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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to__________________
Commission file number: 0-18993
WINTON FINANCIAL CORPORATION
------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1303854
- ------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5511 Cheviot Road, Cincinnati, Ohio 45247
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 385-3880
Securities registered pursuant to Section 12(b) of the Act:
None
------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, without par value
--------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Based upon the last sale price quoted by The American Stock Exchange as of
December 15, 2004, the aggregate market value of the voting stock held by
non-affiliates of the registrant on that date was $_____ million.
On December 15, 2004, there were 5,069,824 of the registrant's common shares
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part I of Form 10-K: Safe Harbor Under the Private Securities Litigation Reform
Act of 1995, Exhibit 99.1.
PART I
ITEM 1. BUSINESS
GENERAL
Winton Financial Corporation, an Ohio corporation ("Winton Financial," the
"Corporation" or "WFC"), 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. Winton Savings conducts business from
its principal office in the Monfort Heights area of Cincinnati, Ohio, its six
branch offices in Hamilton County, Ohio, one loan production office in the
eastern area of Cincinnati and one loan production office in southeastern
Indiana.
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.
Winton Savings also invests in U.S. government guaranteed mortgage-backed
securities and investment securities issued by the U.S. government and agencies
thereof and municipal bonds. 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.
FORWARD-LOOKING STATEMENTS
When used in this Annual Report on Form 10-K, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimated," "projected," or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including changes in economic conditions generally and in
Winton's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in Winton's market area and competition.
Factors listed above could affect WFC's financial performance and could cause
WFC's actual results for future periods to differ materially from any statements
expressed with respect to future periods. See Exhibit 99 hereto, "Safe Harbor
Under the Private Securities Litigation Reform Act of 1995," which is
incorporated herein by reference.
WFC does not undertake, and specifically disclaims any obligation, to
revise publicly any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
LENDING ACTIVITIES
GENERAL. Winton's principal lending activity involves the origination of
conventional fixed-rate and variable-rate mortgage loans for the acquisition or
construction of one- to four-family residences located in Winton's primary
market area, and of nonresidential and multifamily loans, including construction
and permanent mortgage loans on condominiums, multi-unit properties and
commercial properties. Each of such loans is secured by a mortgage on the
underlying property. Winton also originates loans insured by the Federal Housing
Administration and guaranteed by the Veterans Administration, both of which
Winton sells into the secondary market. In addition to residential and
nonresidential real estate lending, Winton originates consumer loans, including
passbook, automobile, home improvement and home equity line of credit loans.
2
LOAN PORTFOLIO COMPOSITION. The following table sets forth certain
information concerning the composition of Winton's loan portfolio at the dates
indicated:
At September 30,
-------------------------------------------------------------------
2004 2003 2002
--------------------- ---------------------- ----------------------
Percent of Percent of Percent of
Amount total loans Amount total loans Amount total loans
--------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
Real estate loans:
One- to four-family (1) $ 285,783 59.0% $ 290,114 59.5% $ 248,606 54.4%
Multifamily 73,891 15.2 76,552 15.7 80,523 17.6
Land and lot 4,907 1.0 6,444 1.3 9,289 2.0
Nonresidential 90,705 18.7 90,571 18.6 91,509 20.0
Construction loans (2) 30,165 6.2 33,646 6.9 31,946 7.0
Consumer and other loans (3) 17,846 3.7 10,096 2.1 12,179 2.7
--------- --------- --------- --------- --------- ---------
Total 503,297 103.8 507,423 104.1 474,052 103.7
Less:
Loans in process (15,477) (3.2) (17,134) (3.5) (14,616) (3.2)
Deferred loan origination fees (617) (.1) (544) (.1) (609) (.1)
Allowance for loan losses (2,448) (.5) (2,265) (.5) (1,850) (.4)
--------- --------- --------- --------- --------- ---------
Total loans $ 484,755 100.0% $ 487,480 100.0% $ 456,977 100.0%
========= ========= ========= ========= ========= =========
At September 30,
----------------------------------------------
2001 2000
---------------------- ----------------------
Percent of Percent of
Amount total loans Amount total loans
--------- ----------- --------- -----------
(Dollars in thousands)
Real estate loans:
One- to four-family (1) $ 226,684 52.6% $ 223,698 53.8%
Multifamily 79,003 18.3 77,870 18.7
Land and lot 3,836 .9 3,502 .8
Nonresidential 86,056 20.0 75,127 18.1
Construction loans (2) 36,431 8.4 37,638 9.1
Consumer and other loans (3) 15,186 3.5 15,241 3.7
--------- --------- --------- -----
Total 447,196 103.7 433,076 104.2
Less:
Loans in process (13,930) (3.2) (16,046) (3.9)
Deferred loan origination fees (748) (.2) (583) (.1)
Allowance for loan losses (1,194) (.3) (1,000) (.2)
--------- --------- --------- -----
Total loans $ 431,324 100.0% $ 415,447 100.0%
========= ========= ========= =====
- ----------------
(1) Includes first and second mortgage loans, home equity lines of credit and
loans held for sale.
(2) Includes loans secured by one-to four-family, multifamily and
nonresidential real estate.
(3) Includes lines of credit that are available to businesses and that are
secured by assets other than real estate.
LOAN MATURITY. The following table sets forth certain information, as of
September 30, 2004, regarding the dollar amount of loans maturing in Winton's
portfolio based on their contractual terms to maturity, before giving effect to
net items. Demand loans, loans having no stated schedule of repayments or
without stated maturity and overdrafts are reported as due in one year or less.
Due over
Due in one year to Due over
one year five years after five years after
or less 9/30/04 9/30/04 Total
---------- ---------------- ---------------- ----------
(In thousands)
Real estate loans:
One- to four-family (1) $ 18,536 $ 43,035 $ 224,212 $ 285,783
Multifamily 2,304 10,807 60,780 73,891
Land and lot 1,446 3,179 282 4,907
Nonresidential 3,315 15,734 71,656 90,705
Construction loans (2) 20,987 9,178 0 30,165
Consumer and other loans (3) 4,016 13,667 163 17,846
---------- ---------- ---------- ----------
Total $ 50,604 $ 95,600 $ 357,093 $ 503,297
========== ========== ========== ==========
- ----------------------
(1) Includes first and second mortgage loans, home equity lines of credit and
loans held for sale.
(2) Includes loans secured by one-to four-family, multifamily and
nonresidential real estate.
(3) Includes lines of credit that are available to businesses and that are
secured by assets other than real estate.
3
The following table sets forth the dollar amount of all loans due after
September 30, 2005, before net items, that have predetermined interest rates and
floating or adjustable interest rates:
Predetermined Floating or
rates adjustable rates Total
------------- ---------------- ------------
(In thousands)
Real estate loans:
One- to four-family $ 172,354 $ 94,894 $ 267,247
Multifamily 25,017 46,569 71,587
Land and lot 381 3,080 3,461
Nonresidential 51,415 35,975 87,390
Construction loans 4,964 4,214 9,178
Consumer and other loans 2,630 11,200 13,830
------------- ------------ ------------
Total $ 256,761 $ 195,932 $ 452,693
============= ============ ============
ONE- TO FOUR-FAMILY REAL ESTATE LOANS. The primary lending activity of
Winton is the origination of conventional loans secured by one- to four-family
residential properties located within Winton's primary market area. At September
30, 2004, a total of $285.8 million, or approximately 59.0%, of Winton's total
loans consisted of one- to four-family residential real estate loans. The
outstanding balance of Winton's largest one- to four-family real estate loan was
$578,000 at September 30, 2004.
Subject to OTS regulations regarding safety and soundness, there are no
limits on the aggregate amount of assets Winton may invest in one- to
four-family loans. OTS regulations and Ohio law limit the amount that Winton may
lend to a single borrower in relationship to the appraised value of the real
estate and improvements thereon at the time of loan origination. In accordance
with such regulations, Winton makes loans on single-family residences up to 95%
of the value of the real estate and improvements (the "Loan-to-Value Ratio" or
"LTV"). Winton also makes loans over the 95% LTV, though most of those loans are
sold in the secondary market. Generally, Winton requires private mortgage
insurance and/or charges premium interest rates for loans over 80% LTV.
Winton offers fixed interest rates on its one- to four-family real estate
loans with terms of up to 30 years. Winton also offers mortgage loans with
adjustable interest rates ("ARMs") with adjustment periods of generally one or
three years. Winton determines the interest rates initially charged on ARMs and
the new rate at each adjustment date by adding a stated margin to the one-year
constant maturity treasury or three-year United States Treasury bill rate at the
time it originates the loan. Winton sets the initial interest rate for a
three-year ARM slightly higher than for the one-year ARM to compensate for the
increased exposure to risk resulting from interest-rate fluctuations during the
adjustment period. The maximum adjustment at each adjustment date for one-year
ARMs is usually 2%, with a maximum adjustment of 6% over the term of the loan.
The maximum adjustment on three-year ARMs presently originated by Winton is 2%
at each adjustment date, with a maximum adjustment of 6% over the life of the
loan. None of Winton's ARMs has negative amortization features.
The one- to four-family real estate mortgage loans offered by Winton are
usually originated for terms of 10 to 30 years. Due to the general long-term
nature of an investment in mortgage loans, such loans could have an adverse
effect upon the earnings spread of an association if such loans do not reprice
as quickly as the association's cost of funds. To minimize such an effect,
Winton sells certain fixed-rate mortgages in the secondary market. Furthermore,
experience during recent years reveals that, as a result of prepayments in
connection with refinancings and sales of the underlying properties, residential
loans generally remain outstanding for periods that are substantially shorter
than the maturity of such loans.
