Dear Shareholders,
We are pleased to present Winton Financial Corporation's Annual Report to
Shareholders for the fiscal year ended September 30, 2000.
Net earnings for fiscal 2000 totaled $3.4 million, or $.74 per diluted share,
reflecting a $677,000 decline in net earnings before merger-related charges. The
reduced earnings level in the current year is primarily attributable to a
$600,000 reduction in after-tax gains on sale of loans. Economic uncertainty
precipitated by six Federal Reserve discount rate increases over the past
eighteen months led to a marked decrease in loan volume compared to prior years'
historical levels. Notwithstanding the reduced earnings, we are very proud that
our earnings performance during fiscal 2000 represented Winton's fourth
consecutive year of double digit returns on shareholders' equity, as well as the
third best annual operating results in the Company's history.
We recognize clearly the overriding significance of earnings to our shareholders
and have sought to provide a foundation for future growth in fiscal 2000. The
starting point for the foundation was expense control. We are pleased to report
that our recurring operating costs increased by less than 1 1/2% during fiscal
2000 and that we have instituted over $400,000 of cost-saving measures which
will be realized in fiscal 2001. We believe that efficient operations are
critical to our future success and we will continue to explore every available
cost-saving opportunity.
Your Board of Directors and management are aware that we are in our tenth
straight year of economic growth. We recognize that this trend cannot continue
forever and have sought to maximize our operating posture in the event of an
economic downturn. Specifically, we have continued to build our loan loss
allowance and have sought to improve the interest rate sensitivity of Winton's
loan portfolio. We believe these strategic stabilizing steps will enable us to
continue successful operations in an ever-increasing competitive environment.
Management believes that the next decade will witness an exponential increase in
banking technology. We continue to explore the feasibility of new technological
products such as enhanced lending software and interactive internet banking
applications. We are committed to keeping Winton at the forefront of banking
technology and will keep you informed of our continued progress.
In conclusion, we are pleased to have completed another successful year and look
eagerly toward our future success.
As always, we thank you for your continued support.
Very truly yours,
/s/Robert L. Bollin /s/William J. Parchman
Robert L. Bollin William J. Parchman
President Chairman of the Board
<PAGE>
Winton Financial Corporation
BUSINESS OF WINTON FINANCIAL
Winton Financial Corporation, an Ohio corporation ("Winton Financial" or the
"Corporation"), is a unitary savings and loan holding company which owns all of
the outstanding common shares of The Winton Savings and Loan Co., an Ohio
savings and loan association ("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 merger transactions with
BenchMark Federal Savings Bank ("BenchMark") and Blue Chip Savings Bank ("Blue
Chip") in June 1999 and January 1996, respectively. Each transaction was
accounted for as a pooling of interests. Winton Savings conducts business from
its principal office in the Monfort Heights area of Cincinnati, Ohio, and its
six branch offices in Hamilton County, Ohio, and one loan production office in
the Western Hills area of Cincinnati.
Winton Savings is principally engaged in the business of making first mortgage
loans to finance the purchase, construction or improvement of residential or
other real property. Such business is conducted through an aggressive marketing
and selling effort of its lending products and services to the communities in
its market area and through the continued development of innovative lending
programs that give Winton Savings a competitive advantage.
Winton Savings also invests in U.S. government guaranteed mortgage-backed
securities 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 and interest repayments, mortgage sales 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
Winton Financial's common shares are listed on the American Stock Exchange, Inc.
("Amex"), under the symbol "WFI." As of December 7, 2000, Winton Financial had
4,412,014 common shares outstanding and held of record by approximately 434
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.
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 fiscal 2000 and 1999. Such sales prices do not
include retail financial markups, markdowns, or commissions. Information
relating to sales prices has been obtained from Amex.
1
<PAGE>
Winton Financial Corporation
MARKET PRICE OF WINTON FINANCIAL'S COMMON SHARES
AND RELATED SECURITY HOLDER MATTERS (CONTINUED)
<TABLE>
<CAPTION>
Cash
Fiscal Year Ending September 30, High Low dividends
2000
<S> <C> <C> <C>
Quarter ending December 31, 1999 $14.94 $12.50 $.080
Quarter ending March 31, 2000 14.00 8.50 .080
Quarter ending June 30, 2000 10.38 7.50 .080
Quarter ending September 30, 2000 11.50 8.63 .080
1999
Quarter ending December 31, 1998 $14.75 $10.88 $.075
Quarter ending March 31, 1999 15.50 12.50 .075
Quarter ending June 30, 1999 13.88 11.00 .075
Quarter ending September 30, 1999 15.50 10.38 .075
</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 amount of its
"well-capitalized" 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 its net earnings for that year to date, plus its retained earnings for
the preceding two years. Savings associations that have total capital in excess
of the "well-capitalized" capital requirement, and that 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 the definition of a "well-capitalized" institution 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>
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. This selected financial data should be read in
conjunction with the consolidated financial statements appearing elsewhere in
this report.
<TABLE>
<CAPTION>
At September 30,
Statement of Financial Condition Data: (1) 2000 1999 1998 1997 1996
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $465,214 $466,278 $408,938 $371,233 $341,680
Interest-bearing deposits in other financial
institutions 672 434 4,879 3,782 1,046
Investment securities (2) 20,030 22,385 20,437 16,231 12,309
Mortgage-backed securities (2) 12,612 13,943 16,801 20,149 24,780
Loans receivable, net (3) 415,447 413,550 351,369 317,830 290,885
Deposits 309,889 312,072 306,343 279,034 261,548
FHLB advances and other borrowings 115,720 116,532 67,404 61,754 51,889
Shareholders' equity - net, restricted 34,006 32,140 30,387 26,610 23,915
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30,
Statement of Earnings Data: (1) 2000 1999 1998 1997 1996
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Total interest income $35,942 $32,896 $30,793 $27,746 $24,131
Total interest expense (23,470) (20,313) (19,112) (17,157) (14,825)
------ ------ ------ ------ ------
Net interest income 12,472 12,583 11,681 10,589 9,306
Provision for losses on loans (125) (160) (86) (6) (279)
------ ------ ------ ------ ------
Net interest income after provision for
losses on loans 12,347 12,423 11,595 10,583 9,027
Other income 1,393 2,234 2,233 1,756 1,600
General, administrative and other expense (8,654) (10,077) (7,606) (7,153) (9,051)
------ ------ ------ ------ ------
Earnings before income taxes 5,086 4,580 6,222 5,186 1,576
Federal income taxes (1,701) (1,640) (2,092) (1,709) (536)
------ ------ ------ ------ ------
Net earnings $ 3,385 $ 2,940 $ 4,130 $ 3,477 $ 1,040
====== ====== ====== ====== ======
Earnings per share
Basic (1) $0.77 $0.67 $0.94 $0.80 $0.24
==== ==== ==== ==== ====
Diluted (1) $0.74 $0.64 $0.90 $0.79 $0.24
==== ==== ==== ==== ====
</TABLE>
------------------------------
(1) The financial data as of and for the fiscal years ended September 30, 1996
through 1998, inclusive, were previously restated to give effect to the
combination with BenchMark. The merger was accounted for using the
pooling-of-interests method of accounting.
(2) Includes securities designated as available for sale. See Note A-2 of the
Consolidated Financial Statements for additional information regarding
Statement of Financial Accounting Standards ("SFAS") No. 115.
(3) Includes loans held for sale.
3
<PAGE>
Winton Financial Corporation
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (CONTINUED)
<TABLE>
<CAPTION>
Year ended September 30,
Other Data: (1) 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Interest rate spread 2.35% 2.63% 2.65% 2.75% 2.72%
Net interest margin 2.70 2.95 3.02 3.07 3.05
Return on average equity (2) 10.19 9.32 14.42 13.76 4.31
Return on average assets (2) .72 .67 1.05 .98 .33
Shareholders' equity to assets 7.31 6.89 7.43 7.17 7.00
Average interest-earning assets to
average interest-bearing liabilities 106.80 106.53 107.43 106.31 106.29
Net interest income to general,
administrative and other expense (2) 144.12 124.87 153.58 148.04 135.78
General, administrative and other
expense to average total assets (2) 1.83 2.30 1.87 2.62 2.86
Nonperforming assets to total
assets .42 .16 .15 .31 .34
Allowance for loan losses to nonperforming
loans 81.50 378.86 220.13 111.72 78.00
Dividend payout ratio 41.56 43.82 25.68 27.21 90.71
Number of:
Loans outstanding 7,021 7,065 6,936 6,616 6,449
Deposit accounts 26,022 26,058 26,503 25,495 25,587
Full service offices 7 7 8 8 8
</TABLE>
------------------------------
(1) The financial data as of and for the fiscal years ended September 30, 1996
through 1998, inclusive, were previously restated to give effect to the
combination with BenchMark. The merger was accounted for using the
pooling-of-interests method of accounting.
(2) Before consideration of merger-related charges during fiscal 1999, the
ratios set forth below would have been as follows:
Return on average equity 13.00%
Return on average assets .94
Net interest income to general, administrative
and other expense 147.98
General, administrative and other expense
to average total assets 1.94
4
<PAGE>
Winton Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
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 2000,
1999 and 1998.
