs. 1995
--------------------------------- ----------------------------------
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) $ 3,244 $ 251 $ 3,495 $ 1,880 $ -- $ 1,880
Mortgage-backed securities- available for sale (18) 24 6 83 (4) 79
Mortgage-backed securities- held to maturity (107) (21) (128) (113) 167 54
Investment securities - available for sale (73) 10 (63) (1) 5 4
Investment securities - held to maturity 120 1 121 126 3 129
Other interest-earning assets(2) 29 (21) 8 (98) 124 26
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 3,195 $ 244 $ 3,439 $ 1,877 $ 295 $ 2,172
======= ======= ======= ======= ======= =======
Interest expense attributable to:
Deposits $ 1,031 $ 278 $ 1,309 $ 883 $ 732 $ 1,615
Borrowings 933 98 1031 207 (85) 122
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 1,964 $ 376 $ 2,340 $ 1,090 $ 647 $ 1,737
======= ======= ======= ======= ======= =======
Increase in net interest income $ 1,099 $ 435
======= =======
- ------------------------------
<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 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 points 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
-21-
<PAGE> 22
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, 1997, 2% of the present value of Winton's assets was
approximately $6.6 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 $8.3 million at September 30, 1997, Winton
would have been required to deduct approximately $850,000 (50% of the
approximate $1.7 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, 1997, would still have exceeded the regulatory
requirement by approximately $5.0 million.
Presented below, as of September 30, 1997, 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, 1997
--------------------------------------------
Change in Interest Rate Board Limit $ Change % Change
(Basis Points) % change In NPV in NPV
----------------------- ----------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
+300 (75)% $(12,965) (43)%
+200 (50) (8,301) (28)
+100 (20) (3,863) (13)
0 0 - -
-100 (15) 2,801 9
-200 (25) 5,396 18
-300 (35) 8,105 27
</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 at the date indicated, the weighted
average yields on Winton's interest-earning assets, the weighted average
interest rates on interest-bearing liabilities, the interest rate spread and the
net interest margin on interest-earning assets.
<TABLE>
<CAPTION>
At September 30,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on loan portfolio 8.35% 8.18% 8.24%
Weighted average yield on mortgage-backed securities 6.43 6.18 6.36
Weighted average yield on investment securities 6.50 6.43 6.51
Weighted average yield on other interest-earning assets 6.59 7.00 4.99
Weighted average yield on all interest-earning assets 8.14 7.96 7.95
Weighted average interest rate paid on deposits 5.31 5.18 5.13
Weighted average interest rate paid on borrowings 6.22 6.15 6.11
Weighted average interest rate paid on all interest-bearing liabilities 5.48 5.34 5.26
Interest rate spread (spread between weighted average interest rate
on all interest-earning assets and all interest-bearing liabilities) 2.66 2.62 2.69
</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, mortgage brokers
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.
PERSONNEL
As of September 30, 1997, Winton had 76 full-time equivalent 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
GENERAL
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
-23-
<PAGE> 24
reports to the OTS concerning its activities and financial condition. In
addition, as 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 (the "Ohio Superintendent"). Because Winton's deposits are
insured by the FDIC, Winton also is subject to regulatory oversight by the FDIC.
Winton must file periodic reports with the OTS concerning its activities and
financial condition. Examinations are conducted periodically by 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. 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 set
of holding company regulations limiting the activities in which WFC may engage
and subjecting WFC to 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, if enacted, may change the
activities in which WFC or Winton are authorized to engage, it is not
anticipated that the current activities of either WFC or 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 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 person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. Neither
WFC nor Winton has opted 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, with certain
exceptions, acquisitions of voting securities which would result in the
acquiring shareholder owning 20%, 33-1/3% or 50% of the outstanding voting
securities of an Ohio corporation (a "Control Share Acquisition") must be
approved in advance by the holders of at least a majority of the outstanding
voting shares of such corporation 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, by certain other persons who acquire or transfer voting shares
after public announcement of the acquisition or by certain officers of the
corporation or directors of the corporation who are employees of the
corporation. The Control Share Acquisition Statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers.
-24-
<PAGE> 25
TAKEOVER BID STATUTE. Ohio law provides that an offeror may not make
not make a tender offer or request or invitation for tenders that would result
in the offeror beneficially owning more than ten percent of any class of the
target company's equity securities unless such offeror files certain information
with the Ohio Division of Securities (the "Securities Division") and provides
such information to the target company and the offerees within Ohio. The
Securities Division may suspend the continuation of the control bid if the
Securities Division determines that the offeror's filed information does not
provide full disclosure to the offerees of all material information concerning
the control bid. The statue also provides that an offeror may not acquire any
equity security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan holding company and the proposed transaction
requires federal regulatory approval.
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 costs 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. 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 of 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.
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.
REGULATORY CAPITAL REQUIREMENTS. Winton is required by OTS regulations
to meet certain minimum capital requirements. The tangible capital requirement
requires savings associations to maintain "tangible capital" of not less than
1.5% of their adjusted total assets. Tangible capital is defined in OTS
regulations as core capital minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 3% of their total assets. 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%,
-25-
<PAGE> 26
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.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of their risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of Winton includes a general loan loss allowance of $763,000
at September 30, 1997.
The 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 the interest rate risk component, a savings association
will 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. 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 more numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. 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 becoming
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, 1997, met the standards
for the highest category, 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 and (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 a savings association 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.
Monetary penalties may be imposed upon associations failing to meet these
liquidity requirements. The eligible liquidity of Winton at September 30, 1997,
was approximately $18.7 million, or 7.0%, and exceeded the then applicable 5.0%
liquidity requirement by approximately $5.8 million. Effective November 24,
1997, the liquidity requirement was reduced to 4%.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, the QTL test 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 and stock issued by any FHLB, the FHLMC
or the FNMA. Under such 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 nine
out of every 12 months. Effective September 30, 1996, a savings association may
also qualify as a QTL by meeting the definition of "domestic
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<PAGE> 27
building and loan association" under the Internal Revenue Code of 1986, as
amended (the "Code"). In order for an institution to meet the definition of a
"domestic building and loan association" under the Code, at least 60% of such
institution's assets must consist of specified types of property, including cash
loans secured by residential real estate or deposits, educational loans 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, 1997,
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 lend 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 the lending
limit. A general exception to the 15% limit provides that an association may
lend to one borrower up to $500,000, for any purpose. In applying the limit on
loans to one borrower, the regulations require that loans to certain related
borrowers be aggregated. At September 30, 1997, Winton was in compliance with
this lending limit.
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
deposits). 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, 1997.
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, purchasing 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, 1997.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, including dividend payments. An association which has converted
from mutual to stock form 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 three-tier system limiting capital
distributions according to ratings of associations based on their capital level
and supervisory condition.
Tier 1 consists 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 up to the
greater of (i) 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, and (ii) 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.
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<PAGE> 28
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 proposing 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 such 30-day period based on safety and soundness concerns.
Winton paid no dividends to WFC during fiscal 1997.
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 is
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 WFC.
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 holding 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 generally has no
restrictions on its activities. 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. It cannot be
predicted whether 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 WFC 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, 1997, Winton met both those tests.
If WFC acquired 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 was an
emergency thrift acquisition and each subsidiary savings association met 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.
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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
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, 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 savings and loan associations and safeguards the
safety and soundness of the banking and savings and loan 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.
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 required to maintain designated levels of reserves in the
SAIF and in the BIF. 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.
Prior to September 1996, the SAIF's ratio of reserves to insured
deposits was significantly below the level required by law, while the BIF's
ratio was above the required level. As a result, institutions with SAIF-insured
deposits were paying higher deposit insurance assessments than institutions with
BIF-insured deposits. Federal legislation providing for the recapitalization of
the SAIF became effective in September 1996 and included a special assessment of
$.657 per $100 of SAIF-insured deposits held at March 31, 1995. Winton had
approximately $195.6 million in deposits at March 31, 1995, and paid a special
assessment of $1.3 million.
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'
activities and investments at September 30, 1997, were permissible for a federal
association.
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<PAGE> 30
FRB RESERVE REQUIREMENTS
Effective December 16, 1997, FRB regulations require savings
associations to maintain reserves of 3% of net transaction accounts (primarily
NOW accounts) up to $47.8 million (subject to an exemption of up to $4.7
million), and of 10% of net transaction accounts in excess of $47.8 million. At
September 30, 1997, Winton was in compliance with the reserve requirements then
in effect and also the new requirements.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances.
Winton is a member of the FHLB of Cincinnati and must maintain an investment in
the capital stock of the FHLB of Cincinnati 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 of Cincinnati. Winton was in
compliance with this requirement with an investment in stock of the FHLB of
Cincinnati of $3.0 million at September 30, 1997.
FHLB advances to member institutions who meet the QTL Test are
generally limited to the lower of (i) 25% of the member's assets or (ii) 20
times the member's investment in FHLB stock. At September 30, 1997, Winton's
maximum limit on advances was approximately $60.0 million. The granting of
advances is also subject to the FHLB's collateral and credit underwriting
guidelines.
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 FHLB; 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.
TAXATION
FEDERAL TAXATION
WFC and Winton are each subject to the federal tax laws and regulations
which apply to corporations generally. In addition to the regular income tax,
WFC and Winton may be subject to the alternative minimum tax which 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 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. However, the Taxpayer Relief Act of 1997 repealed
the alternative minimum tax for certain "small corporations" for tax years
beginning after December 31, 1997. A corporation initially qualifies as a small
corporation if it had average gross receipts of $5,000,000 or less for the three
tax years ending with its first tax year beginning after December 31, 1996. Once
a corporation is recognized as a small corporation, it will continue to be
exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period does not exceed $7,500,000. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration.
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Winton's average gross receipts for the three tax years ending on
September 30, 1997, is $21.8 million and as a result, Winton does not qualify as
a small corporation exempt from the alternative minimum tax.
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 one of two reserve methods of
Section 593 of the Code. The reserve methods under Section 593 of the Code
permitted a thrift institution annually to 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, 1994, and
1993, Winton used the percentage of taxable income method.
The Act eliminated the percentage of taxable income 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.
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 require 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 the gross
income of Winton
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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, 1997, the pre-1988 reserves of Winton for tax purposes totaled
approximately $1.5 million. Winton believes it had approximately $15.1 million
of accumulated earnings and profits for tax purposes as of September 30, 1997,
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.