At September 30, 2004, Winton had nonperforming loans totaling $488,000 in
its one- to four-family portfolio. Winton considers a loan nonperforming when,
in the opinion of management, the collection of additional interest on the loan
is unlikely, the loan meets non-accrual criteria as established by regulatory
authorities, or the loan is accruing interest but is more than 90 days past due.
MULTIFAMILY REAL ESTATE LOANS. Winton originates adjustable- and
fixed-rate loans secured by multifamily properties containing over four units.
At September 30, 2004, a total of $73.9 million, or approximately 15.2%, of
Winton's total loans consisted of multifamily real estate loans. The outstanding
balance of Winton's largest multifamily real estate loan was $3.4 million at
September 30, 2004.
4
Multifamily loans generally have terms of up to 25 years and a maximum LTV
of 80%. Adjustable-rate multifamily residential loans are currently made with
the same adjustment schedules, indexes and caps as for one- to four-family
residential ARMs, with a margin of 3% over the index.
Multifamily lending is generally considered to involve a higher degree of
risk than one- to four-family residential lending because the loan amounts are
larger and the borrower typically depends upon income generated by the project
to cover operating expenses and debt service. The profitability of a project can
be affected by economic conditions, government policies and other factors beyond
the control of the borrower. Winton attempts to reduce the risk associated with
multifamily lending by evaluating the credit-worthiness of the borrower and the
projected income from the project and by obtaining personal guarantees on loans
made to corporations and partnerships. Winton requires that the borrower agree
to submit rent rolls and financial statements annually to enable Winton to
monitor the loan.
At September 30, 2004, Winton had $254,000 of nonperforming loans in its
multifamily real estate portfolio.
LAND AND LOT LOANS. Winton originates loans to individuals and to builders
secured by mortgages on real estate upon which residential and nonresidential
properties will be constructed. At September 30, 2004, a total of $4.9 million,
or approximately 1.0%, of Winton's total loans consisted of land and lot loans.
Ohio regulations limit the amount of any land and lot loan for a single person
to two percent of total assets of the association. The outstanding balance of
Winton's largest land and lot loan was $871,000 or .16% of Winton's total
assets, at September 30, 2004. A developed building lot loan is generally made
for a 20-year term with a five-year balloon payment of principal due upon
expiration of the loan term and generally a maximum LTV of 75%.
Loans on development real estate are generally considered to be subject to
a higher degree of risk because the borrower typically depends on a sale of the
property or the later improvement of the property to cover debt service. The
ability to sell or develop unimproved real estate is affected by economic
conditions, government policies and other factors beyond the control of the
borrower. These risks are increased if the unimproved real estate is for an
entire subdivision rather than a single residential lot. Winton reviews the
viability of the unimproved real estate for improvement and sale and evaluates
the credit-worthiness of the borrowers for these loans.
At September 30, 2004, Winton had no nonperforming loans in its land and
lot loan portfolio.
NONRESIDENTIAL REAL ESTATE LOANS. Winton originates real estate loans
secured by nonresidential real estate, including loans secured by retail, office
and other types of business facilities located in its primary market area. At
September 30, 2004, a total of $90.7 million, or approximately 18.7%, of
Winton's total loans consisted of nonresidential real estate loans. The
outstanding balance of Winton's largest nonresidential real estate loan was $2.3
million at September 30, 2004.
Federal regulations limit the amount of nonresidential mortgage loans that
an association may make to 400% of its capital, and Ohio regulations limit the
amount of nonresidential loans that an association may make to 20% of total
assets. At September 30, 2004, Winton's nonresidential permanent mortgage loans
of $90.7 million and nonresidential construction loans of $3.8 million totaled
195.2% of Winton's capital and 17.1% of Winton's total assets.
In recent years, nonresidential real estate loans have been made on an
adjustable-rate and fixed-rate basis, with loan terms generally up to a maximum
of 25 years. Winton typically originates these loans at a maximum 80% LTV.
Adjustable-rate nonresidential real estate loans have the same adjustment
schedules, index and caps as the residential ARMs described above in "One- to
Four-Family Real Estate Loans."
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. Winton has endeavored to reduce such risk by
evaluating the credit history and past performance of the borrower, the location
of the real estate, the quality of the management constructing and operating the
property, the debt service ratio, the quality and characteristics of the income
stream generated by the property and appraisals supporting the property's
valuation.
At September 30, 2004, Winton had $450,000 of nonperforming loans in its
non-residential real estate portfolio.
CONSTRUCTION LOANS. Winton offers residential construction loans both to
owner-occupants and to builders for homes being built under contract with
owner-occupants. To a very limited extent, Winton also makes construction loans
to persons or businesses constructing projects for investment purposes, for
multifamily properties and for nonresidential
5
projects. At September 30, 2004, a total of $30.2 million, or approximately
6.2%, of Winton's total loans consisted of construction loans. The outstanding
balance of Winton's largest construction loan was $1.9 million at September 30,
2004.
Construction loans generally have terms ranging from 6 to 12 months at
fixed and adjustable rates of interest over the construction period.
Adjustable-rate construction loan products are adjusted based on changes to the
prime rate. Residential construction loans and nonresidential construction loans
are interim loans which are replaced by permanent fixed- or adjustable-rate
loans at the end of the construction period. Such permanent loans may or may not
be obtained from Winton.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developments, developers,
managers and builders. In addition, such loans are more difficult to evaluate
and monitor. Winton advances loan funds upon the security of the project under
construction, which is more difficult to value before the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, it is relatively difficult to evaluate accurately the LTVs
and the total loan funds required to complete a project. In the event a default
on a construction loan occurs and foreclosure follows, Winton would have to take
control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project. Almost all of Winton's
construction loans are secured by properties in its primary market area. The
economy of such lending area has been relatively stable over the three years
ended September 30, 2004.
At September 30, 2004, Winton had no nonperforming loans in its
construction loan portfolio.
CONSUMER AND OTHER LOANS. Winton originates various types of consumer
loans, including loans made to depositors on the security of their savings
deposits, automobile loans, loans secured by stocks of publicly-traded
companies, closed end and line of credit loans to businesses secured by non-real
estate assets and unsecured personal loans. At September 30, 2004, a total of
$17.8 million, or 3.7%, of Winton's total loans consisted of consumer and other
loans. The outstanding balance of Winton's largest consumer or other loan was
$2.5 million at September 30, 2004.
Ohio regulations limit the amount of consumer loans that an association
may make to 20% of total assets. At September 30, 2004, Winton's consumer loans
represented approximately 3.2% of Winton's total assets.
Consumer loans are generally made at fixed rates of interest consistent
with the market rate for the type of collateral offered as security and for
terms of 90 days to five years.
Consumer loans, particularly consumer loans that are unsecured or are
secured by depreciating assets such as automobiles and mobile homes, entail
greater risk than residential loans. Repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan balance. The risk of default on consumer loans increases during periods of
recession, high unemployment and other adverse economic conditions.
At September 30, 2004, Winton had $53,000 of nonperforming loans in its
consumer and other loan portfolio.
LOAN SOLICITATION AND PROCESSING. Winton develops loan originations from a
number of sources, including commissioned loan originators, loan brokers,
continuing business with depositors, other borrowers and real estate developers,
solicitations by Winton's directors, officers and lending staff and walk-in
customers.
Winton's loan personnel take all loan applications for permanent mortgage
loans. Winton obtains a credit report, verification of employment and other
documentation concerning the credit-worthiness of the borrower. Generally, an
independent fee appraiser approved by the Board of Directors will prepare an
appraisal of the fair market value of the real estate that will be given as
security for the loan. An environmental study is conducted only if the appraiser
or management has reason to believe that an environmental problem may exist. For
multifamily and nonresidential mortgage loans, Winton generally requires a
personal guarantee. Winton also obtains information with respect to prior
projects completed by the borrower. Upon the completion of the appraisal and the
receipt of information on the borrower, the application for a loan is submitted
either to Winton's Loan Committee and/or the Board of Directors or to the
secondary market for approval or rejection. Any loan applications that are not
accepted by the secondary market are reviewed and accepted or rejected by
Winton's Loan Committee.
If a mortgage loan application is approved, Winton obtains an attorney's
opinion of title or a title insurance policy on the real estate that will secure
the mortgage loan. Winton requires borrowers to carry fire and casualty
insurance and flood insurance, if applicable, and to name Winton as an insured
mortgagee.
6
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building plans,
construction specifications and estimates of construction costs. Winton also
evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
Winton's mortgage loans carry provisions that the entire balance of the
loan is due upon sale of the property securing the loan.
LOAN ORIGINATIONS, PURCHASES AND SALES. Winton has been actively
originating 30-year, 20-year and 15-year fixed-rate and adjustable-rate loans.
Most residential fixed-rate loans made by Winton are originated on documentation
which will permit a possible sale of such loans to the Federal Home Loan
Mortgage Corporation ("FHLMC") or other secondary mortgage market participants.
Winton sold $127.0 million of fixed-rate loans and $7.4 million of
adjustable rate loans during fiscal 2004, compared to sales of $243.5 million of
fixed-rate loans and $6.8 million of adjustable-rate loans in fiscal 2003.