Forward-Looking Statements
In the following pages, management presents an analysis of the financial
condition of Winton Financial as of September 30, 2000, and the results of
operations for fiscal 2000, 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 following
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 Gramm-Leach-Bliley Act, as set forth under "Potential
Impact of Gramm-Leach-Bliley Act on Future Results of Operations;"
4. Management's determination of the amount and adequacy of the allowance for
loan losses as set forth under "Discussion of Changes in Financial
Condition from September 30, 1999 to September 30, 2000," "Comparison of
Results of Operations for the Fiscal Years Ended September 30, 2000 and
1999."
5. Management's opinion as to the effects of recent accounting pronouncements
as set forth under "Effects of Recent Accounting Pronouncements."
5
<PAGE>
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, 1999 to
September 30, 2000
Winton Financial's consolidated assets totaled $465.2 million at September 30,
2000, a decrease of $1.1 million, or .2%, from September 30, 1999 levels.
Management controlled the growth of the Corporation during fiscal 2000 in an
effort to enhance Winton Savings' capital position while simultaneously striving
to improve the Company's interest rate risk position.
Cash and interest-bearing deposits decreased during fiscal 2000 by $58,000, or
2.8%, to $2.0 million at September 30, 2000. Investment securities totaled $20.0
million at September 30, 2000, a decrease of $2.4 million, or 10.5%, from 1999
levels. This decrease resulted from sales and maturities of investment
securities in the amount of $4.6 million during fiscal 2000, which were
partially offset by purchases of $2.5 million.
Loans receivable, including loans held for sale, increased by $1.9 million, or
.5%, during fiscal 2000 to a total of $415.4 million. During fiscal 2000, loan
origination volume totaled $150.8 million, a decrease of $135.7 million, or
47.3%, from fiscal 1999. Winton Savings experienced lower loan origination
volume compared to the previous year's extraordinary level primarily as a result
of the decrease in demand for such loans because of an overall increase in
interest rates in the economy. The growth in the loan portfolio consisted
primarily of $1.7 million in residential real estate construction, $3.2 million
in nonresidential real estate, construction and land loans and $3.5 million in
consumer loans, which were offset by a decline of $1.9 million in one- to
four-family residential loans, $2.4 million in multi-family residential loans, a
$976,000 increase in the level of undisbursed loans in process and a decrease of
$949,000 in loans held for sale. Loan sales volume totaled $50.7 million during
fiscal 2000, a decrease of $48.5 million, or 48.9%, from fiscal 1999 levels.
At September 30, 2000, the allowance for loan losses of Winton Savings totaled
$1.0 million, an increase of $68,000 over the level maintained at September 30,
1999. At September 30, 2000, the allowance represented approximately .23% of the
total loan portfolio and 81.5% of total non-performing loans. At that date, the
ratio of total non-performing loans to total loans amounted to .28% compared to
.06% at September 30, 1999. Nonperforming loans amounted to $1.2 million and
$246,000 at September 30, 2000 and 1999, respectively. Nonperforming loans are
comprised primarily of loans secured by one-to-four family residential real
estate. It is the opinion of management that such loans are adequately
collateralized and no loss is anticipated on nonperforming loans. Although
management believes that its allowance for loan losses at September 30, 2000 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 $309.9 million at September 30, 2000, a decrease of $2.2
million, or .7%, from 1999 levels. This decrease resulted from a $4.1 million
reduction in passbook accounts and a $629,000 decrease in certificates of
deposit, which were offset by an increase in NOW and money market accounts of
$2.6 million. During fiscal 2000, management elected to replace maturing
brokered certificates of deposit, which declined by $5.7 million, or 20.9%, with
specifically marketed certificate of deposit offerings. Such brokered deposits
totaled approximately $21.6 million and $27.3 million at September 30, 2000 and
1999, respectively.
6
<PAGE>
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, 1999 to
September 30, 2000 (continued)
Advances from the FHLB and other borrowings totaled $115.7 million at September
30, 2000, a decrease of $812,000, or .7%, from the amount outstanding at
September 30, 1999. Management generally utilizes such advances as an
alternative source of funding loan originations.
Shareholders' equity totaled $34.0 million at September 30, 2000, an increase of
$1.9 million, or 5.8%, over the September 30, 1999 total. The increase resulted
primarily from net earnings of $3.4 million, coupled with $55,000 in proceeds
from the exercise of stock options, which were partially offset by dividends on
common shares totaling $1.4 million.
Comparison of Results of Operations for the Fiscal Years Ended September 30,
2000 and 1999
General
Net earnings for the fiscal year ended September 30, 2000, totaled $3.4 million,
a $445,000, or 15.1%, increase over the $2.9 million in net earnings reported
for fiscal 1999. In fiscal 1999, Winton recorded an after-tax charge of $1.1
million for costs associated with the acquisition of BenchMark. Before
consideration of these merger costs, net earnings amounted to $4.1 million in
fiscal 1999. The decrease in earnings, before merger-related charges, of
$677,000, or 16.7%, resulted primarily from an $841,000 decline in other income,
a $151,000 increase in general, administrative and other expense, a $111,000
decline in net interest income, and a $182,000 increase in the provision for
federal income taxes, which were partially offset by a $35,000 decline in the
provision for loan losses.
Net Interest Income
Total interest income amounted to $35.9 million for fiscal 2000, an increase of
$3.0 million, or 9.3%, over fiscal 1999. The increase resulted primarily from a
$35.0 million, or 8.2%, increase in average interest-earning assets year to year
and an 8 basis point increase in the weighted-average yield, to 7.78% in fiscal
2000. Interest income on loans and mortgage-backed securities totaled $34.3
million in fiscal 2000, an increase of $3.1 million, or 9.9%, over fiscal 1999.
This increase resulted primarily from a $35.2 million, or 8.8%, increase in the
average balance outstanding and an increase in yield from 7.84% in 1999 to 7.92%
in fiscal 2000. Interest income on investment securities and interest-bearing
deposits totaled $1.6 million, a $43,000, or 2.6%, decrease from fiscal 1999,
due primarily to a $230,000 decrease in the average balance outstanding and a
decrease in yield from 5.80% in 1999 to 5.70% in fiscal 2000.
Interest expense on deposits totaled $15.9 million for fiscal 2000, an increase
of $622,000, or 4.1%, over fiscal 1999. The increase resulted primarily from an
increase in the average cost of deposits from 4.91% in fiscal 1999 to 5.08% in
fiscal 2000 and an increase in the average balance outstanding of $1.9 million.
Interest expense on borrowings totaled $7.6 million for fiscal 2000, an increase
of $2.5 million, or 49.9%, over fiscal 1999 due primarily to a $29.9 million, or
33.1%, increase in the average balance outstanding and an increase of 71 basis
points in the average cost of borrowings, to 6.33% in fiscal 2000.
7
<PAGE>
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,
2000 and 1999 (continued)
Net Interest Income (continued)
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $111,000, or .9%, to $12.5 million for fiscal
2000, compared to $12.6 million for fiscal 1999. The interest rate spread
declined by 28 basis points, from 2.63% for fiscal 1999 to 2.35% for fiscal
2000. The net interest margin amounted to 2.70% for fiscal 2000, compared to
2.95% for fiscal 1999.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Company, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Company's
market area, and other factors related to the collectibility of the Company's
loan portfolio. As a result of such analysis, management recorded a $125,000
provision for losses on loans during fiscal 2000, compared to a provision of
$160,000 recorded in fiscal 1999. The fiscal 2000 provision was based primarily
upon growth in the loan portfolio during the year and the increase in
nonperforming loans. 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 decreased by $841,000, or 37.6%, for the fiscal year ended
September 30, 2000, compared to fiscal 1999, due to a $906,000, or 66.2%,
decrease in gain on sale of mortgage loans and the effects of a $70,000 gain on
real estate acquired through foreclosure recorded in fiscal 1999, which were
partially offset by an increase of $147,000 in mortgage servicing fees and a
gain on sale of investments of $8,000. The decrease in gain on sale of loans
resulted primarily from a $48.5 million, or 48.9%, decline in sales volume year
to year, due to the overall increase in interest rates during the period. The
increase in net mortgage servicing fees generally reflects the effects of a
reduction in amortization of capitalized mortgage servicing rights year to year.
General, Administrative and Other Expense
General, administrative and other expense increased by $151,000, or 1.8%, for
the year ended September 30, 2000, compared to the same period in 1999,
excluding the $1.6 million of one-time pre-tax merger-related charges recorded
in fiscal 1999. The increase consisted of a $293,000, or 6.8%, increase in
employee compensation and benefits, a $51,000, or 18.6%, increase in advertising
expense, and a $14,000 increase in occupancy and equipment expense. These
increases were partially offset by a $139,000, or 9.1%, decrease in other
operating expense, a $37,000, or 20.8%, decrease in federal deposit insurance
premiums, and a decrease in franchise taxes of $31,000, or 8.6%. The increase in
employee compensation and benefits resulted primarily from a reduction in
deferred salary costs due to a decrease in loan production
8
<PAGE>
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,
2000 and 1999 (continued)
General, Administrative and Other Expense (continued)
volume, coupled with normal merit increases. Also, during fiscal 2000, a
one-time payment was made to an executive officer for early retirement. The
decrease in other operating expense was attributable to efficiencies realized in
the merger with BenchMark. The decrease in federal deposit insurance premiums
was due to a reduction in insurance premium rates.