The tax returns of Winton have been audited or closed without audit
through fiscal year 1993. 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. For tax years beginning after December 31, 1998, the rate of
tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable
income and 8.5% of computed Ohio taxable income in excess of $50,000 or (ii)
.400% 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, 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 the book net worth
of Winton determined in accordance with generally accepted accounting
principles. For tax year 1999, however, the franchise tax on financial
institutions will be 1.4% of the book net worth and for tax year 2000 and years
thereafter the tax will be 1.3% of the book net worth. 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,
1997, 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 $1,078
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 $ 100
10575 Harrison Avenue
Harrison, Ohio 45030 owned 1981 4,800 $ 577
7014 Vine Street
Cincinnati, Ohio 45216 owned 1897 3,200 $ 137
- -----------------------------
<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 $2.6 million at September 30, 1997.
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, 1997.
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<PAGE> 34
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, 1997 (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
1997 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
-34-
<PAGE> 35
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Exhibits
Item 3 Amended Articles of Incorporation and Code of Regulations
Item 10 Material Contracts
Item 13 Portions of the 1997 Annual Report to Shareholders
Item 20 Proxy Statement for 1998 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.
</TABLE>
-35-
<PAGE> 36
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 on December 19, 1997.
<TABLE>
<CAPTION>
<S> <C>
WINTON FINANCIAL CORPORATION
By /s/ Robert L. Bollin
---------------------------------
Robert L. Bollin
President, Chief Executive
Officer and a Director
</TABLE>
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.
<TABLE>
<CAPTION>
<S> <C>
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 19, 1997 Date: December 19, 1997
By /s/ Robert E. Hoeweler By /s/ Thomas H. Humes
--------------------------------- ---------------------------------
Robert E. Hoeweler, Thomas H. Humes,
Director Director
Date: December 19, 1997 Date: December 19, 1997
By /s/ Timothy M. Mooney By /s/ William J. Parchman
--------------------------------- ---------------------------------
Timothy M. Mooney, William J. Parchman,
Director Director
Date: December 19, 1997 Date: December 19, 1997
By /s/ Henry L. Schulhoff By /s/ J. Clay Stinnett
--------------------------------- ---------------------------------
Henry L. Schulhoff, J. Clay Stinnett,
Director Director
Date: December 19, 1997 Date: December 19, 1997
</TABLE>
-36-
<PAGE> 37
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
<S> <C> <C>
3.1 Articles of Incorporation, as amended through February 1, Incorporated by reference to the Current 1995,
1995, of Winton Financial Corporation Report on Form 8-K dated June 21, 1995 and
filed by WFC (the "8-K") with the
Securities and Exchange Commission (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, 1997 Report on Form 10-QSB for the quarter ended
June 30, 1997, filed by WFC with the SEC in
August 1997 (the "6/97 10-QSB")
10.6 Employment Agreement between WFC, Winton and Gregory J. Incorporated by reference to the 6/97 10-QSB
Bollin, dated May 1, 1997
10.7 Employment Agreement between WFC, Winton and James M. Incorporated by reference to Quarterly
Brigger, dated May 1, 1996 Report Form 10-QSB for the quarter ended
June 30, 1996 filed by WFC with the SEC in
August, 1996 (the "6/96 10-QSB")
10.8 Employment Agreement between WFC, Winton and Jill M. Burke, Incorporated by reference to the 6/96 10-QSB
dated May 1, 1996
</TABLE>
-37-
<PAGE> 38
<TABLE>
<CAPTION>
<S> <C> <C>
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 Portions of the Winton Financial Corporation 1997 Annual
Report to Shareholders
20 Proxy Statement for the 1998 Annual Meeting of
Shareholders of Winton Financial Corporation
21 Subsidiaries of the Registrant Incorporated by reference to the Annual
Report on Form 10-KSB in the fiscal year
ended September 30, 1996, filed by WFC with
the SEC on December 24, 1996, Exhibit 21
27 Financial Data Schedule
99 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
</TABLE>
-38-
<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 previously restated to reflect the business
combination as of October 1, 1993. 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 (the "FHLB") of Cincinnati, 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 December 1, 1997, Winton Financial had 2,006,152 common shares outstanding
and held of record by approximately 405 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. From April 1993 to July
1997, Winton Financial's common shares were listed on The Nasdaq SmallCap Market
("Nasdaq"). In July 1997, Winton Financial's common shares were listed on the
American Stock Exchange, Inc. ("Amex").
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 Nasdaq or Amex, as
applicable.
1
<PAGE> 2
WINTON FINANCIAL CORPORATION
<TABLE>
<CAPTION>
CASH
FISCAL YEAR ENDING SEPTEMBER 30, HIGH LOW DIVIDENDS
1997
<S> <C> <C> <C>
Quarter ending December 31, 1996 $ 13.50 $ 11.25 $ .105
Quarter ending March 31, 1997 14.00 11.50 .115
Quarter ending June 30, 1997 15.00 12.00 .115
Quarter ending September 30, 1997 17.50 15.75 .115
1996
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
</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 OF FINANCIAL CONDITION DATA: 1997 1996 1995 1994 1993
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $324,488 $292,241 $250,180 $239,513 $220,212
Interest-bearing deposits in other financial
institutions 1,419 -- 2,360 1,712 4,914
Investment securities (1) 16,216 12,174 13,080 9,316 7,528
Mortgage-backed securities (1) 15,413 19,356 19,442 20,624 26,791
Loans receivable, net (2) 280,544 250,490 205,964 198,879 171,940
Deposits 240,317 221,533 197,905 185,327 181,950
FHLB advances 57,425 46,376 29,830 33,671 19,229
Shareholders' equity - net, restricted (3) 23,277 20,831 20,397 18,879 17,568
YEAR ENDED SEPTEMBER 30,
STATEMENT OF EARNINGS DATA: 1997 1996 1995 1994 1993
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Total interest income $ 24,553 $ 21,114 $ 18,942 $ 17,187 $ 17,848
Total interest expense 15,036 12,696 10,959 9,130 9,755
-------- -------- -------- -------- --------
Net interest income 9,517 8,418 7,983 8,057 8,093
Provision for loan losses -- (253) (88) (45) (247)
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses 9,517 8,165 7,895 8,012 7,846
Other income 1,299 1,135 589 407 1,063
General, administrative and other expense (5,907) (7,491) (5,529) (5,497) (5,006)
-------- -------- -------- -------- --------
Earnings before income taxes 4,909 1,809 2,955 2,922 3,903
Federal income taxes (1,683) (628) (994) (971) (1,338)
-------- -------- -------- -------- --------
Net earnings $ 3,226 $ 1,181 $ 1,961 $ 1,951 $ 2,565
======== ======== ======== ======== ========
Earnings per share (4) $ 1.62 $ .60 $ .99 $ .99 $ 1.30
======== ======== ======== ======== ========
<FN>
(1) 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.
(2) Includes loans held for sale.
(3) Shareholders' equity for fiscal 1993 was 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.
(4) Earnings per share for 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.
</TABLE>
3
<PAGE> 4
WINTON FINANCIAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
OTHER DATA: 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Interest rate spread 2.88% 2.91% 3.06% 3.39% 3.61%
Return on average equity 14.65 5.67 9.94 10.58 15.41
Return on average assets 1.05 .44 .80 .85 1.19
Shareholders' equity to assets 7.17 7.13 8.15 7.88 7.98
Number of:
Loans outstanding 5,576 5,146 4,604 4,329 3,596
Deposit accounts 20,410 20,735 20,209 19,278 20,119
Full service offices 5 5 5 5 5
</TABLE>
4
<PAGE> 5
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 1997,
fiscal 1996 and fiscal 1995.
Forward-Looking Statements
- --------------------------
In the following pages, management presents an analysis of Winton Financial's
financial condition as of September 30, 1997, and the results of operations for
fiscal 1997, 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 statements in the referenced
sections of this discussion and analysis are forward looking and are therefore,
subject to such risks and uncertainties.
1. Management's analysis of the interest rate risk of Winton Savings as set
forth under "Asset/Liability Management;"
2. Management's discussion of the liquidity of Winton Savings' assets and the
regulatory capital of Winton Savings as set forth under "Liquidity and
Capital Resources;"
3. The discussion of the anticipated effect of legislation that may be enacted
as set forth under "Charter Unification Legislation;" and
4. Management's determination of the amount of the allowance for loan losses
as set forth under "Discussion of Changes in Financial Condition from
September 30, 1996 to September 30, 1997," "Comparison of Results of
Operations for the Fiscal Years Ended September 30, 1997 and 1996" and
"Comparison of Results of Operations for the Fiscal Years Ended September
30, 1996 and 1995."
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 4% 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 7.30% at September 30, 1997. At
September 30, 1997, Winton Savings' "liquid" assets totaled approximately $18.7
million, which was $5.8 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 $15.4 million to $20.5 million in excess of the
minimum requirement. Winton Financial believes that the Company's liquidity
posture at September 30, 1997, 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, 1997, Winton Savings' tangible capital of $22.3
million, or 6.9% of adjusted total assets, exceeded the 1.5% requirement by
$17.4 million; its core capital of $22.3 million, or 6.9% of adjusted total
assets, exceeded the minimum 3.0% requirement by $12.5 million; and, its
risk-based capital of $23.0 million, or 10.8% of risk-weighted assets, exceeded
the 8% requirement by $5.9 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 that Winton Savings' regulatory capital
will continue to meet the minimum requirements should the interest rate risk
component or the core capital proposal be adopted in their 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
- -------------------------------
Congress is considering legislation to eliminate the federal savings and loan
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 holding company. Such change in
regulation 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. 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.
Discussion of Changes in Financial Condition from September 30, 1996 to
- -----------------------------------------------------------------------
September 30, 1997
- ------------------
Winton Financial's consolidated assets totaled $324.5 million at September 30,
1997, an increase of $32.2 million, or 11.0%, over September 30, 1996 levels.
The current year's growth followed an increase in assets of $42.1 million, or
16.8%, during fiscal 1996. Winton Financial's growth over the last two years is
generally indicative of management's efforts to increase net interest income
levels by effectively levering the capital base. Fiscal 1997 growth was
primarily funded by growth in deposits of $18.8 million, an increase in advances
from the FHLB of $11.0 million and an increase in shareholders' equity of $2.4
million.