From time to time, Winton sells participation interests in mortgage loans
originated by Winton or purchases participation interests in loans originated by
other lenders. During fiscal 2004, Winton sold participation interests in loans
totaling $125,000 to other lenders. During fiscal 2003, Winton sold
participation interests in loans totaling $3.0 million to other lenders. During
fiscal 2002, Winton sold participation interests in loans totaling $1.1 million
to other lenders. Winton held participations in loans originated by other
lenders of approximately $3.6 million at September 30, 2004. Loans in which
Winton purchases participation interests must meet or exceed the underwriting
standards for the loans that Winton originates.
The following table presents Winton's mortgage loan origination, purchase,
sale and principal repayment activity for the periods indicated:
At September 30,
-----------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- -----------------------
Amount % Amount % Amount %
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Loans originated:
Real estate loans:
One- to four-family:
Fixed-rate $ 118,597 40.7% $ 355,504 69.5% $ 171,500 54.4%
Adjustable-rate 41,648 14.3 26,495 5.2 19,256 6.1
FHA/VA 807 .3 1,819 .4 1,696 .5
Multifamily:
Fixed-rate 1,828 .6 7,797 1.5 4,897 1.6
Adjustable-rate 11,075 3.8 14,365 2.8 14,069 4.5
Nonresidential, land and lot:
Fixed-rate 4,519 1.6 8,750 1.7 18,441 5.8
Adjustable-rate 16,177 5.5 5,293 1.0 5,590 1.8
Construction loans 36,743 12.6 45,623 8.9 35,502 11.2
Consumer and other loans (1) 59,859 20.6 45,773 9.0 44,335 14.1
---------- ---------- ---------- ---------- ---------- ----------
Total loans originated $ 291,253 100.0% $ 511,420 100.0% $ 315,286 100.0%
========== ========== ========== ========== ========== ==========
Loans sold:
Loans $ 134,325 99.4% $ 250,280 98.8% $ 123,674 99.1%
Participations 125 .6 3,029 1.2 1,100 .9
---------- ---------- ---------- ---------- ---------- ----------
Total $ 134,450 100.0% $ 253,309 100.0% $ 124,774 100.0%
========== ========== ========== ========== ========== ==========
Principal repayments on loans $ 155,506 $ 227,155 $ 161,748
========== ========== ==========
At September 30,
-----------------------------------------------
2001 2000
----------------------- --------------------
Amount % Amount %
---------- ---------- -------- ---------
(Dollars in thousands)
Loans originated:
Real estate loans:
One- to four-family:
Fixed-rate $ 123,784 52.2% $ 39,948 26.5%
Adjustable-rate 6,711 2.8 15,303 10.1
FHA/VA 3,442 1.5 6,258 4.1
Multifamily:
Fixed-rate 8,458 3.6 344 .2
Adjustable-rate 6,171 2.6 7,097 4.7
Nonresidential, land and lot:
Fixed-rate 12,322 5.2 4,641 3.1
Adjustable-rate 6,699 2.8 6,423 4.3
Construction loans 30,936 13.0 34,678 23.0
Consumer and other loans (1) 38,570 16.3 36,147 24.0
---------- ---------- -------- ---------
Total loans originated $ 237,093 100.0% $150,839 100.0%
========== ========== ======== =========
Loans sold:
Loans $ 102,968 100.0% $ 50,746 98.3%
Participations -- -- 903 1.7
---------- ---------- -------- ---------
Total $ 102,968 100.0% $ 51,649 100.0%
========== ========== ======== =========
Principal repayments on loans $ 118,004 $ 96,794
========== ========
- ----------------------------
(1) Consists primarily of auto and line of credit disbursements and change in
loans in process.
7
FEDERAL LENDING LIMIT. OTS regulations impose a lending limit on the
aggregate amount that a savings association can lend to one borrower to an
amount equal to 15% of the association's total capital for risk-based capital
purposes plus any loan reserves not already included in total capital (the
"Lending Limit Capital"). A savings association may lend to one borrower an
additional amount not to exceed 10% of the association's Lending Limit Capital,
if the additional amount is fully secured by certain forms of "readily
marketable collateral." Real estate is not considered "readily marketable
collateral." In applying this limit, the regulations require that loans to
certain related or affiliated borrowers be aggregated. An exception to this
limit permits loans of any type to one borrower of up to $500,000. In addition,
the OTS, under certain circumstances, may permit exceptions to the lending limit
on a case-by-case basis. Based on the 15% limit, Winton was able to lend
approximately $7.7 million to one borrower at September 30, 2004. Winton had no
outstanding loans in excess of such limit at September 30, 2004.
LOAN ORIGINATION AND OTHER FEES. Winton realizes loan origination fee and
other fee income from its lending activities and also realizes income from late
payment charges, application fees and fees for other miscellaneous services.
Loan origination fees and other fees are a volatile source of income, varying
with the volume of lending, loan repayments and general economic conditions. All
nonrefundable loan origination fees and certain direct loan origination costs
are deferred and recognized, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 91, as an adjustment to yield over the life of
the related loan.
DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Winton
attempts to minimize loan delinquencies through the assessment of late charges
and adherence to its established collection procedures. After a mortgage loan
payment is 15 days delinquent, Winton assesses a late charge of 5% of the amount
of the payment and contacts the borrower by mail or phone to request payment. In
certain limited instances, Winton may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize the borrower's
financial affairs. If the loan continues in a delinquent status for 90 days or
more, Winton generally will initiate foreclosure proceedings.
Real estate acquired by Winton as a result of foreclosure or by deed in
lieu of foreclosure is classified as "real estate owned" until it is sold. When
Winton acquires such property, Winton records the property at the lower of the
loan's unpaid principal balance or fair value at the date of foreclosure less
estimated selling expenses. Periodically, Winton reviews its real estate owned
to ensure that fair value is not less than carrying value. Any allowance
resulting from the review is charged to earnings as a provision for losses on
real estate acquired through foreclosure. All costs incurred from the date of
acquisition are expensed in the period paid.
The following table reflects the amount of loans in delinquent status as
of the dates indicated:
At September 30,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------- ------
(Dollars in thousands)
Loans delinquent
30 to 59 days $6,413 $3,988 $3,290 $10,678 $3,911
60 to 89 days 1,666 1,011 1,440 381 1,107
90 or more days 1,245 3,759 3,398 2,744 1,227
------ ------ ------ ------- ------
Total delinquent loans $9,324 $8,758 $8,128 $13,803 $6,245
====== ====== ====== ======= ======
Ratio of total delinquent loans to total loans (1) 1.85% 1.73% 1.71% 3.09% 1.44%
====== ====== ====== ======= ======
- --------------------
(1) Includes loans held for sale.
Winton reviews all delinquent loans on a regular basis and places loans on
non-accrual status when, in the opinion of management, the collection of
additional interest is doubtful. Winton places residential mortgage loans on
non-accrual status when either principal or interest is considered
uncollectible. Consumer loans generally are charged off when the loan becomes
over 120 days delinquent. Nonresidential real estate loans are evaluated for
non-accrual status when the loan is 90 days or more past due. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan. The amount of interest that would have
been earned on nonaccruing loans, had such loans been current, for the year
ended September 30, 2004, was approximately $33,000.
8
The following table sets forth information with respect to Winton's
nonperforming assets for the periods indicated. During the periods shown, Winton
had no restructured loans within the meaning of SFAS No. 15. In addition, as of
September 30, 2004, Winton had no loans that were not reflected in the table as
non-accrual, 90 days past due or restructured, but which may become so in the
near future because management has concerns as to the ability of the borrowers
to comply with repayment terms.
At September 30,
--------------------------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
(Dollars in thousands)
Loans accounted for on a non-accrual basis: (1)
Real estate loans:
Residential $ 164 $ 696 $ 885 $ 595 $ 353
Nonresidential 185 2,499 - - 220
Construction loans - - - 1,833 -
------- ------- ------- ------- -------
Total 349 3,195 885 2,428 573
Accruing loans which are contractually past due 90 days or more:
Real estate loans:
Residential 578 526 254 315 589
Nonresidential and land 265 16 2,210 - -
Consumer and other loans 53 22 49 1 65
------- ------- ------- ------- -------
896 564 2,513 316 654
------- ------- ------- ------- -------
Total of non-accrual and 90 days past
due loans $ 1,245 $ 3,759 $ 3,398 $ 2,744 $ 1,227
======= ======= ======= ======= =======
Percentage of total loans .25% .74% .72% .61% .28%
======= ======= ======= ======= =======
Other nonperforming assets (2) $ 4,217 $ 846 $ 2,462 $ 486 $ 716
======= ======= ======= ======= =======
- ----------------------------
(1) Non-accrual status denotes loans on which, in the opinion of management,
the collection of additional interest is unlikely. Payments received on a
non-accrual loan are either applied to the outstanding principal balance
or recorded as interest income, depending on management's assessment of
the collectibility of the loan.
(2) Consists of real estate acquired through foreclosure and other repossessed
assets that are carried at the lower of cost or fair value less estimated
selling expenses.
OTS regulations require that each thrift institution classify its assets
on a regular basis. Problem assets are classified as "substandard," "doubtful"
or "loss." "Substandard" assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. "Doubtful" assets have
the same weaknesses as "substandard" assets, with the additional characteristics
that (i) the weaknesses make collection or liquidation in full on the basis of
currently existing facts, conditions and values questionable and (ii) there is a
high possibility of loss. An asset classified "loss" is considered uncollectible
and of such little value that its continuance as an asset of the institution is
not warranted. The regulations also contain a "special mention" category,
consisting of assets which do not currently expose an institution to a
sufficient degree of risk to warrant classification, but which possess credit
deficiencies or potential weaknesses deserving management's close attention. At
September 30, 2004, Winton had approximately $6.6 million of loans designated as
special mention.