Federal Income Taxes
The provision for federal income taxes was $1.7 million for fiscal 2000, an
increase of $61,000, or 3.7%, compared to fiscal 1999. This increase resulted
primarily from the increase in net earnings before taxes of $506,000, or 11.0%,
which was partially offset by the effects of the nondeductible merger-related
expenses recorded in fiscal 1999. Winton Financial's effective tax rates were
33.4% and 35.8% for the fiscal years ended September 30, 2000 and 1999,
respectively.
Comparison of Results of Operations for the Fiscal Years Ended September 30,
1999 and 1998
General
Net earnings for fiscal 1999 totaled $2.9 million, a decrease of $1.2 million,
or 28.8%, from the $4.1 million in net earnings recorded in fiscal 1998. The
decrease in net earnings was primarily attributable to a $1.6 million charge for
merger-related costs, an increase of $74,000 in the provision for losses on
loans and an increase of $897,000 in general, administrative and other expense
net of the merger-related costs, which were partially offset by an increase of
$902,000 in net interest income and a decrease of $452,000 in the provision for
federal income taxes.
Net Interest Income
Total interest income amounted to $32.9 million for fiscal 1999, an increase of
$2.1 million, or 6.8%, over fiscal 1998. The increase resulted primarily from a
$40.4 million, or 10.4%, increase in average interest-earning assets year to
year, which was partially offset by a 26 basis point decline in the
weighted-average yield, to 7.70% in fiscal 1999. Interest income on loans and
mortgage-backed securities totaled $31.2 million in fiscal 1999, an increase of
$2.0 million, or 6.8%, over fiscal 1998. This increase resulted primarily from a
$37.4 million, or 10.4%, increase in the average balance outstanding, offset by
a decrease in yield, from 8.11% in 1998 to 7.84% in 1999. Interest income on
investment securities and interest-bearing deposits totaled $1.7 million, a
$121,000, or 7.8%, increase over fiscal 1998, due primarily to a $3.0 million
increase in the average balance outstanding, offset by a decrease in yield from
6.00% in 1998 to 5.80% in 1999.
9
<PAGE>
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,
1999 and 1998 (continued)
Net Interest Income (continued)
Interest expense on deposits totaled $15.2 million for fiscal 1999, an increase
of $176,000, or 1.2%, over fiscal 1998. The increase resulted primarily from a
$19.4 million, or 6.7%, increase in the average balance outstanding, partially
offset by a decrease in the average cost of deposits, from 5.17% in fiscal 1998
to 4.91% in fiscal 1999. Interest expense on borrowings totaled $5.1 million for
fiscal 1999, an increase of $1.0 million, or 25.3%, over fiscal 1998, due
primarily to a $21.5 million, or 31.3%, increase in the average balance
outstanding, partially offset by a decrease of 27 basis points in the average
cost of borrowings, to 5.62% in fiscal 1999.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $902,000, or 7.7%, to a total of $12.6 million
for fiscal 1999, compared to $11.7 million for fiscal 1998. The interest rate
spread declined by two basis points, from 2.65% for fiscal 1998 to 2.63% for
fiscal 1999. The net interest margin amounted to 2.95% for fiscal 1999, compared
to 3.02% for fiscal 1998.
Provision for Losses on Loans
As a result of an analysis of 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, management recorded a $160,000 provision for
losses on loans during fiscal 1999, an increase of $74,000, or 86.0%, over
fiscal 1998. The fiscal 1999 provision was due primarily to growth in the loan
portfolio during the year.
Other Income
Other income totaled $2.2 million for each of the fiscal years ended September
30, 1999 and September 30, 1998. During fiscal 1999, the Company realized a
$70,000 increase in gain on sale of real estate acquired through foreclosure and
a $148,000, or 29.2%, increase in other operating income, due primarily to an
increase in ATM surcharge income, which were partially offset by a decrease of
$205,000, or 13.0%, in gain on sale of mortgage loans and a $12,000, or 7.8%,
decrease in net mortgage servicing fees. The decrease in gain on sale of
mortgage loans was due to decreased sales volume year to year.
10
<PAGE>
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,
1999 and 1998 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $10.1 million for fiscal 1999,
an increase of $2.5 million, or 32.5%, over fiscal 1998. The increase was due
primarily to merger-related costs of $1.6 million, coupled with a $576,000, or
15.3%, increase in employee compensation and benefits, a $176,000, or 11.0%,
increase in occupancy and equipment and a $130,000, or 9.3%, increase in other
operating expense.
The Corporation incurred merger related costs as a result of the combination
with BenchMark during fiscal 1999. 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 occupancy and equipment expense
was due primarily to an increase in depreciation expense associated with the
renovation of the main office which was completed in early fiscal 1999. The
increase in other operating expenses was 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 totaled $1.6 million for fiscal 1999, a
decrease of $452,000, or 21.6%, compared to fiscal 1998. This decrease resulted
primarily from the decrease in net earnings before taxes of $1.6 million, or
26.4%, which was partially offset by the effects of nondeductible merger costs.
Winton Financial's effective tax rates were 35.8% and 33.6% for the fiscal years
ended September 30, 1999 and 1998, respectively.
11
<PAGE>
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
The following table sets forth certain information relating to Winton
Financial'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,
2000 1999
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) $420,024 $33,521 7.98% $382,745 $30,343 7.93%
Mortgage-backed securities - available for sale 376 26 6.91 478 31 6.49
Mortgage-backed securities - held to maturity 12,865 759 5.90 14,839 843 5.68
Investment securities - available for sale 4,247 227 5.34 5,364 303 5.65
Investment securities - held to maturity 17,561 955 5.44 15,911 882 5.54
Interest-bearing deposits and other 6,908 454 6.57 7,671 494 6.44
------- ------ ------ ------- ------ ------
Total interest-earning assets 461,981 35,942 7.78 427,008 32,896 7.70
Non-interest-earning assets 10,721 10,816
------- -------
Total assets $472,702 $437,824
======= =======
Interest-bearing liabilities:
Deposits $312,338 15,857 5.08 $310,471 15,235 4.91
FHLB advances and other borrowings 120,239 7,613 6.33 90,365 5,078 5.62
------- ------ ------ ------- ------ ------
Total interest-bearing liabilities 432,577 23,470 5.43 400,836 20,313 5.07
------ ------ ------ ------
Non-interest-bearing liabilities 6,912 5,455
------- -------
Total liabilities 439,489 406,291
Shareholders' equity 33,213 31,533
------- -------
Total liabilities and shareholders' equity $472,702 $437,824
======= =======
Net interest income/Interest rate spread $12,472 2.35% $12,583 2.63%
====== ====== ====== ======
Net interest margin (net interest income as a
percent of average interest-earning assets) 2.70% 2.95%
====== ======
Average interest-earning assets to interest-bearing liabilities 106.80% 106.53%
====== ======
Year ended September 30,
1998
Average Interest
outstanding earned/ Yield/
balance paid rate
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $342,109 $28,102 8.21%
Mortgage-backed securities - available for sale 687 46 6.70
Mortgage-backed securities - held to maturity 17,840 1,087 6.09
Investment securities - available for sale 4,889 279 5.71
Investment securities - held to maturity 13,590 835 6.14
Interest-bearing deposits and other 7,495 444 5.92
------- ------ ------
Total interest-earning assets 386,610 30,793 7.96
Non-interest-earning assets 6,483
-------
Total assets $393,093
=======
Interest-bearing liabilities:
Deposits $291,038 15,059 5.17
FHLB advances and other borrowings 68,824 4,053 5.89
------- ------ ------
Total interest-bearing liabilities 359,862 19,112 5.31
Non-interest-bearing liabilities 4,589
-------
Total liabilities 364,451
Shareholders' equity 28,642
-------
Total liabilities and shareholders' equity $393,093
=======
Net interest income/Interest rate spread $11,681 2.65%
====== ======
Net interest margin (net interest income as a
percent of average interest-earning assets) 3.02%
======
Average interest-earning assets to interest-bearing liabilities 107.43%
======
</TABLE>
---------------------------
(1) Includes loans held for sale and nonaccrual loans.