Cash and interest-bearing deposits increased during fiscal 1997 by $1.3 million,
or 85.2%, and totaled $2.8 million at September 30, 1997. Investment securities
totaled $16.2 million at September 30, 1997, an increase of $4.0 million, or
33.2%, over 1996 levels. This increase resulted from management's decision to
leverage funds into higher-yielding assets.
7
<PAGE> 8
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Changes in Financial Condition from September 30, 1996 to
- -----------------------------------------------------------------------
September 30, 1997 (continued)
- ------------------
Loans receivable increased $28.6 million, or 11.5%, during fiscal 1997 to a
total of $276.3 million. The increase is generally indicative of the favorable
interest rate spreads that were available on Winton's portfolio loans during the
year ended September 30, 1997. During fiscal 1997, loan origination volume
totaled $147.7 million, an increase of $26.1 million, or 21.5%, over fiscal
1996. The growth in the loan portfolio consisted primarily of $16.3 million of
multi-family residential loans, $8.6 million of nonresidential real estate and
land loans and $2.6 million of consumer loans. Loans held for sale totaled $4.2
million at September 30, 1997, representing an increase of $1.5 million over the
prior year level of $2.7 million. Loan sales volume totaled $53.8 million during
fiscal 1997, an increase of $17.4 million, or 47.9%, over fiscal 1996 levels.
At September 30, 1997, the allowance for loan losses of Winton Savings totaled
$827,000, a decrease of $30,000 from the level maintained at September 30, 1996.
At September 30, 1997, the allowance represented approximately .29% of the total
loan portfolio and 175.2% of total non-performing loans. At that date, the ratio
of total non-performing loans to total loans amounted to .16% as compared to
.35% at September 30, 1996. Although management believes that its allowance for
loan losses at September 30, 1997, was adequate based on the available facts and
circumstances, there can be no assurance that additions to such allowance will
not be necessary in future periods, which could adversely affect Winton
Financial's results of operations.
Deposits totaled $240.3 million at September 30, 1997, an increase of $18.8
million, or 8.5%, over 1996 levels. This increase was comprised of $16.4 million
of growth in certificates of deposit and an increase of $2.4 million in
transaction accounts. During fiscal 1997, management elected to employ a
strategy to achieve growth in the deposit portfolio that included acquisition of
brokered certificates of deposit. Such brokered deposits totaled $16.3 million
at September 30, 1997.
Advances from the FHLB totaled $57.4 million at September 30, 1997, an increase
of $11.0 million, or 23.8%, over the amount outstanding at September 30, 1996.
The increase in such advances was used primarily to fund growth in the loan
portfolio.
Shareholders' equity totaled $23.3 million at September 30, 1997, an increase of
$2.4 million, or 11.7%, over the September 30, 1996 total. The increase resulted
from net earnings of $3.2 million, coupled with a $114,000 increase in the net
unrealized gains on securities designated as available for sale, which were
partially offset by dividends on common shares totaling $894,000.
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 Fiscal Years Ended September 30,
- ----------------------------------------------------------------------------
1997 and 1996
- -------------
General
- -------
Net earnings for fiscal 1997 totaled $3.2 million, a $2.0 million, or 173.2%,
increase over the $1.2 million in net earnings recorded in fiscal 1996. The
increase in net earnings is primarily attributable to a $1.3 million charge
recorded in fiscal 1996 related to the recapitalization of the Savings
Association Insurance Fund ("SAIF"), coupled with a $1.1 million increase in net
interest income, a $253,000 decline in the provision for losses on loans, a
$164,000 increase in other income and a decrease of $296,000 in general,
administrative and other expense (after consideration of the SAIF assessment),
which were partially offset by an increase of $1.1 million in the provision for
federal income taxes.
Net Interest Income
- -------------------
Total interest income amounted to $24.6 million for fiscal 1997, an increase of
$3.4 million, or 16.3%, over fiscal 1996. The increase resulted from a $37.1
million, or 14.2%, increase in average interest-earning assets year to year.
Interest income on loans and mortgage-backed securities totaled $23.5 million in
fiscal 1997, an increase of $3.4 million, or 16.8%, over fiscal 1996. This
increase resulted primarily from a $36.0 million, or 14.7%, increase in the
average balance outstanding, coupled with an increase in yield, from 8.21% in
1996 to 8.36% in 1997. Interest income on investment securities and
interest-bearing deposits totaled $1.1 million, a $66,000, or 6.5%, increase
over fiscal 1996, due primarily to a $1.1 million increase in the average
balance outstanding.
Interest expense on deposits totaled $12.0 million for fiscal 1997, an increase
of $1.3 million, or 12.2%, over fiscal 1996. The increase resulted primarily
from a $19.8 million increase in the average balance outstanding, coupled with a
13 basis point increase in the average cost of deposits, to 5.23% in fiscal
1997. Interest expense on borrowings increased by $1.0 million, or 51.7%, due
primarily to a $15.9 million increase in the average balance outstanding coupled
with a 26 basis point increase 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 $1.1 million, or 13.1%, to a total of $9.5
million for fiscal 1997, as compared to fiscal 1996. The interest rate spread
declined by 3 basis points, from 2.91% for fiscal 1996 to 2.88% for fiscal 1997.
The net interest margin also declined by 3 basis points, to 3.19% for fiscal
1997, as compared to 3.22% for fiscal 1996.
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 determined that the
allowance was adequate and, therefore, a provision for losses on loans was not
necessary during the fiscal year ended September 30, 1997. 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.
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 Fiscal Years Ended September 30,
- ----------------------------------------------------------------------------
1997 and 1996 (continued)
- -------------
Other Income
- ------------
Other income totaled $1.3 million for the fiscal year ended September 30, 1997,
an increase of $164,000, or 14.4%, compared to fiscal 1996, due primarily to a
$95,000, or 12.8%, increase in gain on sale of loans, a $32,000 gain on sale of
real estate acquired through foreclosure, and a $27,000 increase in the gain on
sale of investments and mortgage-backed securities. The increase in the gain on
sale of loans is due primarily to the aforementioned increase in the volume of
loan sales during fiscal 1997.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $5.9 million for fiscal 1997,
a decrease of $1.6 million, or 21.1%, from fiscal 1996. The decrease resulted
primarily from the absence of a one-time $1.3 million charge recorded in 1996 in
connection with the assessment to recapitalize the Savings Association Insurance
Fund (the "SAIF") and the resulting decline in premiums for fiscal 1997, coupled
with a $615,000 provision for merger costs recorded in 1996, which were
partially offset by a $291,000, or 11.1%, increase in employee compensation and
benefits and a $194,000, or 22.2%, increase in other operating expenses.
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 $195.6 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 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 of SAIF insured deposits from the rates paid in fiscal 1996.
The increase in employee compensation and benefits resulted primarily from
normal merit increases coupled with an increase in staffing levels year to year.
The increase in other operating expenses is due primarily to an increase in
costs generally related to the increased loan origination volume and an increase
in overall operating costs related to the Corporation's growth year to year.
Federal Income Taxes
- --------------------
The provision for federal income taxes increased by $1.1 million, or 168.0%, for
the fiscal year ended September 30, 1997, as compared to fiscal 1996. This
increase resulted primarily from the increase in net earnings before taxes of
$3.1 million, or 171.4%. Winton Financial's effective tax rates amounted to
34.3% and 34.7% for the fiscal years ended September 30, 1997 and 1996,
respectively.
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 Fiscal Years Ended September 30,
- ----------------------------------------------------------------------------
1996 and 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 Blue Chip 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.
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
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 Fiscal Years Ended September 30,
- ----------------------------------------------------------------------------
1996 and 1995 (continued)
- -------------
Provision for Losses on Loans (continued)
- -----------------------------
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.
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 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.
12
<PAGE> 13
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Results of Operations for the Fiscal Years Ended September 30,
- ----------------------------------------------------------------------------
1996 and 1995 (continued)
- -------------
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.
Effects of Recent Accounting Pronouncements
- -------------------------------------------
In fiscal 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("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 October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", establishing financial accounting and reporting standards for
stock-based compensation plans. SFAS No. 123 encourages all entities to adopt a
new method of accounting to measure compensation cost of all 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.
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)
- -------------------------------------------
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, 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.
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, 1997, 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 Winton Financial's consolidated financial position or results
of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
requires companies to present basic earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings per
share, respectively. Basic earnings per share is computed without including
potential common shares. Diluted earnings per share is computed taking into
consideration common shares outstanding and potentially dilutive common shares,
including options, warrants, convertible securities and contingent stock
agreements. SFAS No. 128 is effective for periods ending after December 15,
1997. Early application is not permitted. SFAS No. 128 is not expected to have a
material effect on Winton Financial's financial statements.
14
<PAGE> 15
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effects of Recent Accounting Pronouncements (continued)
- -------------------------------------------
In February 1997, the FASB issued SFAS No. 129, "Disclosures of Information
about Capital Structure." SFAS No. 129 consolidated existing accounting guidance
relating to disclosure about a company's capital structure. SFAS No. 129 is
effective for financial statements for periods ending after December 15, 1997.
SFAS No. 129 is not expected to have a material impact on the Corporation's
financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. SFAS No. 130 is not expected to
have a material impact on Winton Financial's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about
the way that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 is not expected to have a material impact on the
Corporation's financial statements.