Generally, Winton classifies as "substandard" all loans that are
delinquent more than 60 days, unless management believes the delinquency status
is short-term due to unusual circumstances. Loans delinquent fewer than 60 days
may also be classified if the loans have the characteristics described above
rendering classification appropriate. At September 30, 2004, Winton's classified
assets consisted of substandard assets of approximately $1.1 million and no
loans classified as doubtful. No loans were classified as a loss at September
30, 2004.
Federal examiners are authorized to classify an association's assets. If
an association does not agree with an examiner's classification of an asset, the
association may appeal the classification to the appropriate Regional Director
of the OTS. Winton had no disagreements with the examiners regarding the
classification of assets at the time of the last examination.
9
OTS regulations require that Winton establish prudent general allowances
for loan losses for any loan classified as substandard or doubtful. If an asset,
or portion thereof, is classified as loss, the association must either establish
specific allowances for losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount.
ALLOWANCE FOR LOAN LOSSES. The Board of Directors reviews on a quarterly
basis the allowance for loan losses as it relates to a number of relevant
factors, including, but not limited to, trends in the level of nonperforming
assets and classified loans, current and anticipated economic conditions in the
primary lending area, past loss experience and possible losses arising from
specific problem assets. To a lesser extent, management also considers loan
concentrations to single borrowers and changes in the composition of the loan
portfolio. While the Board of Directors believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in adjustments. Net earnings could be
significantly affected by these adjustments if circumstances differ
substantially from the assumptions used in making the final determination. At
September 30, 2004, Winton's allowance for loan losses totaled $2.4 million.
It is Winton'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, Winton's
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).
Winton 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, Winton 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 Winton's investment in nonresidential and
multifamily 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 that 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, 2004, Winton had no loans defined as impaired under SFAS
No. 114.
As a result of an analysis of historical experience, the volume and type
of lending conducted by Winton, the status of past due principal and interest
payments, and general economic conditions, particularly as such conditions
relate to Winton's loan portfolio, management recorded a $300,000 provision for
losses on loans during the fiscal year ended September 30, 2004, compared to a
provision of $605,000 recorded in fiscal 2003. There can be no assurance that
the allowance for loan losses of Winton will be adequate to cover losses on
nonperforming assets in the future.
10
The following table sets forth an analysis of Winton's allowance for
loan losses for the periods indicated.
Year ended September 30,
-------------------------------------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of period $ 2,265 $ 1,850 $ 1,194 $ 1,000 $ 932
Charge-offs:
Real estate loans:
One- to four-family (44) (35) (42) - (75)
Multifamily and nonresidential - - (124) - (8)
Construction loans - - (349) - -
Consumer loans (118) (207) (155) (124) (41)
------- ------- ------- ------- -------
Total (162) (242) (670) (124) (124)
Total recoveries (1) 45 52 66 18 67
------- ------- ------- ------- -------
Net charge-offs (117) (190) (604) (106) (57)
Provision for loan losses 300 605 1,260 300 125
------- ------- ------- ------- -------
Balance at end of period $ 2,448 $ 2,265 $ 1,850 $ 1,194 $ 1,000
======= ======= ======= ======= =======
Ratio of net charge-offs during the
period to average loans
outstanding during the period (2) .02% .04% .14% .03% .01%
======= ======= ======= ======= =======
- ---------------------------
(1) The recoveries were from consumer loans.
(2) During the respective periods there were $493.4 million, $459.3 million,
$443.2 million, $420.5 million and $420.0 million in average loans
outstanding.
The following table provides an allocation of Winton's allowance for loan
losses as of each of the following dates:
September 30,
-----------------------------------------------------------------------------
% of % of % of % of % of
Total Total Total Total Total
2004 Loans 2003 Loans 2002 Loans 2001 Loans 2000 Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(In thousands)
General allowances
Real estate loans:
One- to four-family $1,390 56.8% $ 906 57.2% $ 792 52.4% $ 392 50.7% $ 455 51.7%
Multifamily and nonresidential 824 33.7 974 32.9 659 36.3 539 36.9 208 35.3
Construction and development loans 147 6.0 249 7.9 290 8.7 132 9.0 203 9.5
Consumer loans 87 3.5 136 2.0 109 2.6 131 3.4 134 3.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total general allowances $2,448 100.0% $2,265 100.0% $1,850 100.0% $1,194 100.0% $1,000 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Total allowance for loan losses $2,448 $2,265 $1,850 $1,194 $1,000
====== ====== ====== ====== ======
11
INVESTMENT ACTIVITIES
Winton Financial invests in municipal bonds, corporate securities, U.S.
government and agency obligations. Municipal bonds owned are primarily bank
qualified general obligations of states and municipalities whose interest in
non-taxable and include private insurance support as to principal. The following
table presents the amortized cost and market values of Winton's investment
securities available for sale at the dates indicated:
September 30,
--------------------------------------------------------------------
2004 2003 2002
-------------------- -------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------- ------- ------- ------- ------- -------
(In thousands)
U.S. government and agency
obligations $11,254 $11,224 $ 8,046 $ 8,103 $12,375 $12,537
Corporate equity securities 145 145 209 606 209 558
Municipal bonds 6,772 6,857 12,850 12,757 - -
------- ------- ------- ------- ------- -------
Total $18,171 $18,226 $21,105 $21,466 $12,584 $13,095
======= ======= ======= ======= ======= =======
The following table presents the contractual maturities or terms to
repricing of U.S. Government and agency obligations and municipal bonds at
annualized cost and the weighted-average yields at September 30, 2004:
Maturing within Maturing within Maturing within Maturing after
one year after one to five years after five to ten years after ten years from
September 30, 2004 September 30, 2004 September 30, 2004 September 30, 2004 Total
------------------- ----------------------- ----------------------- ------------------- -------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(Dollars in thousands)
Available
for sale(1) - - $11,120 2.76% $6,512 3.59% $ 394 3.43% $18,026 3.08%
(1) Tax exempt municipal bonds are shown at stated yields.
Winton maintains a portfolio of mortgage-backed pass-through securities in
the form of FHLMC, Federal National Mortgage Association ("FNMA") and Government
National Mortgage Association ("GNMA") participation certificates.
Mortgage-backed pass-through securities generally entitle Winton to receive a
portion of the cash flows from an identified pool of mortgages and gives Winton
an interest in the pool of mortgages. FHLMC, FNMA and GNMA securities are each
guaranteed by their respective agencies as to principal and interest.
12
The following table sets forth certain information regarding Winton's
investment in mortgage-backed securities at the dates indicated:
At September 30, 2004 At September 30, 2003
------------------------------------------ ------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Estimated Amortized unrealized unrealized Estimated
cost gains losses fair value cost gains losses fair value
--------- ---------- ---------- ---------- --------- ---------- ---------- ----------
(In thousands)
Mortgage-backed securities held to maturity:
FHLMC participation $ 1,194 $ 2 $ (18) $ 1,178 $1,643 $ - $ (34) $1,604
certificates
FNMA participation 1,719 15 (10) 1,724 2,287 2 (30) 2,259
certificates
GNMA participation 93 3 - 96 151 2 - 153
certificates
CMOs - - - - 188 - - 188
------- ----- -------- ------- ------ ---- ------- ------
3,006 20 (28) 2,998 4,269 4 (69) 4,204
Mortgage-backed securities available for sale:
FHLMC participation 3,812 10 (36) 3,786 - - - -
certificates
FNMA participation 5,478 31 (6) 5,503 1,944 21 1,965
certificates
GNMA participation 6,535 19 (81) 6,473 137 1 - 138
------- ----- -------- ------- ------ ---- ------- ------
certificates
15,825 60 (123) 15,762 2,081 22 - 2,103
------- ----- -------- ------- ------ ---- ------- ------
$18,831 $ 80 $ (151) $18,760 $6,350 $ 26 $ (69) $6,307
======= ===== ======== ======= ====== ==== ======= ======
The combined amortized cost of mortgage-backed and related securities
designated as held to maturity or available for sale at September 30, 2004 and
2003, by contractual terms to maturity are shown below. Actual maturities may
differ from contractual maturities because borrowers generally may prepay
obligations without prepayment penalties. Also, the timing of cash flows will be
affected by management's intent to sell securities designated as available for
sale under certain economic conditions.
Amortized cost at Amortized cost at
September 30, 2004 September 30, 2003
------------------- ------------------
(In thousands)
Due within three years $ 2 $ 33
Due after three years through five years 28 -
Due after five years through ten years 4,144 48
Due after ten years through twenty years 2,603 3,289
Due after twenty years 12,054 2,980
----------- --------
$ 18,831 $ 6,350
=========== ========
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of Winton's
funds for use in lending and other investment activities. In addition to
deposits, Winton derives funds from interest payments and principal repayments
on loans and mortgage-backed securities, advances from the FHLB, income on
earning assets, service charges and gains on the sale of assets. Loan payments
are a relatively stable source of funds, while deposit inflows and outflows
fluctuate more in response to general interest rates and money market
conditions. FHLB advances are used on a short-term basis to compensate for
reductions in the availability of funds from other sources or on a longer term
basis for general business purposes.
DEPOSITS. Historically, deposits have been attracted principally from
within Winton's primary market area through the offering of a broad selection of
deposit instruments, including checking accounts, regular passbook savings
accounts, term certificate accounts and individual retirement accounts. In the
recent past Winton has utilized the services of deposit brokers to market
certificates of deposit. At September 30, 2004, the total amount of brokered
deposits equaled approximately $9.0 million, or 2.5%, of total deposits.