12
<PAGE>
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 Financial'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>
Year ended September 30,
2000 vs. 1999 1999 vs. 1998
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) $2,974 $ 204 $3,178 $3,230 $ (989) $2,241
Mortgage-backed securities - available
for sale (6) 1 (5) (14) (1) (15)
Mortgage-backed securities - held to
maturity (115) 31 (84) (174) (70) (244)
Investment securities - available for sale (61) (15) (76) 27 (3) 24
Investment securities - held to maturity 90 (17) 73 135 (88) 47
Other interest-earning assets (2) (51) 11 (40) 10 40 50
----- ------ ----- ----- ----- -----
Total interest income 2,831 215 3,046 3,214 (1,111) 2,103
Interest expense attributable to:
Deposits 93 529 622 963 (787) 176
Borrowings 1,833 702 2,535 1,218 (193) 1,025
----- ------ ----- ----- ----- -----
Total interest expense 1,926 1,231 3,157 2,181 (980) 1,201
----- ------ ----- ----- ----- -----
Increase (decrease) in net interest income $ 905 $(1,016) $ (111) $1,033 $ (131) $ 902
===== ====== ===== ===== ===== =====
</TABLE>
------------------------------
(1) Includes loans held for sale.
(2) Includes interest-bearing deposits.
13
<PAGE>
Winton Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset/Liability Management
Winton Financial's 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 interest-earning assets and interest-bearing liabilities,
Winton Financial's earnings will be affected differently under various interest
rate scenarios. Management believes that the steps which Winton Financial has
taken in asset/liability management may reduce the overall vulnerability of
Winton Financial's 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. In order to better compete for
deposits, however, Winton Savings has offered market-sensitive certificates of
deposit, which result in increased interest expense in rising rate environments.
At September 30, 2000, approximately $161.0 million, or 34.3%, of Winton
Savings' portfolio of interest-earning assets had adjustable rates.
Winton Financial's principal financial objective is to enhance long-term
profitability while reducing exposure to increases in interest rates. To
accomplish this objective, Winton Financial 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 an investment
portfolio with a relatively short term to maturity, (3) to lengthen the
maturities of liabilities to the extent practicable by marketing longer term
certificates of deposit, and (4) 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, subject to repricing within a
three-year time frame, 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.
14
<PAGE>
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. 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. Pursuant to the pending OTS amendment to the
capital regulations, 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.
At September 30, 2000, 2% of the present value of Winton Savings' assets was
approximately $9.3 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 $14.5 million at September 30, 2000, Winton
Savings would have been required to reduce its capital by approximately $2.6
million in determining whether Winton Savings met its risk-based capital
requirement, if such regulation had been in effect for Winton Savings.
Regardless of such reduction, however, Winton Savings' risk-based capital at
September 30, 2000, would still have exceeded the regulatory requirement by
approximately $7.7 million.
The September 30, 2000 table expresses an analysis of interest rate risk as
measured by the change in the NPV ratio for instantaneous and sustained parallel
shifts of 100-300 basis points in market interest rates. This is a change from
previous years analysis using the percentage change.
<TABLE>
<CAPTION>
Board limit
Change in interest rate NPV Ratio September 30, 2000
(Basis Points) not less than NPV Ratio
<S> <C> <C>
+300 4.00% 3.75%
+200 6.00 5.29
+100 6.50 6.78
- 7.00 8.17
-100 7.50 9.31
-200 8.00 10.23
-300 8.50 11.13
</TABLE>
15
<PAGE>
Winton Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Asset and Liability Management (continued)
<TABLE>
<CAPTION>
September 30, 1999
Change in interest rate Board limit $ Change % Change
(Basis Points) % change in NPV in NPV
(In thousands)
<S> <C> <C> <C>
+300 (65)% $(23,037) (69)%
+200 (40) (15,145) (46)
+100 (20) (7,272) (22)
- - - -
-100 10 5,917 18
-200 20 11,593 35
-300 30 17,486 53
</TABLE>
Due to the Federal Reserve's six increases in the discount rate over the past 18
months, Winton Savings is currently deviating from Board limits established at
the +200 and +300 basis point increase shock level. To improve the rate
sensitivity of the Company's interest rate risk exposure, Winton Savings'
management has steadily increased capital levels and restrained growth of the
Company.
As further illustrated in the table, the Company's 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 the
above 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.
16
<PAGE>
Winton Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
Winton Savings, like other financial institutions, is required under applicable
federal regulations to maintain sufficient funds to meet deposit withdrawals,
loan commitments and expenses. Control of the Company's cash flow requires the
anticipation of deposit flows and loan payments. The Company's primary sources
of funds are deposits, borrowings, principal and interest repayments on loans
and proceeds from the sale of mortgage loans.
At September 30, 2000, Winton Savings had $138.5 million of certificates of
deposit maturing within one year. It has been the Company's historic experience
that such certificates of deposit will be renewed at market rates of interest.
It is management's belief that maturing certificates of deposit over the next
year will similarly be renewed at market rates of interest without a material
adverse effect on results of operations.
In the event that certificates of deposit cannot be renewed at prevailing market
rates, the Company can obtain additional advances from the FHLB of Cincinnati.
At September 30, 2000, the Company had $113.7 million of outstanding FHLB
advances. The Company has also utilized brokered deposits as a supplement to its
local deposits when such funds are attractively priced in relation to the local
market. As of September 30, 2000, the Company had $21.6 million in brokered
deposits.
The Company's liquidity, represented by cash and cash-equivalents, is a function
of its operating, investing and financing activities. These activities are
summarized below for the periods indicated.
<TABLE>
<CAPTION>
For the year ended September 30,
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Net earnings $3,385 $ 2,940 $ 4,130
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities 1,317 6,722 (3,744)
----- ------ ------
Net cash provided by operating activities 4,702 9,662 386
Net cash used in investing activities (534) (68,535) (31,507)
Net cash provided by (used in) financing activities (4,226) 53,878 32,554
----- ------ ------
Net increase (decrease) in cash and
cash equivalents (58) (4,995) 1,433
Cash and cash equivalents at beginning of year 2,081 7,076 5,643
----- ------ ------
Cash and cash equivalents at end of year $2,023 $ 2,081 $ 7,076
===== ====== ======
</TABLE>
The OTS requires minimum levels of liquid assets. OTS regulations presently
require Winton Savings to maintain specified levels of "liquid" investments in
qualifying types of United States Government and agency obligations and other
permissible investments having certain maturity limitations and marketability
requirements. Such minimum requirement is an amount equal to 4% of the sum of
the Company's average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement, which may be
changed from time to time by the OTS to reflect changing economic conditions, is
intended to provide a source of relatively liquid funds upon which the Company
may rely, if necessary, to fund deposit withdrawals and other short-term funding
needs.
17
<PAGE>
Winton Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
The liquidity of Winton Savings, as measured by the ratio of cash, cash
equivalents (not committed, pledged or required to liquidate specific
liabilities) and qualifying investments, including mortgage-backed securities
and loans, to the sum of net withdrawable savings plus borrowings payable within
one year, was 13.1% at September 30, 2000. At September 30, 2000, the Company's
"liquid" assets totaled approximately $34.1 million, which was approximately
$23.7 million in excess of the current OTS minimum requirement. Winton Financial
believes that the Company's liquidity posture at September 30, 2000, 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, 2000, Winton Savings' tangible capital of $35.0
million, or 7.5% of adjusted total assets, exceeded the 1.5% requirement by
$28.0 million; its core capital of $35.0 million, or 7.5% of adjusted total
assets, exceeded the minimum 4.0% requirement by $16.4 million; and its
risk-based capital of $36.0 million, or 11.2% of risk-weighted assets, exceeded
the 8% requirement by $10.3 million.
Potential Impact of Gramm-Leach-Bliley Act on Future Results of Operations
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was enacted
into law. The GLB Act repealed prior laws that had generally prevented banks
from affiliating with securities and insurance firms and made other significant
changes in financial services in which various types of financial institutions
may engage.
Prior to the GLB Act, unitary savings and loan holding companies which met
certain requirements were the only financial institution holding companies that
were permitted to engage in any type of business activity, whether or not the
activity was a financial service. The GLB Act continues those broad powers for
unitary thrift holding companies in existence on May 4, 1999, including Winton
Financial. Any thrift holding company formed after May 4, 1999, however, will be
subject to the same restrictions as multiple thrift holding companies, which
generally are limited to activities that are considered incidental to banking.
The GLB Act authorizes a new "financial holding company," which can own banks
and thrifts and which is also permitted to engage in a variety of financial
activities, including insurance and securities underwriting and agency
activities, as long as the depository institutions it owns are well capitalized,
well managed and meet certain other tests.
The GLB Act is not expected to have a material effect on the activities in which
Winton Financial and Winton Savings currently engage, except to the extent that
competition with other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
18
<PAGE>
Winton Financial Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Effects of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
requires entities to recognize all derivatives in their financial statements as
either assets or liabilities measured at fair value. SFAS No. 133 also specifies
new methods of accounting for hedging transactions, prescribes the items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. On adoption, entities are permitted to transfer
held-to-maturity debt securities to the available-for-sale or trading category
without calling into question their intent to hold other debt securities to
maturity in the future. Winton Financial adopted SFAS No. 133 effective October
1, 2000, as required, without material effect on Winton Financial's financial
position or results of operations.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which revises
the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but carries
over most of the provisions of SFAS No. 125 without reconsideration. SFAS No.
140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001, and is effective
for recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. SFAS No. 140 is not expected to have a material effect on
Winton Financial's financial position or results of operations.
The foregoing discussion of the effects of recent accounting pronouncements
contains forward-looking statements that involve risks and uncertainties.