15
<PAGE> 16
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
The following table sets forth certain information relating to Winton Savings'
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 loan losses. 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,
1997 1996
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $263,344 $22,406 8.51% $225,164 $18,911 8.40%
Mortgage-backed securities - available for sale 1,948 119 6.11 2,400 113 4.71
Mortgage-backed securities - held to maturity 15,552 942 6.06 17,311 1,070 6.18
Investment securities - held to maturity 11,785 757 6.42 9,927 636 6.41
Investment securities - available for sale 2,007 122 6.08 3,228 185 5.73
Other interest-earning assets 3,544 207 5.84 3,049 199 6.53
-------- ------- ----- -------- ------- -----
Total interest-earning assets 298,180 24,553 8.23 261,079 21,114 8.09
Non-interest-earning assets 7,970 7,283
-------- --------
Total assets $306,150 $268,362
======== ========
Interest-bearing liabilities:
Deposits $229,708 12,009 5.23 $209,879 10,700 5.10
FHLB advances 51,146 3,027 5.92 35,292 1,996 5.66
-------- ------- ----- -------- ------- -----
Total interest-bearing liabilities 280,854 15,036 5.35 245,171 12,696 5.18
------- ----- ------- --------
Non-interest-bearing liabilities 3,275 2,349
-------- --------
Total liabilities 284,129 247,520
Shareholders' equity 22,021 20,842
-------- --------
Total liabilities and shareholders' equity $306,150 $268,362
======== ========
Net interest income/Interest rate spread $ 9,517 2.88% $ 8,418 2.91%
======== ==== ======== ====
Net interest margin (net interest income as a
percent of average interest-earning assets) 3.19% 3.22%
==== ====
Average interest-earning assets to interest-bearing liabilities 106.17% 106.49%
====== ======
YEAR ENDED SEPTEMBER 30,
1995
AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $202,844 $17,031 8.40%
Mortgage-backed securities - available for sale 606 34 5.61
Mortgage-backed securities - held to maturity 18,946 1,016 5.36
Investment securities - held to maturity 9,936 632 6.36
Investment securities - available for sale 1,030 56 5.44
Other interest-earning assets 4,215 173 4.10
-------- ------- -----
Total interest-earning assets 237,577 18,942 7.97
Non-interest-earning assets 6,816
--------
Total assets $244,393
=======
Interest-bearing liabilities:
Deposits $191,870 9,085 4.73
FHLB advances 31,312 1,874 5.98
-------- ------- -----
Total interest-bearing liabilities 223,182 10,959 4.91
------- ----
Non-interest-bearing liabilities 1,473
---------
Total liabilities 224,655
Shareholders' equity 19,738
--------
Total liabilities and shareholders' equity $244,393
=======
Net interest income/Interest rate spread $ 7,983 3.06%
======== ====
Net interest margin (net interest income as a
percent of average interest-earning assets) 3.36%
====
Average interest-earning assets to interest-bearing liabilities 106.45%
======
- ---------------------------
<FN>
(1) Includes loans held for sale and non-accrual loans.
</TABLE>
16
<PAGE> 17
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rate/Volume Table
- -----------------
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 Savings' 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>
YEAR ENDED SEPTEMBER 30,
1997 VS. 1996 1996 VS. 1995
INCREASE INCREASE
(DECREASE) (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) $3,244 $ 251 $3,495 $1,880 $ - $1,880
Mortgage-backed securities - available
for sale (18) 24 6 83 (4) 79
Mortgage-backed securities - held to
maturity (107) (21) (128) (113) 167 54
Investment securities - available for sale (73) 10 (63) (1) 5 4
Investment securities - held to maturity 120 1 121 126 3 129
Other interest-earning assets (2) 29 (21) 8 (98) 124 26
------- ----- -------- ------- ---- -------
Total interest income 3,195 244 3,439 1,877 295 2,172
Interest expense attributable to:
Deposits 1,031 278 1,309 883 732 1,615
Borrowings 933 98 1,031 207 (85) 122
------ ----- ----- ------ ----- ------
Total interest expense 1,964 376 2,340 1,090 647 1,737
----- ---- ----- ----- ---- -----
Increase in net interest income $1,231 $(132) $1,099 $ 787 $(352) $ 435
===== ==== ===== ===== ==== ======
- ------------------------------
<FN>
(1) Includes loans held for sale.
(2) Includes interest-bearing deposits and certificates of deposit in other
financial institutions.
</TABLE>
17
<PAGE> 18
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 may reduce 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, 1997, approximately $152.9 million, or 46.8%, 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) 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.
The management and Board of Directors of Winton Savings attempt to manage Winton
Savings' exposure to interest rate risk (the sensitivity of an institution's
earnings and net asset values to changes in interest rates) 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 Savings
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 Savings. Although Winton
Savings is not currently subject to the NPV regulation, because its
implementation has been delayed by the OTS, the application of the NPV
methodology may illustrate Winton Savings' level of interest rate risk.
18
<PAGE> 19
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management (continued)
- ------------------------------
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 points 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
Savings' 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, 1997, 2% of the present value of Winton Savings' assets was
approximately $6.6 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 $8.3 million at September 30, 1997, Winton
Savings would have been required to deduct approximately $850,000 (50% of the
approximate $1.7 million difference) from its capital in determining whether
Winton Savings met its risk-based capital requirement, if the regulation had
been in effect for Winton Savings. Regardless of such reduction, however, Winton
Savings' risk-based capital at September 30, 1997, would still have exceeded the
regulatory requirement by approximately $5.0 million.
Presented below, as of September 30, 1997, is an analysis of Winton Savings'
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, 1997
CHANGE IN INTEREST RATE BOARD LIMIT $ CHANGE % CHANGE
(BASIS POINTS) % CHANGE IN NPV IN NPV
(In thousands)
<S> <C> <C> <C>
+300 (75)% $(12,965) (43)%
+200 (50) (8,301) (28)
+100 (20) (3,863) (13)
- - - -
-100 (15) 2,801 9
-200 (25) 5,396 18
-300 (35) 8,105 27
</TABLE>
19
<PAGE> 20
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management (continued)
- ------------------------------
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 Savings 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 Savings would pay on its deposits would
increase rapidly because Winton Savings' 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 Savings' net interest income could
be expected to be negatively affected. Moreover, rising interest rates could
negatively affect Winton Savings' earnings due to diminished loan demand.
20
<PAGE> 21
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles.
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 Winton Financial Corporation's
consolidated statements of earnings, shareholders' equity and cash flows for the
year ended September 30, 1995, prior to the Corporation's restatement of the
1995 consolidated financial statements for the 1996 pooling-of-interests with
Blue Chip Savings Bank. Separate financial statements of Blue Chip included in
the 1995 consolidated financial statements were audited and reported on
separately by other auditors.
Grant Thornton LLP
Cincinnati, Ohio
November 24, 1997
21
<PAGE> 22
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 1,367 $ 1,504
Interest-bearing deposits in other financial institutions 1,419 --
-------- --------
Cash and cash equivalents 2,786 1,504
Investment securities available for sale - at market 3,631 2,581
Investment securities - at amortized cost, approximate market
value of $12,679 and $9,623 at September 30, 1997 and 1996 12,585 9,593
Mortgage-backed securities available for sale - at market 799 2,942
Mortgage-backed securities - at cost, approximate market
value of $14,345 and $15,983 at September 30, 1997 and 1996 14,614 16,414
Loans receivable - net 276,334 247,755
Loans held for sale - at lower of cost or market 4,210 2,735
Office premises and equipment - at depreciated cost 2,627 2,667
Real estate acquired through foreclosure 513 561
Federal Home Loan Bank stock - at cost 2,998 2,359
Accrued interest receivable on loans 2,185 1,908
Accrued interest receivable on mortgage-backed securities 109 126
Accrued interest receivable on investments and interest-bearing deposits 241 163
Prepaid expenses and other assets 393 409
Intangible assets - net of amortization 463 524
-------- --------
Total assets $324,488 $292,241
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $240,317 $221,533
Advances from the Federal Home Loan Bank 57,425 46,376
Accounts payable on mortgage loans serviced for others 842 686
Advance payments by borrowers for taxes and insurance 412 312
Other liabilities 1,137 2,273
Accrued federal income taxes 85 7
Deferred federal income taxes 993 223
-------- --------
Total liabilities 301,211 271,410
Commitments -- --
Shareholders' equity
Preferred stock - 2,000,000 shares without par value authorized;
no shares issued -- --
Common stock - 5,000,000 shares without par value authorized;
1,986,152 shares issued and outstanding -- --
Additional paid-in capital 6,501 6,501
Retained earnings - restricted 16,474 14,142
Unrealized gains on securities designated as available for sale,
net of related tax effects 302 188
-------- --------
Total shareholders' equity 23,277 20,831
-------- --------
Total liabilities and shareholders' equity $324,488 $292,241
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE> 23
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest income
Loans $ 22,406 $ 18,911 $ 17,031
Mortgage-backed securities 1,061 1,183 1,050
Investment securities 879 821 688
Interest-bearing deposits and other 207 199 173
-------- -------- --------
Total interest income 24,553 21,114 18,942
Interest expense
Deposits 12,009 10,700 9,085
Borrowings 3,027 1,996 1,874
-------- -------- --------
Total interest expense 15,036 12,696 10,959
-------- -------- --------
Net interest income 9,517 8,418 7,983
Provision for losses on loans -- 253 88
-------- -------- --------
Net interest income after provision for losses on loans 9,517 8,165 7,895
Other income
Gain on sale of mortgage loans 837 742 250
Gain on sale of investments and mortgage-backed securities
designated as available for sale 36 9 47
Gain on sale of real estate acquired through foreclosure 32 -- 5
Other operating 394 384 287
-------- -------- --------
Total other income 1,299 1,135 589
General, administrative and other expense
Employee compensation and benefits 2,916 2,625 2,698
Occupancy and equipment 1,225 1,154 1,138
Federal deposit insurance premiums 206 1,773 425
Franchise taxes 264 254 232
Amortization of intangible assets 61 61 40
Advertising 169 137 143
Other operating 1,066 872 853
Merger related costs -- 615 --
-------- -------- --------
Total general, administrative and other
expense 5,907 7,491 5,529
-------- -------- --------
Earnings before income taxes 4,909 1,809 2,955
Federal income taxes
Current 972 844 740
Deferred 711 (216) 254
-------- -------- --------
Total federal income taxes 1,683 628 994
-------- -------- --------
NET EARNINGS $ 3,226 $ 1,181 $ 1,961
======== ======== ========
EARNINGS PER SHARE $ 1.62 $ .60 $ .99
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE> 24
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 1997, 1996 and 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
UNREALIZED
GAINS (LOSSES)
ADDITIONAL ON SECURITIES
COMMON PAID-IN AVAILABLE RETAINED
STOCK CAPITAL FOR SALE EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
Balance at October 1, 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 gains 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
Net earnings for the year ended September 30, 1997 -- -- -- 3,226 3,226
Unrealized gains on securities designated as available for
sale, net of related tax effects -- -- 114 -- 114
Dividends on common stock -- -- -- (894) (894)
--- -------- -------- -------- --------
Balance at September 30, 1997 $- $ 6,501 $ 302 $ 16,474 $ 23,277
=== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE> 25
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 3,226 $ 1,181 $ 1,961
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Amortization of premiums on investments and mortgage-backed
securities 17 52 47
Amortization of deferred loan origination fees (198) (149) (213)
Depreciation and amortization 393 355 350
Amortization of intangible assets 61 61 40
Gain on sale of investment securities designated as available for sale (36) -- (47)
Gain on sale of mortgage-backed securities designated as available
for sale -- (9) --
Gain on sale of real estate acquired through foreclosure (32) -- (5)
Provision for losses on loans -- 253 88
Gain on sale of mortgage loans (517) (420) (250)