Interest rates paid, maturity terms, service fees and withdrawal penalties
for the various types of accounts are established periodically by management of
Winton based on Winton's liquidity requirements, growth goals and interest rates
paid by competitors. Winton attempts to manage its interest rate risk by
lengthening the term to maturity of its deposit liabilities.
At September 30, 2004, Winton's certificates of deposit totaled $248.9
million, or 68.2% of total deposits. Of such amount, approximately $144.5
million in certificates of deposit mature within one year. Based on past
experience and Winton's prevailing pricing strategies, management believes that
a substantial percentage of such certificates will renew with
13
Winton at maturity, although brokered deposits are less likely to renew than
other certificates of deposit. If there is a significant deviation from
historical experience, Winton can, to a limited extent, utilize additional
borrowings from the FHLB as an alternative to this source of funds. See
"Borrowings" and "REGULATION - Federal Home Loan Banks."
During fiscal 2004, 2003 and 2002, Winton offered certificates of deposit
with terms from six months to five years at rates which adjust monthly with
designated market indices, which were the prime rate, the six-month CD resale
rate or the three-year Treasury rate. Approximately $8.2 million of these
certificates of deposit were outstanding at September 30, 2004. Because these
certificates of deposit are market rate sensitive, they increase Winton's
interest rate risk. See "Asset/Liability Management."
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Winton at September 30, 2004:
Percent
of total
Amount deposits
-------- --------
(In thousands)
Transaction accounts:
Passbook and club accounts (1) $ 79,582 21.81%
Checking accounts (2) 36,370 9.97
-------- ------
Total transaction accounts 115,952 31.78
Certificates of deposit (3):
Less than 2.00% 28,296 7.76
2.00 - 3.99% 183,686 50.35
4.00 - 5.99% 28,660 7.86
6.00 - 7.99% 8,227 2.25
8.00 - 9.99% 12 -
-------- ------
Total certificates of deposit 248,881 68.22
-------- ------
Total deposits $364,833 100.00%
======== ======
- ---------------
(1) Winton's weighted-average interest rate on passbook accounts fluctuates
with the general movement of interest rates. The weighted-average interest
rate on passbook accounts was 1.17% at September 30, 2004.
(2) Winton's weighted-average interest rate paid on checking accounts
fluctuates with the general movement of interest rates. The
weighted-average rate on checking accounts was .60% at September 30, 2004.
(3) Includes Individual Retirement Accounts and jumbo certificates of deposit
(those with balances in excess of $100,000). Terms of certificates of
deposit offered range from 30 days to 15 years, with the average accounts
ranging from 90 days to five years.
14
The following table shows rate and maturity information for Winton's
certificates of deposit as of September 30, 2004:
Amount Due
--------------------------------------------------------
Over Over
Up to 1 year to 2 years to Over
Rate one year 2 years 3 years 3 years Total
- ---- -------- ------- ------- ------ --------
(In thousands)
Less than 2.00% $ 23,982 $ 4,287 $ 27 $ - $ 28,296
2.00 - 3.99% 109,339 57,977 11,224 5,146 183,686
4.00 - 5.99 6,643 5,054 13,820 3,143 28,660
6.00 - 7.99 4,519 3,582 94 32 8,227
8.00 - 9.99 - 12 - - 12
-------- ------- ------- ------ --------
Total certificates of
deposit $144,483 $70,912 $25,165 $8,321 $248,881
======== ======= ======= ====== ========
The following table presents the amount of Winton's certificates of
deposit of $100,000 or more, by the time remaining until maturity at September
30, 2004:
At September 30, 2004
---------------------
Maturity (In thousands)
- --------
Three months or less $17,498
Over 3 months to 6 months 11,639
Over 6 months to 12 months 14,436
Over twelve months 33,398
------
Total $76,971
=======
BORROWINGS. During the year ended September 30, 2004, WFC's borrowings
consisted of FHLB advances and a $2.0 million loan with a correspondent bank.
The following table sets forth the maximum amount of WFC's FHLB advances and
other borrowings outstanding at any month-end, during the periods shown, and the
average aggregate balances of FHLB advances for such periods:
Year ended September 30,
---------------------------------------------
2004 2003 2002
---- ---- ----
(In thousands)
Maximum amount of FHLB advances and other borrowings $143,995 $146,612 $135,411
======== ======== ========
Average amount of FHLB advances and other borrowings
outstanding during period $136,778 $128,519 $126,053
======== ======== ========
The following table sets forth certain information as to Winton's FHLB
advances and other borrowings at the dates indicated:
At September 30,
---------------------------------------------
2004 2003 2002
---- ---- ----
(In thousands)
FHLB advances and other borrowings $131,088 $138,612 $126,427
======== ======== ========
Weighted-average interest cost of FHLB advances and other
borrowings during period based on month end balances 4.74% 4.91% 5.55%
======== ======== ========
COMPETITION
Winton competes for deposits with other savings associations, commercial
banks and credit unions and with the issuers of commercial paper and other
securities, such as shares in money market mutual funds. The primary factors in
15
competing for deposits are interest rates and convenience of office location. In
making loans, Winton competes with other savings associations, commercial banks,
consumer finance companies, credit unions, leasing companies, mortgage brokers
and other lenders. Winton competes for loan originations primarily through the
interest rates and loan fees it charges and through the efficiency and quality
of services it provides to borrowers. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable.
The size of financial institutions competing with Winton is likely to
increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions. Such
increased competition may have an adverse effect upon Winton.
SUBSIDIARY ACTIVITIES
WFC has two subsidiaries, Winton and Walnut Street Enterprises L.L.C.
Walnut Street Enterprises was incorporated in fiscal 2004 for the purpose of
acquiring and owning real estate.
PERSONNEL
As of September 30, 2004, Winton had 134 full-time equivalent employees.
Winton believes that relations with its employees are good. Winton offers
health, disability, life and dependent care benefits. None of the employees of
Winton are represented by a collective bargaining unit.
REGULATION
GENERAL
WFC is a savings and loan holding company within the meaning of the Home
Owners Loan Act, as amended (the "HOLA"). Consequently, WFC is subject to
regulation, examination and oversight by the OTS and must submit periodic
reports to the OTS concerning its activities and financial condition. In
addition, as a corporation organized under Ohio law, WFC is subject to
provisions of the Ohio Revised Code applicable to corporations generally.
As an Ohio savings and loan association, Winton is subject to regulation,
examination and oversight by the Superintendent of the Division of Financial
Institutions (the "Ohio Superintendent"). Because Winton's deposits are insured
by the FDIC, Winton also is subject to regulatory oversight by the FDIC. Winton
must file periodic reports with the OTS concerning its activities and financial
condition. Examinations are conducted periodically by federal and state
regulators to determine whether Winton is in compliance with various regulatory
requirements and is operating in a safe and sound manner. Winton is a member of
the FHLB and is subject to certain regulations promulgated by the Board of
Governors of the Federal Reserve System (the "FRB").
OHIO CORPORATION LAW
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code regulates
certain takeover bids affecting certain public corporations that have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination may
not occur unless (1) one of the specified exceptions applies, (2) the holders of
at least two-thirds of the voting shares, and of at least a majority of the
voting shares not beneficially owned by the Interested Shareholder, approve the
business combination at a meeting called for such purpose, or (3) the business
combination meets certain statutory criteria designed to ensure that the issuing
public corporation's remaining shareholders receive fair consideration for their
shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of
16
such an opt-out amendment. The statute also provides that it will continue to
apply to any business combination between a person who became an Interested
Shareholder prior to the adoption of such an amendment as if the amendment had
not been adopted. Neither WFC nor Winton has opted out of the protection
afforded by Chapter 1704.
CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code (the
"Control Share Acquisition Statute") requires that, with certain exceptions,
acquisitions of voting securities which would result in the acquiring
shareholder owning 20%, 33-1/3% or 50% of the outstanding voting securities of
an Ohio corporation (a "Control Share Acquisition") must be approved in advance
by the holders of at least a majority of the outstanding voting shares of such
corporation represented at a meeting at which a quorum is present and a majority
of the portion of the outstanding voting shares represented at such a meeting
excluding the voting shares owned by the acquiring shareholder, by certain other
persons who acquire or transfer voting shares after public announcement of the
acquisition or by certain officers of the corporation or directors of the
corporation who are employees of the corporation. The Control Share Acquisition
Statute was intended, in part, to protect shareholders of Ohio corporations from
coercive tender offers.
TAKEOVER BID STATUTE. Ohio law provides that an offeror may not make a
tender offer or request or invitation for tenders that would result in the
offeror beneficially owning more than ten percent of any class of the target
company's equity securities unless such offeror files certain information with
the Ohio Division of Securities (the "Securities Division") and provides such
information to the target company and the offerees within Ohio. The Securities
Division may suspend the continuation of the control bid if the Securities
Division determines that the offeror's filed information does not provide full
disclosure to the offerees of all material information concerning the control
bid. The statute also provides that an offeror may not acquire any equity
security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan holding company and the proposed transaction
requires federal regulatory approval.