Changes in economic circumstances or interest rates could cause the effects of
the accounting pronouncements to differ from management's foregoing assessment.
19
<PAGE>
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, 2000 and 1999, and the
related consolidated statements of earnings, comprehensive income, shareholders'
equity and cash flows for each of the years in the three year period ended
September 30, 2000. 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, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the years in the three year period
ended September 30, 2000, in conformity with generally accepted accounting
principles.
/s/GRANT THORNTON LLP
Cincinnati, Ohio
November 20, 2000
20
<PAGE>
Winton Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
ASSETS 2000 1999
<S> <C> <C>
Cash and due from banks $ 1,351 $ 1,647
Interest-bearing deposits in other financial institutions 672 434
------- -------
Cash and cash equivalents 2,023 2,081
Investment securities available for sale - at market 4,273 5,503
Investment securities held to maturity - at amortized cost, approximate market
value of $15,661 and $16,774 at September 30, 2000 and 1999 15,757 16,882
Mortgage-backed securities available for sale - at market 345 410
Mortgage-backed securities held to maturity - at amortized cost, approximate
market value of $11,850 and $13,058 at September 30, 2000 and 1999 12,267 13,533
Loans receivable - net 413,904 411,058
Loans held for sale - at lower of cost or market 1,543 2,492
Office premises and equipment - at depreciated cost 3,418 3,708
Real estate acquired through foreclosure 716 492
Federal Home Loan Bank stock - at cost 6,941 5,925
Accrued interest receivable on loans 2,910 2,890
Accrued interest receivable on mortgage-backed securities 88 90
Accrued interest receivable on investments and interest-bearing deposits 247 247
Prepaid expenses and other assets 502 433
Intangible assets - net of amortization 280 341
Prepaid federal income taxes - 193
------- -------
Total assets $465,214 $466,278
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $309,889 $312,072
Advances from the Federal Home Loan Bank 113,720 116,532
Other borrowed money 2,000 -
Accounts payable on mortgage loans serviced for others 786 838
Advance payments by borrowers for taxes and insurance 1,148 1,023
Other liabilities 1,678 1,990
Accrued federal income taxes 274 -
Deferred federal income taxes 1,713 1,683
------- -------
Total liabilities 431,208 434,138
Commitments - -
Shareholders' equity
Preferred stock - 2,000,000 shares without par value authorized;
no shares issued - -
Common stock - 18,000,000 shares without par value authorized;
4,412,014 and 4,403,714 shares issued and outstanding - -
Additional paid-in capital 9,972 9,917
Retained earnings - restricted 23,593 21,619
Accumulated other comprehensive income, unrealized gains on
securities designated as available for sale, net of related tax effects 441 604
------- -------
Total shareholders' equity 34,006 32,140
------- -------
Total liabilities and shareholders' equity $465,214 $466,278
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
Winton Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except share data)
2000 1999 1998
<S> <C> <C> <C>
Interest income
Loans $33,521 $30,343 $28,102
Mortgage-backed securities 785 874 1,133
Investment securities 1,182 1,185 1,114
Interest-bearing deposits and other 454 494 444
------ ------ ------
Total interest income 35,942 32,896 30,793
Interest expense
Deposits 15,857 15,235 15,059
Borrowings 7,613 5,078 4,053
------ ------ ------
Total interest expense 23,470 20,313 19,112
------ ------ ------
Net interest income 12,472 12,583 11,681
Provision for losses on loans 125 160 86
------ ------ ------
Net interest income after provision for losses on loans 12,347 12,423 11,595
Other income
Gain on sale of mortgage loans 462 1,368 1,573
Gain on sale of investment securities designated as available for sale 8 - -
Gain (loss) on sale of real estate acquired through foreclosure (2) 70 -
Mortgage servicing fees, net 289 142 154
Other operating 636 654 506
------ ------ ------
Total other income 1,393 2,234 2,233
General, administrative and other expense
Employee compensation and benefits 4,624 4,331 3,755
Occupancy and equipment 1,788 1,774 1,598
Federal deposit insurance premiums 141 178 175
Franchise taxes 330 361 356
Amortization of intangible assets 61 61 61
Advertising 325 274 267
Other operating 1,385 1,524 1,394
Merger related costs - 1,574 -
------ ------ ------
Total general, administrative and other expense 8,654 10,077 7,606
------ ------ ------
Earnings before income taxes 5,086 4,580 6,222
Federal income taxes
Current 1,590 1,541 1,702
Deferred 111 99 390
------ ------ ------
Total federal income taxes 1,701 1,640 2,092
------ ------ ------
NET EARNINGS $ 3,385 $ 2,940 $ 4,130
====== ====== ======
EARNINGS PER SHARE
Basic $.77 $.67 $.94
=== === ===
Diluted $.74 $.64 $.90
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
Winton Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended September 30,
(In thousands)
2000 1999 1998
<S> <C> <C> <C>
Net earnings $3,385 $2,940 $4,130
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during
the period, net of tax of $(81), $7 and $148 in
2000, 1999 and 1998, respectively (158) 14 288
Reclassification adjustment for realized gains
included in earnings, net of tax of $3 in 2000 (5) - -
----- ----- -----
Comprehensive income $3,222 $2,954 $4,418
===== ===== =====
Accumulated comprehensive income $ 441 $ 604 $ 590
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
Winton Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 2000, 1999 and 1998
(In thousands, except share data)
Unrealized
gains on
Additional securities
Preferred Common paid-in available Retained
stock stock capital for sale earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1997 $ - $ - $7,402 $302 $18,906 $26,610
Stock dividend effected in the form of a 2-for-1 stock split - - 2,007 - (2,007) -
Proceeds from shares issued under stock option and
compensation plans - - 418 - - 418
Net earnings for the year ended September 30, 1998 - - - - 4,130 4,130
Unrealized gains on securities designated as available for
sale, net of related tax effects - - - 288 - 288
Cash dividends of $.2414 per share - - - - (1,059) (1,059)
--- --- ----- --- ------ ------
Balance at September 30, 1998 - - 9,827 590 19,970 30,387
Proceeds from exercise of stock options - - 90 - - 90
Net earnings for the year ended September 30, 1999 - - - - 2,940 2,940
Unrealized gains on securities designated as available for
sale, net of related tax effects - - - 14 - 14
Cash dividends of $.2936 per share - - - - (1,291) (1,291)
--- --- ----- --- ------ ------
Balance at September 30, 1999 - - 9,917 604 21,619 32,140
Proceeds from exercise of stock options - - 55 - - 55
Net earnings for the year ended September 30, 2000 - - - - 3,385 3,385
Unrealized losses on securities designated as available
for sale, net of related tax effects - - - (163) - (163)
Cash dividends of $.32 per share - - - - (1,411) (1,411)
--- --- ----- --- ------ ------
Balance at September 30, 2000 $ - $ - $9,972 $441 $23,593 $34,006
=== === ===== === ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
Winton Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
2000 1999 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 3,385 $ 2,940 $ 4,130
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Amortization of premiums on investments and mortgage-backed
securities 54 65
48
Amortization of deferred loan origination fees (50) (87) (186)
Depreciation and amortization 530 525 470
Amortization of intangible assets 61 61 61
Gain on sale of investment securities designated as available for sale (8) - -
Loss on merger-related disposition of office premises and equipment - 174 -
(Gain) loss on sale of real estate acquired through foreclosure 2 (70) -
Provision for losses on loans 125 160 86
Gain on sale of mortgage loans (398) (1,179) (1,204)
Loans disbursed for sale in the secondary market (49,797) (93,494) (108,747)
Proceeds from sale of loans in the secondary market 51,144 100,434 105,908
Federal Home Loan Bank stock dividends (473) (346) (286)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (20) (186) (225)
Accrued interest receivable on mortgage-backed securities 2 30 24
Accrued interest receivable on investments and interest-bearing
deposits - 38 (44)
Prepaid expenses and other assets (69) 147 (91)
Accounts payable on mortgage loans serviced for others (52) (125) 59
Other liabilities (312) 525 168
Federal income taxes
Current 467 (49) (175)
Deferred 111 99 390
------- ------- -------
Net cash provided by operating activities 4,702 9,662 386
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 1,301 2,813 3,288
Proceeds from maturity of investment securities 3,100 8,150 7,150
Proceeds from sale of investment securities designated as
available for sale 1,500 - -
Purchase of investment securities designated as held to maturity (1,255) (10,095) (9,428)
Purchase of investment securities designated as available for sale (1,250) - (1,495)
Loan principal repayments 97,218 122,174 101,551
Loan disbursements (101,042) (192,998) (137,676)
Sale of loan participations 903 2,730 6,729
Proceeds from sale of real estate acquired through foreclosure 180 249 34
Purchase and renovation of office premises and equipment (222) (556) (873)
Additions to real estate acquired through foreclosure (424) (15) -
Purchase of Federal Home Loan Bank stock (543) (987) (787)
------- ------- -------
Net cash used in investing activities (534) (68,535) (31,507)
------- ------- -------
Net cash provided by (used in) operating and investing activities
(subtotal carried forward) 4,168 (58,873) (31,121)
------- ------- -------
</TABLE>
25
<PAGE>
Winton Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
2000 1999 1998
<S> <C> <C> <C>
Net cash provided by (used in) operating and investing activities
(balance brought forward) $ 4,168 $(58,873) $(31,121)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts, including
purchased deposits (2,183) 5,729 27,309
Proceeds from Federal Home Loan Bank advances 64,350 66,000 79,539
Repayment of Federal Home Loan Bank advances (65,162) (16,872) (73,889)
Advances by borrowers for taxes and insurance 125 222 236
Proceeds from issuance of shares under stock option and
compensation plans 55 90 418
Dividends paid on common stock (1,411) (1,291) (1,059)
------ ------- -------
Net cash provided by (used in) financing activities (4,226) 53,878 32,554
------ ------- -------
Net increase (decrease) in cash and cash equivalents (58) (4,995) 1,433
Cash and cash equivalents at beginning of year 2,081 7,076 5,643
------ ------- -------
Cash and cash equivalents at end of year $ 2,023 $ 2,081 $ 7,076
====== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 1,117 $ 1,581 $ 1,805
====== ======= =======
Interest on deposits and borrowings $23,407 $ 20,157 $ 18,984
====== ======= =======
Supplemental disclosure of noncash investing activities:
Transfer from loans to real estate acquired through
foreclosure $ 424 $ 567 $ 52
====== ======= =======
Issuance of mortgage loans upon sale of real estate
acquired through foreclosure $ 152 $ 488 $ 74
====== ======= =======
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ (163) $ 14 $ 288
====== ======= =======
Recognition of mortgage servicing rights in
accordance with SFAS No. 125 $ 64 $ 189 $ 369
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Winton Financial Corporation ("Winton Financial" or the "Corporation") is a
savings and loan holding company whose activities are primarily limited to
holding the stock of The Winton Savings and Loan Co. ("Winton Savings" or
the "Company"). The Company 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 Company'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 Company 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.