Loans disbursed for sale in the secondary market (43,888) (36,301) (16,876)
Proceeds from sale of loans in the secondary market 42,930 35,065 16,816
Federal Home Loan Bank stock dividends (188) (155) (136)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (277) (329) (163)
Accrued interest receivable on mortgage-backed securities 17 9 (15)
Accrued interest receivable on investments (78) 24 (36)
Prepaid expenses and other assets 16 (73) 144
Accounts payable on mortgage loans serviced for others 156 64 105
Other liabilities (1,136) 1,666 (87)
Federal income taxes
Current 78 (91) 117
Deferred 711 (216) 254
--------- --------- ---------
Net cash provided by operating activities 1,255 987 2,094
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 3,950 2,040 2,515
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) --
Proceeds from the sale of mortgage-backed securities designated as
available for sale -- 1,406 --
Proceeds from the maturity of investment securities 3,500 2,250 3,570
Proceeds from the sale of investment securities designated as
available for sale 122 -- 579
Purchase of investment securities designated as held to maturity (2,491) (1,350) (5,285)
Purchase of investment securities designated as available for sale (4,988) -- (2,291)
Loan principal repayments 63,990 40,475 38,279
Loan disbursements (103,776) (85,242) (46,146)
Sale of loan participations 11,385 1,732 1,074
Proceeds from the sale of real estate acquired through foreclosure 94 -- 203
Purchase and renovation of office premises and equipment (334) (246) (33)
Additions to real estate acquired through foreclosure (13) (157) (192)
Purchase of Federal Home Loan Bank stock (451) (41) (152)
Intangible assets arising from branch purchase -- -- (611)
--------- --------- ---------
Net cash used in investing activities (29,012) (42,513) (9,890)
--------- --------- ---------
Net cash used in operating and investing activities
(subtotal carried forward) (27,757) (41,526) (7,796)
--------- --------- ---------
</TABLE>
25
<PAGE> 26
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net cash used in operating and investing activities
(balance brought forward) $(27,757) $(41,526) $ (7,796)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts, including
purchased deposits 18,784 23,628 12,578
Proceeds from Federal Home Loan Bank advances 37,107 65,262 21,500
Repayment of Federal Home Loan Bank advances (26,058) (48,716) (25,341)
Advances by borrowers for taxes and insurance 100 23 (3)
Proceeds from exercise of stock options -- 57 128
Dividends paid on common stock (894) (814) (749)
-------- -------- --------
Net cash provided by financing activities 29,039 39,440 8,113
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,282 (2,086) 317
Cash and cash equivalents at beginning of year 1,504 3,590 3,273
-------- -------- --------
Cash and cash equivalents at end of year $ 2,786 $ 1,504 $ 3,590
======== ======== ========
Supplemental disclosure of cash flow information: Cash paid during the year for:
Federal income taxes $ 894 $ 809 $ 640
======== ======== ========
Interest on deposits and borrowings $ 14,808 $ 12,650 $ 10,924
======== ======== ========
Supplemental disclosure of noncash investing activities:
Transfer from loans to real estate acquired through
foreclosure $ 200 $ 61 $ 155
======== ======== ========
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 $ 114 $ 10 $ 178
======== ======== ========
Recognition of mortgage servicing rights in
accordance with SFAS No. 122 $ 320 $ 322 $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE> 27
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
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.
During fiscal 1996, Winton Financial merged Blue Chip Savings Bank ("Blue
Chip") 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 were previously restated to reflect the effects of the business
combination as of October 1, 1994. In connection with the business
combination, 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 policy described in Note 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 M as of September 30, 1997 and 1996, and for the fiscal
years ended September 30, 1997, 1996 and 1995. All significant intercompany
balances and transactions have been eliminated in the accompanying
consolidated financial statements.
27
<PAGE> 28
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
The Corporation accounts for investment and mortgage-backed securities in
accordance with 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. At September 30, 1997 and 1996, the Corporation's shareholders
equity reflected net unrealized gains on securities designated as available
for sale totaling $302,000 and $188,000, 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 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,
1997 and 1996, loans held for sale were carried at cost.
The Company generally retains the servicing on loans sold and agrees to
remit to the investor loan principal and interest at agreed-upon rates.
These rates can differ from the loan's contractual interest rate resulting
in a "yield differential." In addition to previously deferred loan
origination fees and cash gains, gains on sale of loans can represent the
present value of the future yield differential less a normal servicing fee,
capitalized over the estimated life of
28
<PAGE> 29
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
----------------
the loans sold. Normal servicing fees are determined by reference to the
stipulated servicing fee set forth in the loan sale agreement. Such fees
approximate the Company's normal servicing costs. The resulting capitalized
excess servicing fee is amortized to operations over the estimated life of
the loans using the interest method. If prepayments are higher than
expected, an immediate charge to operations is made. If prepayments are
lower than original estimates, then the related adjustments are made
prospectively.
In May 1995, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 122 "Accounting for Mortgage Servicing Rights," which requires that
the Company 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 was 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 was prohibited, and
earlier adoption was encouraged. Management adopted SFAS No. 122 as of
October 1, 1995, which resulted in recognition of mortgage servicing rights
totaling $320,000 and $322,000 during fiscal 1997 and 1996, respectively.
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.
29
<PAGE> 30
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
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 Company 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 nonresidential and multi-family residential real estate loans,
and its evaluation of impairment thereof, 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, 1997 and 1996, the Company had no loans that would be
defined as impaired under SFAS No. 114.
30
<PAGE> 31
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
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. 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 federal 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, mortgage servicing rights, 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.
31
<PAGE> 32
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
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 are being amortized on the
straight-line method over a ten year period.
10. Employee Benefit Plans
----------------------
The Corporation has an Employee Stock Ownership Plan ("ESOP") which provides
retirement benefits for substantially all employees who have completed one
year of service. Contributions of $90,000, $65,000 and $48,000 were made to
the ESOP for the years ended September 30, 1997, 1996 and 1995,
respectively. At September 30, 1997, the ESOP held 154,481 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 $25,000, $23,000 and $20,000,
for the years ended September 30, 1997, 1996 and 1995, 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, 1996, 120,500 options were granted at fair value of
$13.31 per share. At September 30, 1997, none of the stock options granted
had been exercised.
12. Earnings Per Share
------------------
Earnings per share is based on net earnings divided by 1,986,152, 1,985,017
and 1,971,294 weighted-average shares outstanding for the fiscal years ended
September 30, 1997, 1996 and 1995, respectively. In computing earnings per
share for the year ended September 30, 1995, the 361,954 shares issued to
Blue Chip were added to the Corporation's historic weighted-average shares
outstanding. 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.
32
<PAGE> 33
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
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.
When quoted market prices are not available for financial instruments, 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,
1997 and 1996:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in
the consolidated statements 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 statements 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.
33
<PAGE> 34
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Fair Value of Financial Instruments (continued)
-----------------------------------
ADVANCES FROM THE FEDERAL HOME LOAN BANK: 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, 1997 and 1996, was 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>
1997 1996
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,786 $ 2,786 $ 1,504 $ 1,504
Investment securities designated
as available for sale 3,631 3,631 2,581 2,581
Investment securities - at cost 12,585 12,679 9,593 9,623
Mortgage-backed securities designated
as available for sale 799 799 2,942 2,942
Mortgage-backed securities - at cost 14,614 14,345 16,414 15,983
Loans receivable - net 280,544 283,594 250,490 254,244
Federal Home Loan Bank stock 2,998 2,998 2,359 2,359
------- ------- ------- -------
$317,957 $320,832 $285,883 $289,236
======= ======= ======= =======
Financial liabilities
Deposits $240,317 $240,875 $221,533 $222,205
Advances from Federal Home Loan Bank 57,425 57,428 46,376 46,431
Advance payments and amounts due on loans
serviced for others 1,254 1,254 998 998
------- ------- ------- -------
$298,996 $299,557 $268,907 $269,634
======= ======= ======= =======
</TABLE>
15. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 1997
consolidated financial statement presentation.
34
<PAGE> 35
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE B - INVESTMENT 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>
1997 1996
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Government and agency
obligations $12,585 $12,679 $ 9,593 $ 9,623
AVAILABLE FOR SALE:
U.S. Government and agency obligations 3,088 3,149 2,098 2,120
Corporate equity securities 103 482 189 461
------ ------ ------ ------
3,191 3,631 2,287 2,581
------ ------ ------ ------
Total investment securities $15,776 $16,310 $11,880 $12,204
====== ====== ====== ======
</TABLE>
At September 30, 1997, the fair value appreciation of the Corporation's
investment securities in excess of cost totaled $534,000, which was
comprised of gross unrealized gains of $549,000 and gross unrealized losses
of $15,000.
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.
The amortized cost and estimated fair value of U.S. Government and agency
obligations, including those designated as available for sale, at September
30, 1997, 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 $ 2,905 $ 2,911
Due in one to three years 8,186 8,251
Due in three to five years 4,582 4,666
------ ------
$15,673 $15,828
====== ======
</TABLE>
35
<PAGE> 36
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
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, 1997
and 1996, are shown below.
<TABLE>
<CAPTION>
1997
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 $ 5,371 $ 34 $ (92) $ 5,313
Government National Mortgage Association
Participation certificates 811 25 - 836
Federal National Mortgage Association
Participation certificates 3,449 5 (63) 3,391
Collateralized mortgage obligations 1,657 - (67) 1,590
CMC Securities Corporation
Collateralized mortgage obligations 3,137 - (106) 3,031
Residential Funding Corporation
Collateralized mortgage obligations 189 - (5) 184
------ ---- ---- ------
Total mortgage-backed securities
held to maturity 14,614 64 (333) 14,345
AVAILABLE FOR SALE:
Government National Mortgage Corporation
Participation Certificates 782 17 - 799
------ ---- ---- ------
Total mortgage-backed securities $15,396 $ 81 $(333) $15,144
====== ==== ==== ======
</TABLE>
36
<PAGE> 37
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
<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>
37
<PAGE> 38
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
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, 1997, 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 $ -
Due after three years through five years 3
Due after five years through ten years 26
Due after ten years through twenty years 1,841
Due after twenty years 13,526
------
$15,396
======
</TABLE>
Mortgage-backed securities with an approximate carrying value of $2.5
million were pledged to secure public deposits at September 30, 1997.