OHIO SAVINGS AND LOAN REGULATION
The Ohio Superintendent is responsible for the regulation and supervision
of Ohio savings and loan associations in accordance with the laws of the State
of Ohio and imposes assessments on Ohio associations based on their asset size
to cover the costs of supervision and examination. Ohio law prescribes the
permissible investments and activities of Ohio savings and loan associations,
including the types of lending that such associations may engage in and the
investments in real estate, subsidiaries and corporate or government securities
that such associations may make. The ability of Ohio associations to engage in
these state-authorized investments and activities is subject to oversight and
approval by the FDIC, if such investments or activities are not permissible for
a federally-chartered savings association. The Ohio Superintendent also has
approval authority over any mergers involving, or acquisitions of control of,
Ohio savings and loan associations. The Ohio Superintendent may initiate certain
supervisory measures or formal enforcement actions against Ohio associations.
Ultimately, if the grounds provided by law exist, the Superintendent may place
an Ohio association in conservatorship or receivership.
In addition to being governed by the laws of Ohio specifically governing
savings and loan associations, Winton is also governed by Ohio corporate law, to
the extent such law does not conflict with the laws specifically governing
savings and loan associations.
OFFICE OF THRIFT SUPERVISION
REGULATORY CAPITAL REQUIREMENTS. Winton is required by OTS regulations to
meet certain minimum capital requirements. The tangible capital requirement
requires savings associations to maintain "tangible capital" of not less than
1.5% of their adjusted total assets. Tangible capital is defined in OTS
regulations as core capital minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 4% of their adjusted total
assets, except for associations with the highest examination rating and
acceptable levels of risk.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of their risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of Winton includes a general loan loss allowance of $2.4
million at September 30, 2004. The OTS may adjust the risk-based capital
requirement on an individualized basis to take into account risks due to
concentrations of credit and non-traditional activities.
17
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and more numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. In addition, the OTS
generally can downgrade an association's capital category, notwithstanding its
capital level, if, after notice and opportunity for hearing, the association is
deemed to be engaging in an unsafe or unsound practice because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. Winton's capital at September 30, 2004, met the
standards for the highest category, a "well-capitalized" institution.
QUALIFIED THRIFT LENDER TEST. Savings associations must meet one of two
tests in order to be a qualified thrift lender ("QTL"). The first test requires
a savings association to maintain a specified level of investments in assets
that are designated as qualifying thrift investments ("QTIs"). Generally, QTIs
are assets related to domestic residential real estate and manufactured housing
and include credit card, student and small business loans and stock issued by
any FHLB, the FHLMC or the FNMA. Under the first test, at least 65% of an
institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business and 20% of liquid assets) must
consist of QTI on a monthly average basis in nine out of every 12 months. The
second test permits a savings association to qualify as a QTL by meeting the
definition of "domestic building and loan association" under the Internal
Revenue Code of 1986, as amended (the "Code"). In order for an institution to
meet the definition of a "domestic building and loan association" under the
Code, at least 60% of such institution's assets must consist of specified types
of property, including cash loans secured by residential real estate or
deposits, educational loans and certain governmental obligations. The OTS may
grant exceptions to the QTL tests under certain circumstances. If a savings
association fails to meet one of the QTL tests, the association and its holding
company become subject to certain operating and regulatory restrictions. At
September 30, 2004, Winton qualified as a QTL.
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's Lending Limit Capital (or 200% of
Lending Limit Capital for qualifying institutions with less than $100 million in
deposits). Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of the board of directors of the association, with any "interested"
director not participating. All loans to directors, executive officers and
principal shareholders must be made on terms substantially the same as offered
in comparable transactions with the general public or as offered to all
employees in a company-wide benefit program, and loans to executive officers are
subject to additional limitations. Winton was in compliance with such
restrictions at September 30, 2004.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA") and the
Federal Reserve Board's Regulation W. An affiliate of a savings association is
any company or entity that controls, is controlled by or is under common control
with the savings association. WFC and Alpine Terrace II, LLC, a wholly owned
subsidiary of Winton, are affiliates of Winton. Generally, Sections 23A and 23B
of the FRA (i) limit the extent to which a savings association or its
subsidiaries may engage in "covered transactions" with any one affiliate up to
an amount equal to 10% of such institution's capital stock and surplus, (ii)
limit the aggregate of all such transactions with all affiliates up to an amount
equal to 20% of such capital stock and surplus, and (iii) require that all such
transactions be on terms substantially the same, or at least as favorable to the
association, as those provided in transactions with a non-affiliate. The term
"covered transaction" includes the making of loans, purchasing of assets,
acceptance of a security issued by the affiliate as collateral for an extension
of credit to any person, issuance of a guarantee and other similar types of
transactions. In addition to the limits in Sections 23A and 23B, a savings
association may not make any loan or other extension of credit to an affiliate
unless the affiliate is engaged only in activities permissible for a bank
holding company and may not purchase or invest in securities of any affiliate
except shares of a subsidiary. Winton was in compliance with these requirements
and restrictions at September 30, 2004.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various restrictions
or requirements on the ability of associations to make capital distributions.
Capital distributions include, without limitation, payments of cash dividends,
repurchases and certain other acquisitions by an association of its shares and
payments to stockholders of another association in an acquisition of such other
association.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (i) if the
proposed distribution would cause total distributions for the calendar year to
exceed the savings association's retained net income for that year to date plus
the retained net income for the preceding two years; (ii) if the savings
association will not be at least adequately capitalized following the capital
distribution; (iii) if the proposed distribution would violate a prohibition
contained in any applicable statute, regulation or agreement between the savings
association and the OTS (or the FDIC), or violate a condition imposed on the
savings association in an OTS-approved application or notice. If a savings
association subsidiary of a holding company is not required to file an
application, it must file a 30-day notice of the proposed capital distribution
with the OTS.
18
HOLDING COMPANY REGULATION. As a savings and loan holding company within
the meaning of the HOLA, WFC has registered with the OTS and is subject to OTS
regulations, examination, supervision and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by WFC.
Except with the prior approval of the OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such holding company's stock may also acquire control of any
savings institution, other than a subsidiary institution, or any other savings
and loan holding company.
As a unitary savings and loan holding company in existence on May 4, 1999,
WFC generally has no restrictions on its activities. If the OTS determines that
there is reasonable cause to believe that the continuation by a savings and loan
holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings association, however,
the OTS may impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of WFC and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL test, then such unitary savings and
loan holding company would become subject to the activities restrictions
applicable to multiple holding companies. At September 30, 2004, Winton met the
QTL test.
FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF WFC AND WINTON. In
addition to the Ohio law limitations on the merger and acquisition of WFC,
federal limitations generally require regulatory approval of acquisitions at
specified levels. Under pertinent federal law and regulations, no person,
directly or indirectly, or acting in concert with others, may acquire control of
Winton or WFC without 60 days' prior notice to the OTS. "Control" is generally
defined as having more than 25% ownership or voting power; however, ownership or
voting power of more than 10% may be deemed "control" if certain factors are in
place. If the acquisition of control is by a company, the acquiror must obtain
approval, rather than give notice, of the acquisition.
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE AND ASSESSMENTS. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and savings and loan associations and safeguards the
safety and soundness of the banking and savings and loan industries. The FDIC
administers two separate insurance funds, the Bank Insurance Fund ("BIF") for
commercial banks and state savings banks and the SAIF for savings associations.
Winton is a member of the SAIF and its deposit accounts are insured by the FDIC
up to the prescribed limits. The FDIC has examination authority over all insured
depository institutions, including Winton, and has authority to initiate
enforcement actions against federally-insured savings associations if the FDIC
does not believe the OTS has taken appropriate action to safeguard safety and
soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in the SAIF
and in the BIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such rates if such target
level has been met. The FDIC has established a risk-based assessment system for
both SAIF and BIF members. Under this system, assessments vary based on the risk
the institution poses to its deposit insurance fund. The risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
STATE-CHARTERED ASSOCIATION ACTIVITIES. The ability of state-chartered
associations to engage in any state-authorized activities or make any
state-authorized investments is limited if such activity is conducted or
investment is made in a manner different than that permitted for, or subject to
different terms and conditions than those imposed on, federally chartered
savings associations. Engaging as a principal in any such activity or investment
not permissible for a federal association is subject to approval by the FDIC.
Such approval will not be granted unless certain capital requirements are met
and there is not a significant risk to the FDIC insurance fund. All of Winton's
activities and investments at September 30, 2004, were permissible for a federal
association.
19
FRB RESERVE REQUIREMENTS
FRB regulations require savings associations to maintain certain reserves
equal to a percentage of net transaction accounts (primarily NOW accounts). At
September 30, 2004, Winton was in compliance with the present reserve
requirements and the requirements then in effect.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances. Winton
is a member of the FHLB of Cincinnati and must maintain an investment in the
capital stock of the FHLB of Cincinnati in an amount equal to the greater of 1%
of the aggregate outstanding principal amount of Winton's residential mortgage
loans, home purchase contracts and similar obligations at the beginning of each
year, or 5% of its advances from the FHLB of Cincinnati. Winton was in
compliance with this requirement with an investment in stock of the FHLB of
Cincinnati of $8.5 million at September 30, 2004.
The FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by the FHLB must be made only to provide funds for
residential housing finance.