The following is a summary of the significant accounting policies which have
been consistently applied in the preparation of the accompanying
consolidated financial statements.
1. Principles of Consolidation
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, 2000 and 1999, and
for the fiscal years ended September 30, 2000, 1999 and 1998. All
significant intercompany balances and transactions have been eliminated in
the accompanying consolidated financial statements.
27
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
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, 2000 and 1999, the Corporation's
shareholders' equity reflected net unrealized gains on securities designated
as available for sale totaling $441,000 and $604,000, 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,
2000 and 1999, loans held for sale were carried at cost.
Winton Savings accounts for mortgage servicing rights pursuant to the
provisions of SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which requires that
Winton Savings 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 must allocate some of the cost of the loans to
mortgage servicing rights.
28
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loans Receivable (continued)
SFAS No. 125 requires that capitalized mortgage servicing rights and
capitalized excess servicing receivables be assessed for impairment.
Impairment is measured based on fair value. The mortgage servicing rights
recorded by the Company, calculated in accordance with the provisions of
SFAS No. 125, were segregated into pools for valuation purposes, using as
pooling criteria the loan term and coupon rate. Once pooled, each grouping
of loans was evaluated on a discounted earnings basis to determine the
present value of future earnings that a purchaser could expect to realize
from each portfolio. Earnings were projected from a variety of sources
including loan servicing fees, interest earned on float, net interest earned
on escrows, miscellaneous income, and costs to service the loans. The
present value of future earnings is the "economic" value for the pool, i.e.,
the net realizable present value to an acquirer of the acquired servicing.
The Company recorded amortization related to mortgage servicing rights
totaling approximately $81,000, $254,000 and $247,000 for the years ended
September 30, 2000, 1999 and 1998, respectively. At September 30, 2000, the
fair value and carrying value of the Company's mortgage servicing rights
totaled approximately $1.2 million and $739,000, respectively. At September
30, 1999, the fair value and carrying value of the Company's mortgage
servicing rights totaled approximately $1.0 million and $756,000,
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.
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).
29
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
5. Allowance for Loan Losses (continued)
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." SFAS No. 114 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.
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, 2000 and 1999, the Company had no loans that would be
defined as impaired under SFAS No. 114.
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.
30
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
8. Federal Income Taxes
The Corporation accounts for federal income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes." 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 and costs, 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.
9. Amortization of Intangible Assets
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 $85,000, $125,000 and $115,000 were made
to the ESOP for the years ended September 30, 2000, 1999 and 1998,
respectively. At September 30, 2000, the ESOP held 340,227 shares (adjusted)
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 $40,000, $44,000 and $40,000,
for the years ended September 30, 2000, 1999 and 1998, respectively.
31
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Earnings Per Share
Basic earnings per share is computed based upon 4,408,655, 4,395,166 and
4,375,685 weighted-average shares outstanding for the fiscal years ended
September 30, 2000, 1999 and 1998, respectively.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
4,567,706, 4,583,738 and 4,568,110 for the fiscal years ended September 30,
2000, 1999 and 1998, respectively. Incremental shares related to the assumed
exercise of stock options included in the calculation of diluted earnings
per share totaled 159,051, 188,572 and 192,425 for the fiscal years ended
September 30, 2000, 1999 and 1998, respectively.
Options to purchase 193,000 shares of common stock with a weighted-average
exercise price of $12.55 were outstanding at September 30, 2000, but were
excluded from the computation of common share equivalents for the year ended
September 30, 2000, because the exercise prices were greater than the
average market price of common shares.
12. 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.
13. 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, 2000 and 1999:
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.
32
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
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, advance payments and amounts due on loans serviced
for others 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.
Advances from the Federal Home Loan Bank and other borrowed
money: The fair value of these borrowings is estimated using
the interest rates currently offered for borrowings 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, 2000 and 1999, was not material.
33
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. Fair Value of Financial Instruments (continued)
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>
2000 1999
Carrying Fair Carrying Fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,023 $ 2,023 $ 2,081 $ 2,081
Investment securities designated
as available for sale 4,273 4,273 5,503 5,503
Investment securities - at cost 15,757 15,661 16,882 16,774
Mortgage-backed securities designated
as available for sale 345 345 410 410
Mortgage-backed securities - at cost 12,267 11,850 13,533 13,058
Loans receivable - net 415,447 397,486 413,550 409,693
Federal Home Loan Bank stock 6,941 6,941 5,925 5,925
------- ------- ------- -------
$457,053 $438,579 $457,884 $453,444
======= ======= ======= =======
Financial liabilities
Deposits $309,889 $312,182 $312,072 $312,375
Advances from Federal Home Loan Bank and
other borrowed money 115,720 113,957 116,532 111,618
Advance payments and amounts due on loans
serviced for others 1,934 1,934 1,861 1,861
------- ------- ------- -------
$427,543 $428,073 $430,465 $425,854
======= ======= ======= =======
</TABLE>
14. Advertising
Advertising costs are expensed when incurred.
15. Reclassifications
Certain prior year amounts have been reclassified to conform to the 2000
consolidated financial statement presentation.
34
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
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>
2000 1999
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 $15,757 $15,661 $16,882 $16,774
Available for sale:
U.S. Government and agency obligations 3,505 3,495 4,491 4,528
Corporate equity securities 103 778 103 975
------ ------ ------ ------
Total securities available for sale 3,608 4,273 4,594 5,503
------ ------ ------ ------
Total investment securities $19,365 $19,934 $21,476 $22,277
====== ====== ====== ======
</TABLE>
At September 30, 2000, the fair value appreciation of the Corporation's
investment securities in excess of cost totaled $569,000, which was
comprised of gross unrealized gains totaling approximately $689,000 and
gross unrealized losses totaling approximately $120,000.
At September 30, 1999, the fair value appreciation of the Corporation's
investment securities in excess of cost totaled $801,000, which was
comprised of gross unrealized gains totaling approximately $952,000 and
gross unrealized losses totaling approximately $151,000.
The amortized cost and estimated fair value of U.S. Government and agency
obligations, including those designated as available for sale, at September
30, 2000, 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 $ 7,656 $ 7,613
Due in one to three years 11,606 11,543
------ ------
$19,262 $19,156
====== ======
</TABLE>
At September 30, 2000, investment securities with a carrying value of $3.8
million were pledged to secure public deposits.
35
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE B - INVESTMENT 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, 2000
and 1999, are shown below.