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family residential $145,039 $144,306
Multi-family residential 71,798 55,507
Construction 15,036 17,524
Nonresidential real estate and land 47,974 39,327
Nonresidential construction 1,401 450
Consumer and other 5,003 2,408
-------- ---------
286,251 259,522
Less:
Undisbursed portion of loans in process 8,364 10,150
Deferred loan origination fees 726 760
Allowance for loan losses 827 857
-------- ----------
$276,334 $247,755
======= =======
</TABLE>
38
<PAGE> 39
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
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 $222.0 million, or 80%, of the total loan
portfolio at September 30, 1997, and $205.6 million, or 83%, of the total
loan portfolio at September 30, 1996. 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, generally retaining servicing on
the loans sold. Loans sold and serviced for others totaled approximately
$145.2 million, $116.6 million and $104.6 million at September 30, 1997,
1996 and 1995, respectively. At September 30, 1997, loans sold with recourse
totaled $2.4 million.
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>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Beginning balance $857 $654 $582
Provision for losses on loans - 253 88
Charge-off of loans (51) (50) (122)
Recoveries of loan losses 21 - 106
---- -- ---
Ending balance $827 $857 $654
=== === ===
</TABLE>
39
<PAGE> 40
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE D - ALLOWANCE FOR LOAN LOSSES (continued)
At September 30, 1997, the Company's allowance for loan losses was comprised
of a general loan loss allowance of $763,000, which is includible as a
component of regulatory risk-based capital, and a specific loan loss
allowance totaling $64,000.
Nonperforming and nonaccrual loans at September 30, 1997, 1996 and 1995,
totaled $472,000, $923,000 and $602,000, respectively. Interest income that
would have been recognized had nonaccrual loans performed pursuant to
contractual terms totaled approximately $26,000, $53,000 and $35,000 for the
years ended September 30, 1997, 1996 and 1995.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment is comprised of the following at September 30:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Land $ 336 $ 336
Office buildings and improvements 2,413 2,375
Furniture, fixtures and equipment 2,323 2,277
----- -----
5,072 4,988
Less accumulated depreciation and
amortization 2,445 2,321
----- -----
$2,627 $2,667
===== =====
</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.
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 1998 and 1999, and
$7,000 for fiscal 2000.
40
<PAGE> 41
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND WEIGHTED-AVERAGE INTEREST RATE 1997 1996
(In thousands)
<S> <C> <C>
NOW accounts and money market deposits
1997 - 1.65% $ 13,575
1996 - 1.70% $ 12,187
Passbook and Club accounts
1997 - 3.70% 50,622
1996 - 3.55% 49,651
-------- --------
Total demand, transaction and passbook deposits 64,197 61,838
Certificates of deposit
Original maturities of:
Less than 12 months
1997 - 5.66% 49,356
1996 - 5.37% 47,603
12 months to 36 months
1997 - 6.14% 80,730
1996 - 6.20% 70,815
More than 36 months
1997 - 6.25% 15,758
1996 - 6.28% 17,102
Individual Retirement and Keogh
1997 - 6.16% 30,276
1996 - 6.06% 24,175
-------- --------
Total certificates of deposit 176,120 159,695
------- -------
Total deposit accounts $240,317 $221,533
======= =======
</TABLE>
The Company had certificates of deposit accounts with balances equal to or
in excess of $100,000 totaling $54.7 million and $39.4 million at September
30, 1997 and 1996, respectively.
41
<PAGE> 42
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE F - DEPOSITS (continued)
Interest expense on deposits at September 30 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Passbook and money market deposit accounts $ 1,843 $ 1,735 $1,893
NOW accounts 218 206 181
Certificates of deposit 9,948 8,759 7,011
------- ------- -----
$12,009 $10,700 $9,085
====== ====== =====
</TABLE>
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Less than one year $101,627 $ 92,423
One year to three years 68,954 57,423
More than three years 5,539 9,849
--------- ---------
$176,120 $159,695
======== ========
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
1997, by pledges of certain residential mortgage loans totaling $86.1
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 1997 1996
(In thousands)
<S> <C> <C> <C>
4.70% - 7.20% 1997 $ - $28,000
5.15% - 7.20% 1998 25,500 7,500
5.67% - 7.20% 1999 8,500 6,500
6.17% - 8.35% 2000 11,000 4,000
6.23% - 7.20% 2001 4,000 -
6.05% - 7.20% 2002 8,318 376
2.50% Thereafter 107 -
------ ------
$57,425 $46,376
====== ======
Weighted-average interest rate 6.22% 6.15%
==== ====
</TABLE>
42
<PAGE> 43
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE H - FEDERAL INCOME TAXES
Federal income taxes differ from the amounts computed at the statutory
corporate tax rate for the years ended September 30 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at statutory rate $1,669 $615 $1,005
Increase (decrease) in taxes resulting from:
Other 14 13 (11)
----- --- ------
Federal income tax provision per consolidated
financial statements $1,683 $628 $ 994
===== === ======
Effective tax rate 34.3% 34.7% 33.6%
==== ==== ====
</TABLE>
The composition of the Corporation's net deferred tax liability at September
30 is as follows:
<TABLE>
<CAPTION>
Taxes (payable) refundable on temporary 1997 1996
differences at statutory rate: (In thousands)
Deferred tax assets:
<S> <C> <C>
General loan loss allowance $ 281 $ 256
Deferred loan origination fees - 76
SAIF recapitalization assessment - 438
Amortization of intangible assets 43 58
Other - 4
----- --------
Total deferred tax assets 324 832
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (444) (373)
Difference between book and tax depreciation (76) (147)
Percentage of earnings bad debt deduction (331) (330)
Unrealized gains on securities designated as available for sale (155) (96)
Deferred loan origination costs (68) -
Mortgage servicing rights (216) (109)
Other (27) -
------- ----
Total deferred tax liabilities (1,317) (1,055)
----- -----
Net deferred tax liability $ (993) $ (223)
====== ======
</TABLE>
43
<PAGE> 44
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
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, 1997. The approximate amount of the unrecognized deferred tax liability
relating to the cumulative bad debt deduction was approximately $400,000 at
September 30, 1997. See Note K 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 its
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, 1997, the Company had total outstanding commitments of
approximately $6.6 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 $1.7 million were comprised of adjustable-rate loans at rates
ranging from 7.00% to 10.50%, and $4.9 million were comprised of fixed-rate
loans at rates ranging from 7.375% to 10.75%. The Company also had total
outstanding commitments of approximately $362,000 to originate
adjustable-rate nonresidential real estate and land loans at interest rates
ranging from 8.25% to 9.50%. Additionally, the Company had unused lines of
credit related to home equity loans and commercial loans totaling $8.5
million and $1.5 million, respectively. In the opinion of management, all
loan commitments equaled or exceeded prevalent market interest rates as of
September 30, 1997, 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.
44
<PAGE> 45
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE J - REGULATORY CAPITAL
The Company is subject to minimum regulatory capital standards promulgated
by the Office of Thrift Supervision ("OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on its financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, Winton
Savings must meet specific capital guidelines that involve quantitative
measures of Winton Savings' assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. Winton
Savings' capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
The minimum capital standards of the OTS 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. The risk-based capital
requirement currently provides for the maintenance of core capital plus
general loan loss allowances equal to 8.0% of risk-weighted assets as of
September 30, 1997. In computing risk-weighted assets, Winton Savings
multiplies the value of each asset on its statement of financial condition
by a defined risk-weighted factor, e.g., one- to four-family residential
loans carry a risk-weighted factor of 50%.
The OTS has proposed an amendment to the core capital requirement that would
increase the minimum requirement to a range of 4.0% - 5.0% of adjusted total
assets for substantially all savings associations. Management anticipates no
material change to the Company's excess regulatory capital position if the
proposal is adopted in its present form.
As of September 30, 1997, management believes that the Company met all
capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
------ -----------------
AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible capital $22,252 6.9% greater than or equal to $ 4,852 greater than or equal to 1.5%
Core capital $22,252 6.9% greater than or equal to $ 9,704 greater than or equal to 3.0%
Risk-based capital $23,015 10.8% greater than or equal to $ 17,129 greater than or equal to 8.0%
<CAPTION>
TO BE "WELL-
CAPITALIZED" UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
-----------------
AMOUNT RATIO
<S> <C> <C>
Tangible capital greater than or equal to $16,173 greater than or equal to 5.0%
Core capital greater than or equal to $19,408 greater than or equal to 6.0%
Risk-based capital greater than or equal to $21,412 greater than or equal to 10.0%
</TABLE>
The Company's management believes that under the current regulatory capital
regulations, the Company will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the control
of the Company, such as increased interest rates or a downturn in the
economy in the Company's market area, could adversely affect future earnings
and consequently, the ability to meet future regulatory capital
requirements.
45
<PAGE> 46
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE K - LEGISLATIVE DEVELOPMENTS
The deposit accounts of Winton Savings and of other savings associations are
insured by the Federal Deposit Insurance Corporation ("FDIC") through 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
through 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 fiscal 1996 and 1997, no BIF assessments were
required for healthy commercial banks except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provided 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. Winton
Savings held $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.
Under separate legislation related to the recapitalization plan, Winton
Savings is required to recapture as taxable income approximately $850,000 of
its tax 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 bad debt deduction in the future. Winton Savings has provided
deferred taxes for this amount and will be permitted to amortize the
recapture of the bad debt reserve in taxable income over six years.
NOTE L - STOCK OPTION PLAN
The Corporation has a Stock Option Plan that provides for the issuance of
324,840 shares of authorized, but unissued shares of common stock at the
fair market value at the date of grant.
The Corporation applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plan.
Accordingly, no compensation cost has been recognized for the plan. Had
compensation cost for the Corporation's stock option plan been determined
based on the fair value at the grant dates for awards under the plan
consistent with the accounting method utilized in SFAS No. 123, the
Corporation's net earnings and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net earnings As reported $3,226 $1,961
===== =====
Pro-forma $3,226 $1,610
===== =====
Earnings per share As reported $1.62 $.99
==== ===
Pro-forma $1.62 $.81
==== ===
</TABLE>
46
<PAGE> 47
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE L - STOCK OPTION PLAN (continued)
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
assumptions used for grants in fiscal 1996: dividend yield of 3.4%, expected
volatility of 20.0%, risk-free interest rate of 6.0% and expected lives of
ten years.