TAXATION
FEDERAL TAXATION
WFC and Winton are each subject to the federal tax laws and regulations
which apply to corporations generally. In addition to the regular income tax,
WFC and Winton may be subject to an alternative minimum tax. An alternative
minimum tax is imposed at a minimum tax rate of 20% on "alternative minimum
taxable income" (which is the sum of a corporation's regular taxable income,
with certain adjustments, and tax preference items), less any available
exemption. Such tax preference items include interest on certain tax-exempt
bonds issued after August 7, 1986. In addition, 75% of the amount by which a
corporation's "adjusted current earnings" exceeds its alternative minimum
taxable income computed without regard to this preference item and prior to
reduction by net operating losses, is included in alternative minimum taxable
income. Net operating losses can offset no more than 90% of alternative minimum
taxable income. The alternative minimum tax is imposed to the extent it exceeds
the corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. However, the
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average gross
receipts of $5,000,000 or less for the three tax years ending with its first tax
year beginning after December 31, 1996. Once a corporation is recognized as a
small corporation, it will continue to be exempt from the alternative minimum
tax for as long as its average gross receipts for the prior three-year period
does not exceed $7,500,000. In determining if a corporation meets this
requirement, the first year that it achieved small corporation status is not
taken into consideration.
Winton's average gross receipts for the three tax years ending on
September 30, 2004, is $32.1 million and as a result, Winton does not qualify as
a small corporation exempt from the alternative minimum tax.
Certain thrift institutions, such as Winton, are allowed deductions for
bad debts under methods more favorable than those granted to other taxpayers.
Qualified thrift institutions may compute deductions for bad debts using either
the specific charge-off method of Section 166 of the Code or the experience
method of Section 593 of the Code. The experience method is also available to
small banks. Under the "experience" method, a thrift institution is generally
allowed a deduction for an addition to its bad debt reserve equal to the greater
of (i) an amount based on its actual average experience for losses in the
current and five preceding taxable years, or (ii) an amount necessary to restore
the reserve to its balance as of the close of the base year.
Thrift institutions that are treated as small banks are allowed to utilize
the experience method applicable to such institutions, while thrift institutions
that are treated as large banks are required to use only the specific charge off
method.
A thrift institution required to change its method of computing reserves
for bad debt will treat such change as a change in the method of accounting,
initiated by the taxpayer and having been made with the consent of the Secretary
of the Treasury. Section 481(a) of the Code requires certain amounts to be
recaptured with respect to such change. Generally, the amounts to be recaptured
will be determined solely with respect to the "applicable excess reserves" of
the taxpayer. The amount of the applicable excess reserves will be taken into
account ratably over a six-taxable year period, commencing with
20
the first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like Winton, the amount of
the institution's applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by Winton to WFC is deemed paid out of its pre-1988
reserves under these rules, the pre-1988 reserves would be reduced and the gross
income of Winton for tax purposes would be increased by the amount which, when
reduced by the income tax, if any, attributable to the inclusion of such amount
in its gross income, equals the amount deemed paid out of the pre-1988 reserves.
As of September 30, 2004, the pre-1988 reserves of Winton for tax purposes
totaled approximately $1.8 million. Winton believes it had approximately $38.9
million of accumulated earnings and profits for tax purposes as of September 30,
2004, which would be available for dividend distributions, provided regulatory
restrictions applicable to the payment of dividends are met. No representation
can be made as to whether Winton will have current or accumulated earnings and
profits in subsequent years.
The tax returns of Winton have been closed without audit through fiscal
year 2000. In the opinion of management, any examination of open returns would
not result in a deficiency which could have a material adverse effect on the
financial condition of Winton.
OHIO TAXATION
WFC is subject to the Ohio corporation franchise tax, which, as applied to
WFC, is a tax measured by both net earnings and net worth. The rate of tax is
the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and
8.5% of computed Ohio taxable income in excess of $50,000 or (ii) .400% times
taxable net worth.
In computing its tax under the net worth method, WFC may exclude 100% of
its investment in the capital stock of Winton, as reflected on the balance sheet
of WFC in computing its taxable net worth as long as it owns at least 25% of the
issued and outstanding capital stock of Winton. The calculation of the exclusion
from net worth is based on the ratio of the excludable investment (net of any
appreciation or goodwill included in such investment) to total assets multiplied
by the net value of the stock. As a holding company, WFC may be entitled to
various other deductions in computing taxable net worth that are not generally
available to operating companies.
A special litter tax is also applicable to all corporations, including
WFC, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
..22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
WFC may elect to be a "qualified holding company" and, as such, be exempt
from the net worth tax. A corporation franchise tax based solely on net earnings
would still apply. To be exempt, WFC must satisfy all the requirements of the
applicable statute, including making related member adjustments that could
affect the taxable net worth of WFC's subsidiary, Winton.
Winton is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.3% of the taxable book
net worth of Winton determined in accordance with generally accepted accounting
principles. As a "financial institution," Winton is not subject to any tax based
upon net income or net profits imposed by the State of Ohio.
21
ITEM 2. PROPERTIES
The following table sets forth certain information at September 30, 2004,
regarding the properties on which the main office, each branch office and
lending office of Winton is located. The aggregate net book value of the
properties was $7.0 million at September 30, 2004.
Owned Date
Location or leased Acquired
- ---------------------------- ---------------- --------
Main office:
5511 Cheviot Road
Cincinnati, Ohio 45247 owned/leased (1) 1967
Branch offices:
4517 Vine Street
Cincinnati, Ohio 45217 owned 1932
10575 Harrison Avenue
Harrison, Ohio 45030 owned 1981
7014 Vine Street
Cincinnati, Ohio 45216 owned 1897
8670 Winton Road
Cincinnati, Ohio 45231 owned 1993
9635 Montgomery Road
Cincinnati, Ohio 45242 leased 2003
5440 Muddy Creek Road
Cincinnati, Ohio 45238 owned 2003
Lending offices:
8291 Beechmont Ave., Suite C
Cincinnati, Ohio 45255 leased 2003
211 Walnut Street
Lawrenceburg, Indiana 47025 leased 2003
- ---------------------
(1) In January 1990, Winton entered into a lease agreement pursuant to which
it leases a building containing approximately 3,750 square feet adjacent
to Winton's main office on Cheviot Road. The initial term of the lease was
three years, renewable for seven successive three year periods. Winton has
the right to purchase the building during the term of the lease. In
January 2005, the lease will be renewed for an additional three year
period.
ITEM 3. LEGAL PROCEEDINGS
Neither WFC nor Winton is presently engaged in any legal proceedings of a
material nature. From time to time, Winton is involved in legal proceedings to
enforce its security interest in collateral taken as security for its loans.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders of WFC
during the last quarter of the fiscal year ended September 30, 2004.
22
PART II
ITEM 5. MARKET FOR WFC'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
WFC's common shares are listed on the American Stock Exchange, Inc.
("Amex"), under the symbol "WFI." As of December 10, 2004, WFC had 5,069,824
common shares outstanding and held of record by approximately 400 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 below are the high and low sales prices for WFC's common shares,
as well as the amount of cash dividends paid on the common shares for each
quarter of fiscal 2004 and 2003. Such sales prices do not include retail
financial markups, markdowns, or commissions. Information relating to sales
prices has been obtained from Amex.
CASH
FISCAL YEAR ENDING SEPTEMBER 30, HIGH LOW DIVIDENDS
- -------------------------------- ----------- ----------- ----------
2004
Quarter ending September 30, 2004 $22.00 $ 14.20 $ .1125
Quarter ending June 30, 2004 15.24 13.50 .1125
Quarter ending March 31, 2004 14.75 12.70 .1125
Quarter ending December 31, 2003 13.65 12.70 .1125
2003
Quarter ending September 30, 2003 $13.80 $ 12.55 $ .1025
Quarter ending June 30, 2003 12.74 10.49 .1025
Quarter ending March 31, 2003 11.75 10.15 .1025
Quarter ending December 31, 2002 11.25 9.20 .1025
The earnings of WFC consist primarily of dividends from Winton. 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 subsidiary of a savings and loan
holding company must file an application with the OTS before it can declare and
pay a dividend if (1) the proposed distributions would cause total distributions
for that calendar year to exceed net income for that year to date plus the
savings association's retained net earnings for the preceding two years; (2) the
savings association will not be at least adequately capitalized following the
capital distribution; (3) the proposed distribution would violate a prohibition
contained in any applicable statute, regulation, or agreement between the
savings association and the OTS (or the FDIC), or a condition imposed on the
savings association in an OTS-approved application or notice; or, (4) if the
savings association has not received certain favorable examination ratings from
the OTS. If a savings association subsidiary of a holding company is not
required to file an application, it must file a notice with the OTS.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth certain information concerning WFC'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 herein.
23
AT SEPTEMBER 30,
STATEMENT OF FINANCIAL CONDITION DATA: 2004 2003 2002 2001 2000
(In thousands)
Total amount of:
Assets $551,842 $543,902 $505,701 $473,776 $465,214
Cash and cash equivalents 5,278 9,496 11,965 5,609 2,023
Investment securities 18,226 21,466 13,095 14,263 20,030
Mortgage-backed securities (1) 18,768 6,372 5,958 7,298 12,612
Loans receivable, net (2) 484,755 487,480 456,977 431,324 415,447
Deposits 364,833 354,296 332,995 316,960 309,889
FHLB advances and other borrowings 131,088 138,612 126,427 114,668 115,720
Shareholders' equity - net 48,412 44,222 40,016 36,690 34,006
FOR THE YEAR ENDED SEPTEMBER 30,
STATEMENT OF EARNINGS DATA: 2004 2003 2002 2001 2000
(In thousands, except share data)
Total interest income $ 30,828 $ 31,644 $ 33,945 $ 35,605 $ 35,942
Total interest expense (15,108) (16,396) (19,433) (23,536) (23,470)
-------- -------- -------- -------- --------
Net interest income 15,720 15,248 14,512 12,069 12,472
Provision for losses on loans (300) (605) (1,260) (300) (125)
-------- -------- -------- -------- --------
Net interest income after provision for
losses on loans 15,420 14,643 13,252 11,769 12,347
Other income 3,664 4,415 3,479 2,316 1,393
General, administrative and other expense (12,079) (10,563) (9,185) (8,293) (8,654)
-------- -------- -------- -------- --------
Earnings before income taxes 7,005 8,495 7,546 5,792 5,086
Federal income taxes (2,263) (2,789) (2,523) (1,937) (1,701)
-------- -------- -------- -------- --------
Net earnings $ 4,742 $ 5,706 $ 5,023 $ 3,855 $ 3,385
======== ======== ======== ======== ========
Earnings per share
Basic $ 1.03 $ 1.27 $ 1.13 $ 0.87 $ 0.77
======== ======== ======== ======== ========
Diluted $ 1.01 $ 1.23 $ 1.10 $ 0.85 $ 0.74
======== ======== ======== ======== ========
Dividends per share $ 0.45 $ 0.41 $ 0.37 $ 0.33 $ 0.32
======== ======== ======== ======== ========
- -----------------------
(1) 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.