<TABLE>
<CAPTION>
2000
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 $ 3,843 $ 2 $(150) $ 3,695
Government National Mortgage Association
Participation certificates 536 5 (8) 533
Federal National Mortgage Association
Participation certificates 3,604 - (126) 3,478
Collateralized mortgage obligations 959 - (45) 914
CMC Securities Corporation
Collateralized mortgage obligations 3,137 - (80) 3,057
Residential Funding Corporation
Collateralized mortgage obligations 188 - (15) 173
------ --- ---- ------
Total mortgage-backed securities
held to maturity 12,267 7 (424) 11,850
Available for sale:
Government National Mortgage Corporation
Participation certificates 342 3 - 345
------ --- ---- ------
Total mortgage-backed securities $12,609 $ 10 $(424) $12,195
====== === ==== ======
</TABLE>
36
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
<TABLE>
<CAPTION>
1999
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 $ 4,589 $ 9 $(228) $ 4,370
Government National Mortgage Association
Participation certificates 655 10 (7) 658
Federal National Mortgage Association
Participation certificates 3,995 - (180) 3,815
Collateralized mortgage obligations 969 - (79) 890
CMC Securities Corporation
Collateralized mortgage obligations 3,137 - - 3,137
Residential Funding Corporation
Collateralized mortgage obligations 188 - - 188
------ --- ---- ------
Total mortgage-backed securities
held to maturity 13,533 19 (494) 13,058
Available for sale:
Government National Mortgage Corporation
Participation certificates 403 7 - 410
------ --- ---- ------
Total mortgage-backed securities $13,936 $ 26 $(494) $13,468
====== === ==== ======
</TABLE>
37
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost of mortgage-backed securities, including those designated
as available for sale at September 30, 2000, 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 $ 3
Due after three years through five years 430
Due after five years through ten years 151
Due after ten years through twenty years 3,852
Due after twenty years 8,173
------
$12,609
======
</TABLE>
Mortgage-backed securities with an approximate carrying value of $3.7
million were pledged to secure public deposits at September 30, 2000.
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
2000 1999
(In thousands)
<S> <C> <C>
Residential real estate
One- to four-family residential $222,155 $224,094
Multi-family residential 77,870 80,309
Construction 24,609 22,926
Nonresidential real estate and land 78,629 78,779
Nonresidential construction 13,029 9,729
Consumer and other 15,241 11,709
------- -------
431,533 427,546
Less:
Undisbursed portion of loans in process 16,046 15,070
Deferred loan origination fees 583 486
Allowance for loan losses 1,000 932
------- -------
$413,904 $411,058
======= =======
</TABLE>
38
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
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 $308.6 million, or 75%, of the total loan
portfolio at September 30, 2000, and $312.3 million, or 76%, of the total
loan portfolio at September 30, 1999. 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
$141.8 million and $149.8 million at September 30, 2000 and 1999,
respectively. At September 30, 2000, loans sold with recourse totaled $8.1
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>
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 932 $917 $905
Provision for losses on loans 125 160 86
Charge-off of loans (124) (188) (76)
Recoveries of loan losses 67 43 2
----- --- ---
Ending balance $1,000 $932 $917
===== === ===
</TABLE>
At September 30, 2000, the Company's allowance for loan losses was comprised
solely of a general loan loss allowance, which is includible as a component
of regulatory risk-based capital.
Nonperforming and nonaccrual loans at September 30, 2000, 1999 and 1998,
totaled $1.2 million, $246,000 and $1.2 million, respectively. Interest
income that would have been recognized had nonaccrual loans performed
pursuant to contractual terms totaled approximately $39,000, $8,000 and
$38,000 for the years ended September 30, 2000, 1999 and 1998, respectively.
39
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment is comprised of the following at September 30:
<TABLE>
<CAPTION>
2000 1999
(In thousands)
<S> <C> <C>
Land $ 597 $ 597
Office buildings and improvements 3,010 3,006
Furniture, fixtures and equipment 3,760 3,543
----- -----
7,367 7,146
Less accumulated depreciation and
amortization 3,949 3,438
----- -----
$3,418 $3,708
===== =====
</TABLE>
At September 30, 2000, the Company had outstanding future lease obligations
as follows:
<TABLE>
<CAPTION>
Year ended
September 30, (In thousands)
<S> <C>
2001 $134
2002 98
2003 88
2004 70
2005 and thereafter 70
---
$460
===
</TABLE>
The Company has recognized operating lease expense totaling $152,000,
$155,000 and $107,000 for the fiscal years ended September 30, 2000, 1999
and 1998, respectively.
40
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
Deposit type and weighted-average interest rate 2000 1999
(In thousands)
<S> <C> <C>
NOW accounts and money market deposits
2000 - 1.11% $ 20,703
1999 - 1.07% $ 18,129
Passbook and Club accounts
2000 - 3.41% 56,183
1999 - 3.36% 60,311
------- -------
Total demand, transaction and passbook deposits 76,886 78,440
Certificates of deposit
Original maturities of:
Less than 12 months
2000 - 5.88% 52,276
1999 - 5.05% 78,589
12 months to 36 months
2000 - 6.36% 119,362
1999 - 5.76% 98,142
More than 36 months
2000 - 6.37% 26,695
1999 - 6.19% 20,836
Individual Retirement and Keogh
2000 - 5.98% 34,670
1999 - 5.84% 36,065
------- -------
Total certificates of deposit 233,003 233,632
------- -------
Total deposit accounts $309,889 $312,072
======= =======
</TABLE>
The Company had certificate of deposit accounts with balances equal to or in
excess of $100,000 totaling $62.0 million and $68.8 million at September 30,
2000 and 1999, respectively.
41
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE F - DEPOSITS (continued)
Interest expense on deposits at September 30 is summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Passbook and money market deposit accounts $ 2,027 $ 1,991 $ 2,203
NOW accounts 211 234 217
Certificates of deposit 13,619 13,010 12,639
------ ------ ------
$15,857 $15,235 $15,059
====== ====== ======
</TABLE>
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
2000 1999
(In thousands)
<S> <C> <C>
Less than one year $138,486 $153,858
One year to three years 86,413 73,033
More than three years 8,104 6,741
------- -------
$233,003 $233,632
======= =======
</TABLE>
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
2000, by pledges of certain residential mortgage loans totaling $158.2
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 2000 1999
(Dollars in thousands)
<S> <C> <C> <C>
5.70% - 8.35% 2000 $ - $ 37,500
6.23% - 6.71% 2001 42,850 4,000
6.05% - 7.20% 2002 10,118 10,190
5.60% - 7.40% 2003 13,918 17,452
5.45% - 6.71% 2004 7,198 7,250
2.50% - 6.97% Thereafter 39,636 40,140
------- -------
$113,720 $116,532
======= =======
Weighted-average interest rate 6.58% 5.94%
==== ====
</TABLE>
42
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE H - OTHER BORROWED MONEY
During fiscal 2000, the Corporation had a $6.0 million line of credit with
another financial institution, with interest payable at prime less 50 basis
points. At September 30, 2000, the Corporation had $2.0 million outstanding
at an interest rate of 9.0%. This line of credit expires in the first
quarter of fiscal 2003. The loan is secured by the outstanding shares of the
Company.
NOTE I - 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>
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed at statutory rate $1,729 $1,557 $2,115
Increase (decrease) in taxes resulting from:
Nondeductible expenses 39 142 11
Nontaxable dividend income (12) (4) (4)
Low income housing investment tax credits (42) (42) (42)
Other (13) (13) 12
----- ----- -----
Federal income tax provision per consolidated
financial statements $1,701 $1,640 $2,092
===== ===== =====
Effective tax rate 33.4% 35.8% 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 2000 1999
differences at statutory rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
General loan loss allowance $ 340 $ 317
Amortization of intangible assets 38 35
Other 9 6
------ ------
Total deferred tax assets 387 358
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (914) (757)
Difference between book and tax depreciation (111) (81)
Percentage of earnings bad debt deduction (223) (282)
Unrealized gains on securities designated as available for sale (227) (312)
Deferred loan origination costs (365) (352)
Mortgage servicing rights (251) (257)
Other (9) -
------ ------
Total deferred tax liabilities (2,100) (2,041)
------ ------
Net deferred tax liability $(1,713) $(1,683)
====== ======
</TABLE>
43
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE I - 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 qualified 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, 2000. The amount of the unrecognized deferred tax liability relating to
the cumulative bad debt deduction was approximately $500,000 at September
30, 2000.
Winton Savings is required to recapture as taxable income approximately $1.0
million 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 began to amortize
the recapture of the bad debt reserve into taxable income over a six year
period in fiscal 1999.
NOTE J - 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, 2000, the Company had total outstanding commitments of
approximately $4.4 million to originate residential one- to four-family and
multi-family real estate loans of which $1.2 million were comprised of
adjustable-rate loans at rates ranging from 8.00% to 12.50%, and $3.2
million were comprised of fixed-rate loans at rates ranging from 7.50% to
10.00%. The Company also had total outstanding commitments of approximately
$2.5 million to originate nonresidential real estate and land loans, of
which $400,000 were comprised of fixed-rate loans at interest rates ranging
from 8.00% to 9.50%, and $2.1 million were comprised of adjustable rate
loans at rates ranging from 7.50% to 9.50%. Additionally, the Company had
unused lines of credit related to home equity loans and commercial loans
totaling $14.5 million and $3.9 million, respectively. In the opinion of
management, all loan commitments equaled or exceeded prevalent market
interest rates as of September 30, 2000, 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>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE J - LOAN COMMITMENTS (continued)
The Company has an outstanding commitment to sell $1.5 million of loans to
FHLMC at September 30, 2000.
NOTE K - 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 4.0% 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, 2000. 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%.
During the 2000 fiscal year, the Company was notified from its regulator
that it was categorized as "well-capitalized" under the regulatory framework
for prompt corrective action. To be categorized as "well-capitalized," the
Company must maintain minimum capital ratios as set forth in the following
tables.