A summary of the status of the Corporation's fixed stock option plans as of
September 30, 1997, 1996 and 1995, and changes during the periods ending on
those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 247,000 $11.59 126,000 $10.00 126,000 $10.00
Granted - $ - 120,500 $13.31 - $ -
Exercised - $ - - $ - - $ -
Forfeited - $ - - $ - - $ -
------- ----- ------- ----- ------- -----
Outstanding at end of year 247,000 $11.59 247,000 $11.59 126,000 $10.00
======= ===== ======= ===== ======= =====
Options exercisable at year-end 247,000 $11.59 120,500 $13.31 -
======= ===== ======= ===== ======= =====
Weighted-average fair value of
options granted during the year N/A $ 3.41 N/A
=== ====== ===
</TABLE>
The following information applies to options outstanding at September 30,
1997:
<TABLE>
<S> <C>
Number outstanding 247,000
Range of exercise prices $10.00 - $13.50
Weighted-average exercise price $11.59
Weighted-average remaining contractual life 7.9 years
</TABLE>
47
<PAGE> 48
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE M - CONDENSED FINANCIAL STATEMENTS OF WINTON FINANCIAL
CORPORATION
The following condensed financial statements summarize the financial
position of the Corporation as of September 30, 1997 and 1996, and the
results of its operations and its cash flows for each of the years ended
September 30, 1997, 1996 and 1995.
WINTON FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
September 30,
<TABLE>
<CAPTION>
ASSETS 1997 1996
(In thousands)
<S> <C> <C>
Cash $ 313 $ 252
Investment in The Winton Savings and Loan Co. 22,830 20,387
Corporate equity securities - at fair value 482 461
Prepaid expenses and other assets 9 32
------ ------
Total assets $23,634 $21,132
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 228 $ 209
Deferred federal income taxes 129 92
------ ------
Total liabilities 357 301
Shareholders' equity
Additional paid-in capital 6,501 6,501
Retained earnings 16,474 14,142
Unrealized gain on securities designated as
available for sale, net of related tax effects 302 188
------ ------
Total shareholders' equity 23,277 20,831
------ ------
Total liabilities and shareholders' equity $23,634 $21,132
====== ======
</TABLE>
48
<PAGE> 49
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE M - CONDENSED FINANCIAL STATEMENTS OF WINTON FINANCIAL
CORPORATION (continued)
WINTON FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Year ended September 30,
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Revenue
Interest and dividends on investments $ 13 $ 17 $ 13
Gain on sale of investment securities
designated as available for sale 36 - 20
Dividends received from subsidiary 894 904 425
Equity in undistributed earnings of subsidiary 2,400 346 1,581
----- ------ -----
3,343 1,267 2,039
Expenses
General and administrative 117 86 78
----- ------ -----
Net earnings $3,226 $1,181 $1,961
===== ===== =====
</TABLE>
WINTON FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Year ended September 30,
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the year $3,226 $1,181 $1,961
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Undistributed earnings of consolidated subsidiary (2,400) (346) (1,581)
Gain on sale of investment securities
designated as available for sale (36) - (20)
Increases (decreases) in cash due to changes in:
Prepaid expenses and other assets 23 (18) 17
Other liabilities 20 73 -
------- ------- ----
Net cash provided by operating activities 833 890 377
Cash flows provided by (used in) investing activities:
Purchase of corporate equity securities - - (36)
Proceeds from sale of investment securities
designated as available for sale 122 - 58
------ ----- -------
Net cash provided by investing activities 122 - 22
Cash flows used in financing activities:
Payment of dividends on common stock (894) (814) (650)
------ ------ ------
Net increase (decrease) in cash and cash equivalents 61 76 (251)
Cash and cash equivalents at beginning of year 252 176 427
------ ------ ------
Cash and cash equivalents at end of year $ 313 $ 252 $ 176
====== ====== ======
</TABLE>
49
<PAGE> 50
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE M - CONDENSED FINANCIAL STATEMENTS OF WINTON FINANCIAL
CORPORATION (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 earnings for the most recent four quarters. Pursuant to such OTS
dividend regulations, Winton Savings had the ability to pay dividends of
approximately $5.1 million to Winton Financial at September 30, 1997.
50
<PAGE> 51
WINTON FINANCIAL CORPORATION
SHAREHOLDER SERVICES. Star Bank, N.A. 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:
Star Bank, N.A.
Corporate Trust Services
425 Walnut Street
Cincinnati, Ohio 45201-1118
MARKET SPECIALIST. Cohen Specialists L.L.C./Palbro Partners L.L.C. serve as
market specialists for Winton Financial's common shares.
ANNUAL MEETING. The Annual Meeting of Shareholders of Winton Financial will be
held on January 30, 1998, 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
51
<PAGE> 52
WINTON FINANCIAL CORPORATION
<TABLE>
<CAPTION>
WINTON FINANCIAL WINTON SAVINGS
<S> <C>
BOARD OF DIRECTORS BOARD OF DIRECTORS
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 & OFFICERS
Development Co.
Robert L. Bollin
Timothy M. Mooney President
Vice President and Chief Financial Officer
of Kendle International Inc. Gregory J. Bollin
Executive Vice President
J. Clay Stinnett
President, J.R. Concepts, Inc. 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/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
</TABLE>
52
<PAGE> 1
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 Ave., Cincinnati, Ohio 45224, on January 30, 1998, 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 reelect three directors of WFC for terms expiring in 2001;
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.
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 12, 1997, will be entitled to receive notice of and to vote at the
Annual Meeting and at 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 5, 1998 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 1998
Annual Meeting of Shareholders of WFC to be held at Shuller's Wigwam Restaurant,
6210 Hamilton Ave., Cincinnati, Ohio 45224, on January 30, 1998, 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 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 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 J. Bollin, Henry L. Schulhoff and
Thomas H. Humes as directors of WFC for terms expiring in 2001; and
FOR the ratification of the selection of Grant Thornton LLP 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 as of the close of business on December 12,
1997 (the "Voting Record Date"), are eligible to vote at the Annual Meeting and
will be entitled to cast one vote for each share of WFC (the "Common Shares")
owned. WFC's records disclose that, as of the Voting Record Date, there were
2,006,152 votes entitled to be cast at the Annual Meeting.
This Proxy Statement is first being mailed to shareholders of WFC on or
about January 5, 1998.
<PAGE> 3
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and the Code of Regulations of WFC (the "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.
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 LLP ("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 1, 1997:
<TABLE>
<CAPTION>
Amount and Nature Percentage of Common
Name and Address of Beneficial Ownership(1) Shares Outstanding(2)
- ---------------- -------------------------- ---------------------
<S> <C> <C>
Star Bank, N.A., as Trustee 154,481 (3) 7.70%
P.O. Box 1118
Cincinnati, Ohio 45201
Daniel P. Randolph 131,354 (4) 6.55%
Suite 700
105 East Fourth Street
Cincinnati, Ohio 45202
Henry L. Schulhoff 143,900 (5) 7.08%
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 directly or indirectly 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 granted 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 2,006,152 Common Shares
outstanding, plus the number of Common Shares such person may acquire
pursuant to the Option Plan within 60 days, if any.
</TABLE>
(Footnotes continue on next page.)
-2-
<PAGE> 4
(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").
(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; 88,082 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; 8,800 Common Shares owned by Mr. Schulhoff's spouse as to
which Mr. Schulhoff disclaims beneficial ownership; and 7,100 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 1, 1997:
<TABLE>
<CAPTION>
Amount and Nature of Percent of Common
Name and Address (1) Beneficial Ownership (2) Shares Outstanding (3)
- ----------------- --------------------- -------------------
<S> <C> <C>
Robert J. Bollin 46,320 (4) 2.29%
Robert L. Bollin 95,893 (5) 4.69
Robert E. Hoeweler 90,600 (6) 4.46
Thomas H. Humes 6,000 (7) 0.30
Timothy M. Mooney 5,000 (8) 0.25
William J. Parchman 90,880 (9) 4.49
Henry L. Schulhoff 143,900 (10) 7.08
J. Clay Stinnett 5,500 (11) 0.27
All directors and executive officers
of WFC as a group (12 persons) 640,661 (12) 28.95%
- -------------------
<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 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 2,006,152 Common Shares
outstanding, plus the number of Common Shares such person may acquire
pursuant to the Option Plan within 60 days, if any.
(4) 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.
(5) Includes 40,000 Common Shares that may be acquired upon the exercise of
options; 18,494 Common Shares held for the benefit of Robert L. Bollin
in The Winton Savings and Loan Co. Cash and Deferred Plan (the
"Deferred Plan"), the trustees of which are James W. Brigger, Robert L.
Bollin and Mary Ellen Lovett, executive officers of WFC; 16,579 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; 18,040 Common Shares held jointly with Mr. Bollin's
spouse; 800 and 1,200 Common Shares held by Merrill Lynch for the
benefit of Robert L. Bollin and Elaine Bollin, respectively; and 100
Common Shares held by Elaine Bollin as custodian for Anthony Bollin.
</TABLE>
(Footnotes continue on next page.)
-3-
<PAGE> 5
(6) Includes 25,000 Common Shares that may be acquired upon the exercise of
options; 25,800 Common Shares held jointly with Mr. Hoeweler's spouse;
19,900 Common Shares owned as trustee under a trust for the benefit of
Brian Hoeweler; and 19,900 Common Shares owned as trustee under a trust
for the benefit of Jennifer Hoeweler.
(7) Includes 5,000 Common Shares that may be acquired upon the exercise of
an option and 1,000 Common Shares held by Prudential Securities, for
the benefit of Thomas H. and Marcia Humes.
(8) Includes 5,000 Common Shares that may be acquired upon the exercise of
an option.
(9) 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 Mr. Parchman's spouse.
(10) Includes 25,000 Common Shares that may be acquired upon the exercise of
options; 8,800 Common Shares owned by Mr. Schulhoff's spouse, as to
which Mr. Schulhoff disclaims beneficial ownership; and 7,100 Common
Shares owned by Schulhoff & Company, Inc., a corporation of which Mr.
Schulhoff is a major shareholder.
(11) Includes 5,000 Common Shares that may be acquired upon the exercise of
an option and 500 Common Shares held by Merrill Lynch, for the benefit
of J. Clay Stinnett.
(12) Includes 207,000 Common Shares that may be acquired upon the exercise
of options.
BOARD OF DIRECTORS
ELECTION OF DIRECTORS
The Regulations 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. The directors of WFC were first elected in November
1989 when WFC was incorporated. 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 a Nominating Committee for
selecting nominees for election as directors. In accordance with Section 2.03 of
the Regulations, 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.
The Board of Directors proposes the reelection of the following
directors to terms which will expire in 2001:
<TABLE>
<CAPTION>
Name Age (1) Position(s) Held Director Since
---- ---- ---------------- --------------
<S> <C> <C> <C>
Robert J. Bollin (2) 75 Director 1989
Thomas H. Humes 48 Director 1996
Henry L. Schulhoff 53 Director 1989
- -----------------------------
<FN>
(1) As of December 12, 1997.
(2) Robert J. Bollin, a director of WFC, is the father of Robert L. Bollin,
a director and the 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. No shareholder may cumulate votes in the election of
directors. There is presently one vacancy on the Board of Directors in the
-4-
<PAGE> 6
class of directors which will stand for election in January 2000. The vacancy
arose as a result of the decision of Donald G. Avery not to stand for reelection
in 1997.
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 L. Bollin (2) 45 Director and 1989 2000
President
Robert E. Hoeweler 50 Director 1989 1999
Timothy M. Mooney 50 Director 1996 1999
William J. Parchman 78 Director and 1989 2000
Chairman of
the Board
J. Clay Stinnett 46 Director 1996 1999
- -----------------------------
<FN>
(1) As of December 12, 1997.
(2) Robert L. Bollin, a director and the President of WFC, is the son of
Robert J. Bollin, a director of WFC, and a brother of Gregory J.
Bollin, a Vice President of WFC.
</TABLE>
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
Secretary and Chief Executive Officer. He has since retired from his positions
as Secretary and 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.
THOMAS H. HUMES has served as President of Great Traditions Land and
Development Co., a real estate and land development company in Cincinnati, for
the past six years.
HENRY L. SCHULHOFF became a director of Winton in February 1988. Since
1976, Mr. Schulhoff has been the President of Schulhoff and Company, Inc., a
local investment counseling firm.
ROBERT L. BOLLIN has been the President and a director of Winton since
1988 and the President and a director of WFC since incorporation in November
1989. Mr. Bollin joined Winton in 1969, initially working part time while
completing a degree in Business Management at Miami University. 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.
TIMOTHY M. MOONEY has served as Vice President and Chief Financial
Officer of Kendle Research Associates, Inc., a clinical research organization in
Cincinnati since 1996. From 1994 to 1995, he served as Vice President, Chief
Financial Officer and Treasurer of The Future Now, Inc., a computer reseller
located 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. A
graduate of the University of Cincinnati, he received his law degree and 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
-5-
<PAGE> 7
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.
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 20 years in the banking business, including
serving as President and Chief Operating Officer of PNC Bank, N.A. (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, 1997. 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, 1997. 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 Nominating 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.
The members of Winton's Audit Committee are Thomas H. Humes, Timothy M.
Mooney and J. Clay Stinnett. 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 for the fiscal year ended September 30, 1997.
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 40 times during
the fiscal year ended September 30, 1997.
The members of the Nominating Committee are William J. Parchman, Henry
L. Schulhoff, Robert J. Bollin and Robert E. Hoeweler. The Nominating Committee
proposes directors of WFC and Winton for election and considers shareholder
recommendations in selecting nominees. The Nominating Committee met twice during
the fiscal year ended September 30, 1997.
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 45 times during the fiscal year
ended September 30, 1997.
Winton's Compensation Committee consists of Robert L. Bollin, Thomas H.
Humes, Timothy M. Mooney and J. Clay Stinnett. 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 once during the fiscal year ended
September 30, 1997.
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, Robert E. Hoeweler and William J. Parchman. The ESOP Committee
met once during the fiscal year ended September 30, 1997.
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 did not meet during the fiscal year ended
-6-
<PAGE> 8
September 30, 1997. The current members of the Stock Option Committee are Robert
L. Bollin, Robert E. Hoeweler, William J. Parchman 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 once during the fiscal year ended September 30, 1997.
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 45 President and Director
Gregory J. Bollin 43 Vice President
Jill M. Burke 35 Treasurer and Chief
Financial Officer
James W. Brigger 49 Secretary
Mary Ellen Lovett 59 Vice President
- -----------------------------
<FN>
(1) As of November 30, 1997.
</TABLE>
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 1993. Mr. Bollin served as Vice
President of Winton from 1988 until January 1993.
JILL M. BURKE is the Treasurer and Chief Financial Officer of WFC, a
position she has held since 1989. Ms. Burke also serves as Treasurer and
Controller of Winton, a position she has held since 1989.
JAMES W. BRIGGER is the Secretary of WFC, a position he has held since
1989. Mr. Brigger also serves as Vice President of Winton.
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 January 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."
-7-
<PAGE> 9
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 $100,000 in salary and bonus
payments from Winton during the year ended September 30, 1997. The following
table sets forth certain information with respect to compensation paid to the
President and Executive Vice President of Winton:
Summary Compensation Table
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation
Awards
--------------------------------------------------- All Other
Options/SARs Compensation
Name and Principal Position Year Salary($) Bonus($) (#)(1) ($)(2)(3)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert L. Bollin, President 1997 $158,599 $16,000 - $8,352
1996 $153,649 $16,000 20,000 $6,929
1995 $142,467 $15,000 - $8,443
Gregory J. Bollin, Executive 1997 $115,569 $13,000 - $6,293
Vice President 1996 $109,838 $13,000 12,000 $4,791
1995 $ 99,838 $12,000 - $6,683
- -----------------------------
<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 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.
(2) Consists of cash or stock contributions to the ESOP or the reallocation
of forfeited shares in the ESOP of $6,202, $4,862 and $7,463, allocated
to Mr. Robert L. Bollin's account and $2,150, $2,067 and $1,912 in
matching contributions to the Deferred Plan for Mr. Robert L. Bollin's
account for the years ended September 30, 1997, 1996 and 1995,
respectively.
(3) Consists of cash or stock contributions to the ESOP or the reallocation
of forfeited shares in the ESOP of $5,316, $3,982 and $5,768, allocated
to Mr. Gregory J. Bollin's account and $977, $807 and $915 in matching
contributions to the Deferred Plan for Mr. Gregory J. Bollin's account
for the years ended September 30, 1997, 1996 and 1995, respectively.
</TABLE>
-8-
<PAGE> 10
OPTION PLAN
The following table sets forth information regarding the number and
value of unexercised options held by the persons listed in the Summary
Compensation Table.
<TABLE>
<CAPTION>
Aggregate Option/SAR Exercises in Last Fiscal Year and 9/30/97 Option/SAR Values
-------------------------------------------------- -----------------------------
Value of Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options/SARs
Options/SARs at 9/30/97(#) at 9/30/97($)(1)
-------------------------- ----------------
Shares Acquired Value Exercisable/
Name on Exercise(#) Realized ($) Unexercisable Exercisable/
- ---- -- --------------- ------------ -------------
Unexercisable
<S> <C> <C> <C> <C>
Robert L. Bollin - - 40,000 / - $225,000 / -
Gregory J. Bollin - - 24,000 / - $135,000 / -
- ------------------------
<FN>
(1) An option is "in-the-money" if the fair value of the underlying stock
exceeds the market price of the option. 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 $17.375 closing bid price for the Common Shares
reported by the American Stock Exchange, Inc. on September 30, 1997,
the last trading day of the quarter.
</TABLE>
DIRECTOR COMPENSATION
WFC does not pay directors fees. Each director of Winton receives
$12,000 annually for monthly meetings and $100 for each meeting attended of a
committee of the Board of Directors of Winton, 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, 1997. 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 15, 1997.
EMPLOYMENT CONTRACTS
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, 2000. The
employment agreements have a term of three years and provide for an annual
salary of not less than $174,000 for Robert L. Bollin and $128,000 for Gregory
J. Bollin and an annual salary and performance review by the Board of Directors.
The employment agreements require 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 provide 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 and a
continuation of benefits substantially equal to those being provided at the date
of termination of employment
-9-
<PAGE> 11
until the earliest to occur of the expiration of the term of the employment
agreement or the date on which the employee becomes employed full-time by
another employer.
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, he 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 $522,000 and to Gregory J. Bollin would be $384,000,
or three times the greater of the minimum salary levels in the agreements or the
salary levels for fiscal 1997 reflected in the Summary Compensation Table above.
SELECTION OF AUDITORS
The Board of Directors has selected Grant Thornton LLP ("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 LLP AS AUDITORS FOR THE CURRENT FISCAL YEAR.
PROPOSALS OF SECURITY HOLDERS AND OTHER MATTERS
Any proposals of security holders intended to be included in WFC's
proxy statement for the 1997 annual meeting of shareholders should be sent to
WFC by certified mail and must be received by WFC not later than September 7,
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
January 5, 1998 James W. Brigger, Secretary
-10-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 1,367
<INT-BEARING-DEPOSITS> 1,419
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,430
<INVESTMENTS-CARRYING> 27,199
<INVESTMENTS-MARKET> 27,024
<LOANS> 280,544
<ALLOWANCE> 827
<TOTAL-ASSETS> 324,488
<DEPOSITS> 240,317
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,469
<LONG-TERM> 57,425
0
0
<COMMON> 0
<OTHER-SE> 23,277
<TOTAL-LIABILITIES-AND-EQUITY> 324,488
<INTEREST-LOAN> 22,406
<INTEREST-INVEST> 1,940
<INTEREST-OTHER> 207
<INTEREST-TOTAL> 24,553
<INTEREST-DEPOSIT> 12,009
<INTEREST-EXPENSE> 15,036
<INTEREST-INCOME-NET> 9,517
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 36
<EXPENSE-OTHER> 5,907
<INCOME-PRETAX> 4,909
<INCOME-PRE-EXTRAORDINARY> 3,226
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,226
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.62
<YIELD-ACTUAL> 2.88
<LOANS-NON> 393
<LOANS-PAST> 79
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,084
<ALLOWANCE-OPEN> 857
<CHARGE-OFFS> 51
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 827
<ALLOWANCE-DOMESTIC> 64
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 763
</TABLE>
<PAGE> 1
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 because actual results to
differ material 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 1997 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 statement s 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
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
<PAGE> 2
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 prepayment 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, higher
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 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
<PAGE> 3
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 l, 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.
5. Management's efforts to manage delinquencies.
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.