45
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE K - REGULATORY CAPITAL (continued)
As of September 30, 2000 and 1999, management believes that the Company met
all capital adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
As of September 30, 2000
Required
to be "well-
Required capitalized" under
for capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $35,008 7.5% =>$ 6,961 =>1.5% =>$23,204 => 5.0%
Core capital $35,008 7.5% =>$18,563 =>4.0% =>$27,845 => 6.0%
Risk-based capital $36,008 11.2% =>$25,706 =>8.0% =>$32,133 =>10.0%
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1999
Required
to be "well-
Required capitalized" under
for capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $30,838 6.6% =>$ 6,971 =>1.5% =>$23,237 => 5.0%
Core capital $30,838 6.6% =>$18,590 =>4.0% =>$27,885 => 6.0%
Risk-based capital $31,722 10.0% =>$25,378 =>8.0% =>$31,722 =>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.
46
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE L - STOCK OPTION PLANS
Shareholders of the Corporation have approved stock option plans that
provide for the issuance of up to 1,051,210 common shares to be granted at
the discretion of the Board of Directors. Under the 1988 Stock Option Plan,
649,680 common shares were reserved for issuance to directors, officers, and
key employees of the Corporation and its subsidiary. At September 30, 2000,
459,500 options under the 1988 Plan were subject to exercise at the
discretion of the grantees through fiscal 2008, while 126,680 options
remained ungranted at the Plan's expiration date. The 1999 Stock Option Plan
reserved 401,530 common shares for issuance to directors, officers, and key
employees of the Corporation and its subsidiary. At September 30, 2000,
283,500 options under the 1999 Plan were subject to exercise at the
discretion of the grantees through fiscal 2010, while 118,030 options were
ungranted.
The Corporation accounts for its stock option plan in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stock-based compensation that entities may
use, which measures compensation cost at the grant date based on the fair
value of the award. Compensation is then recognized over the service period,
which is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue to account for stock options and similar equity
instruments under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net earnings and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for the plans. Had compensation cost for the Corporation's
stock option plans been determined based on the fair value at the grant
dates for awards under the plans 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>
2000 1999 1998
<S> <C> <C> <C> <C>
Net earnings (In thousands) As reported $3,385 $2,940 $4,130
===== ===== =====
Pro-forma $3,120 $2,566 $4,039
===== ===== =====
Earnings per share
Basic As reported $.77 $.67 $.94
=== === ===
Pro-forma $.71 $.58 $.92
=== === ===
Diluted As reported $.74 $.64 $.90
=== === ===
Pro-forma $.68 $.56 $.88
=== === ===
</TABLE>
47
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE L - STOCK OPTION PLANS (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 2000, 1999 and 1998: dividend yield of
2.9%, 2.3% and 3.4%, respectively, expected volatility of 20.0% for all
years, risk-free interest rate of 6.5% for 2000, and 6.0% for 1999 and 1998
and expected lives of ten years for all grants.
A summary of the status of the Corporation's stock option plans as of
September 30, 2000, 1999 and 1998, and changes during the periods ending on
those dates is presented below:
<TABLE>
<CAPTION>
2000 1999 1998
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 622,300 $ 7.89 481,000 $ 6.13 501,375 $5.78
Granted 135,500 9.26 154,500 13.21 30,000 9.94
Exercised (8,300) 6.79 (13,200) 6.09 (50,375) 4.93
Forfeited (6,500) 13.25 - - - -
------- ----- ------- ----- ------- ----
Outstanding at end of year 743,000 $ 8.11 622,300 $ 7.89 481,000 $6.13
======= ===== ======= ===== ======= ====
Options exercisable at year-end 743,000 $ 8.11 622,300 $ 7.89 481,000 $6.13
======= ===== ======= ===== ======= ====
Weighted-average fair value of
options granted during the year $ 2.67 $ 3.54 $1.99
===== ===== ====
</TABLE>
The following information applies to options outstanding at September 30,
2000:
Number outstanding 743,000
Range of exercise prices $6.75 - $13.25
Weighted-average exercise price $8.11
Weighted-average remaining contractual life 6.30 years
48
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
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, 2000 and 1999, and the
results of its operations and its cash flows for each of the years ended
September 30, 2000, 1999 and 1998.
Winton Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
September 30,
ASSETS 2000 1999
(In thousands)
<S> <C> <C>
Cash $ 372 $ 421
Investment in The Winton Savings and Loan Co. 35,358 31,284
Corporate equity securities - at fair value 778 975
Prepaid expenses and other assets 15 16
Prepaid federal income tax 71 71
------- ------
Total assets $36,594 $32,767
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable $ 2,000 $ -
Accrued expenses and other liabilities 359 331
Deferred federal income taxes 229 296
------ ------
Total liabilities 2,588 627
Shareholders' equity
Additional paid-in capital 9,972 9,917
Retained earnings 23,593 21,619
Unrealized gains on securities designated as
available for sale, net of related tax effects 441 604
------ ------
Total shareholders' equity 34,006 32,140
------ ------
Total liabilities and shareholders' equity $36,594 $32,767
====== ======
</TABLE>
49
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE M - CONDENSED FINANCIAL STATEMENTS OF WINTON FINANCIAL
CORPORATION (continued)
Winton Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
Year ended September 30,
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Revenue
Interest and dividends on investments $ 24 $ 18 $ 15
Dividends received from subsidiary 1,463 1,311 773
Equity in undistributed earnings of subsidiary 2,107 1,675 3,408
----- ----- -----
3,594 3,004 4,196
Expenses
General and administrative 209 64 66
----- ----- -----
Net earnings $3,385 $2,940 $4,130
===== ===== =====
</TABLE>
Winton Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year ended September 30,
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net earnings for the year $3,385 $2,940 $4,130
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Undistributed earnings of consolidated subsidiary (2,107) (1,675) (3,408)
Increases (decreases) in cash due to changes in:
Prepaid expenses and other assets 1 (17) (61)
Other 28 109 42
----- ----- -----
Net cash provided by operating activities 1,307 1,357 703
Cash flows used in investing activities:
Investment in subsidiary (2,000) - -
Cash flows provided by (used in) financing activities:
Proceeds from borrowings 2,000 - -
Payment of dividends on common stock (1,411) (1,291) (1,059)
Proceeds from exercise of stock options 55 90 308
----- ----- -----
Net cash provided by (used in)
financing activities 644 (1,201) (751)
----- ----- -----
Net increase (decrease) in cash and cash equivalents (49) 156 (48)
Cash and cash equivalents at beginning of year 421 265 313
----- ----- -----
Cash and cash equivalents at end of year $ 372 $ 421 $ 265
===== ===== =====
</TABLE>
50
<PAGE>
Winton Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE M - CONDENSED FINANCIAL STATEMENTS OF WINTON FINANCIAL
CORPORATION (continued)
Winton Savings is subject to regulations imposed by the OTS regarding the
amount of capital distributions payable by the Company to the Corporation.
Generally, Winton Savings' payment of dividends is limited, without prior
OTS approval, to net earnings for the current calendar year plus the two
preceding calendar years, less capital distributions paid over the
comparable time period. Insured institutions are required to file an
application with the OTS for capital distributions in excess of this
limitation. During November, 2000, Winton Savings received OTS approval to
make up to $1.7 million in capital distributions during fiscal 2001.
51
<PAGE>
Winton Financial Corporation
SHAREHOLDER SERVICES. Firstar, 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:
Firstar, 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 26, 2001, at 10:00 a.m. Eastern Standard Time, at Dante's
Restaurant, 5510 Rybolt Road, Cincinnati, Ohio 45248.
FORM 10-K ANNUAL REPORT. A copy of Winton Financial's Annual Report on Form
10-K, 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: Gregory P. Niesen, Secretary/Treasurer
52
<PAGE>
Winton Financial Corporation
<TABLE>
<CAPTION>
<S> <C>
WINTON FINANCIAL CORPORATION THE WINTON SAVINGS AND LOAN CO.
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 Corporation
and The Winton Savings and Loan Co. Robert E. Hoeweler
Robert E. Hoeweler Henry L. Schulhoff
President, Hoeweler Group, Inc.
Thomas H. Humes
Henry L. Schulhoff
President, Schulhoff and Company, Inc. Timothy M. Mooney
Thomas H. Humes J. Clay Stinnett
President, Great Traditions Land &
Development Co.
Officers
Timothy M. Mooney
Executive Vice President and Robert L. Bollin
Chief Financial Officer President
Kendle International Inc.
Gregory J. Bollin
J. Clay Stinnett Executive Vice President
President, J.R. Concepts, Inc.
Mary Ellen Lovett
Senior Vice President/Savings
Officers
Jill M. Burke
Robert L. Bollin Chief Financial Officer
President
Gregory P. Niesen
Jill M. Burke Secretary/Treasurer
Chief Financial Officer
Gregory J. Bollin
Vice President
Mary Ellen Lovett
Vice President
Gregory P. Niesen
Secretary/Treasurer
</TABLE>
53