(2) Includes loans held for sale.
24
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
OTHER DATA: 2004 2003 2002 2001 2000
Interest rate spread 2.70% 2.74% 2.71% 2.26% 2.35%
Net interest margin 2.92 3.01 3.03 2.63 2.70
Return on average equity 10.42 13.38 13.05 10.87 10.19
Return on average assets .86 1.10 1.03 .82 .72
Shareholders' equity to assets 8.77 8.13 7.91 7.74 7.31
Average interest-earning assets to
average interest-bearing liabilities 107.74 108.04 107.99 107.34 106.80
Net interest income to general,
administrative and other expense 130.14 144.35 158.00 145.53 144.12
General, administrative and other
expense to average total assets 2.19 2.04 1.88 1.77 1.83
Nonperforming assets to total
assets .99 .85 1.16 .68 .42
Allowance for loan losses to
nonperforming loans 196.63 60.26 54.44 43.51 81.50
Dividend payout ratio 43.44 32.28 32.74 37.93 41.56
Number of:
Loans outstanding 7,270 6,842 7,177 6,743 7,021
Deposit accounts 26,044 25,830 26,114 26,125 26,022
Full service offices 7 7 6 7 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
General
WFC's activities primarily have been limited to owning the outstanding common
shares of Winton. Therefore, the discussion that follows focuses on the
comparison of Winton's operations in fiscal 2004, 2003 and 2002.
Forward-Looking Statements
In the following pages, management presents an analysis of the financial
condition of WFC as of September 30, 2004, and the results of operations for
fiscal 2004 compared to prior years. In addition to this historical information,
the following discussion contains forward-looking statements that involve risks
and uncertainties. Economic circumstances, WFC's operations and WFC'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 WFC'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 as set forth
under "Asset/Liability Management;"
2. Management's discussion of the liquidity of Winton's assets and the
regulatory capital of Winton as set forth under "Liquidity and Capital
Resources;" and
3. 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, 2003 to September 30, 2004," and "Comparison
of Results of Operations for the Fiscal Years Ended September 30, 2004 and
2003."
25
Critical Accounting Policies
Allowance for Loan Losses: It is the Company's policy to provide valuation
allowances for estimated losses on loans based upon past loss experience, trends
in the level of delinquent and specific problem loans, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral and current economic conditions in the Company's primary
market areas. When the collection of a loan becomes doubtful or otherwise
troubled, the Company records a loan loss provision equal to the difference
between the fair value of the property collateralizing the loan and the loan's
carrying value. Major loans and major lending areas are reviewed periodically to
determine potential problems at an early date. The allowance for the loan losses
is increased by charges to earnings and decreased by charge-offs (net of
recoveries).
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." This Statement 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 loans 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 commercial and other
loans, and its evaluation of impairment thereof, such loans are collateral
dependent and as a result are carried as a practical matter at the lower of cost
or fair value.
It is the Company's policy to charge off unsecured credits that are more than
ninety days delinquent. Similarly, 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.
Mortgage Servicing Rights: Mortgage servicing rights are accounted for pursuant
to the provisions of SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," which requires that the
company recognize as separate assets, rights to service mortgage loans for
others, regardless of how those servicing rights are acquired. An institution
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells those loans with servicing rights
retained must allocate some of the cost of the loans to the mortgage servicing
rights.
SFAS No. 140 requires that capitalized mortgage servicing rights 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. 140, 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 of the pool (i.e., the net realizable
present value to an acquiror of the acquired servicing rights).
26
Discussion of Changes in Financial Condition from September 30, 2003 to
September 30, 2004
The Corporation had total assets of $551.8 million at September 30, 2004, an
increase of $7.9 million, or 1.5%, over the September 30, 2003 total. The
increase in assets was comprised of an increase in mortgage-backed securities of
$12.4 million and an increase in office premises and equipment of $915,000,
which were partially offset by a $4.2 million decrease in cash and interest
bearing deposits, a $3.2 million decrease in investments available for sale and
a $2.7 million decrease in loans receivable, including loans held for sale. The
growth in assets was funded primarily by an increase in deposits of $10.5
million, undistributed earnings of $2.7 million and proceeds from the exercise
of stock options of $2.8 million, which was partially offset by a decrease in
Federal Home Loan Bank ("FHLB") advances of $7.5 million.
Investment securities totaled $18.2 million at September 30, 2004, a decrease of
$3.2 million, or 15.1%, over September 30, 2003 levels. The decrease in
investment securities resulted from sales and maturities of $19.1 million, which
more than exceeded purchases totaling $15.6 million. Purchases during the period
consisted primarily of agency bonds and municipal securities with maturities
ranging from one to five years.
Mortgage-backed securities totaled $18.8 million at September 30, 2004, an
increase of $12.4 million, or 194.5%, over September 30, 2003, due to purchases
of $14.6 million, which were partially offset by principal repayments of $2.1
million.
Loans receivable totaled $484.8 million at September 30, 2004, a decrease of
$2.7 million, or .6%, compared to the September 30, 2003 total. The decrease was
due primarily to $134.3 million in loans sold and $157.4 million in principal
repayments, which exceeded loan originations of $291.3 million. Winton
experienced a decline in loan origination volume compared to the previous year
primarily as a result of the decline in loan refinance activity. The volume of
loans sold during fiscal 2004 amounted to $134.3 million, a decrease of $116.0
million, or 46.3%, over fiscal 2003. Winton continued its strategy of selling
lower yielding fixed-rate loans in fiscal 2004.
The Company's allowance for loan losses totaled $2.4 million at September 30,
2004, an increase of $183,000, or 8.1%, over the total at September 30, 2003. At
September 30, 2004, the allowance represented approximately 0.51% of the total
loan portfolio and 196.6% of total nonperforming loans. Nonperforming loans
totaled $1.2 million and $3.8 million at September 30, 2004 and 2003,
respectively. At September 30, 2004, nonperforming loans were comprised
primarily of $488,000 of loans secured by one- to four-family residential real
estate, $450,000 of loans secured by nonresidential real estate, and $254,000 of
multi-family loans. At September 30, 2004, the ratio of total nonperforming
loans to total loans amounted to .61%, compared to .75% at September 30, 2003.
Management believes all nonperforming loans are adequately collateralized and
that there are no unreserved losses on such nonperforming loans at September 30,
2004. Although management believes that its allowance for loan losses at
September 30, 2004 is 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 WFC's results of operations.
Real estate owned ("REO") increased $3.4 million, or 398.6%, due to the
conversion of a $3.4 million non-performing commercial real estate loan to REO.
The addition to REO consists of an office building and lot which was under
sales contract for $4.2 million at September 30, 2004. The sale contract was
ultimately terminated in October 2004. Management is presently evaluating its
various sales scenarios for the property, including a sale at liquidation
value. Such a sale strategy may result in a write-down or loss upon sale.
Office premises and equipment totaled $7.0 million at September 30, 2004, an
increase of $915,000, or 13.0%, over September 30, 2003. During fiscal 2004, the
Company relocated an existing full service branch to a more strategic location.
Deposits totaled $364.8 million at September 30, 2004, an increase of $10.5
million, or 3.0%, over September 30, 2003 levels. Deposits increased during
fiscal 2004 due primarily to management's continuing efforts to grow the
portfolio through marketing and pricing strategies, as well as continuing growth
at new branch locations. Advances from the FHLB and other borrowings totaled
$131.1 million at September 30, 2004, a decrease of $7.5 million, or 5.4%, from
September 30, 2003 levels. During the year ended September 30, 2004, the Company
repaid $104.5 million to the FHLB and borrowed $97.0 million.
Shareholders' equity totaled $48.4 million at September 30, 2004, an increase of
$4.2 million, or 9.5%, over September 30, 2003. The increase resulted from net
earnings of $4.7 million and proceeds from the exercise of stock options of $2.8
million, which were partially offset by dividends to shareholders totaling $2.1
million,
27
purchases of treasury shares of $1.0 million and a decrease in unrealized gains
on available for sale securities of $258,000.
Winton is required to meet minimum capital standards promulgated by the Office
of Thrift Supervision (the "OTS"). At September 30, 2004, the Company's
regulatory capital exceeded such minimum capital requirements.
Comparison of Results of Operations for the Fiscal Years Ended September 30,
2004 and 2003
General
The Corporation recorded net earnings totaling $4.7 million for the fiscal year
ended September 30, 2004, a decrease of $964,000 or 16.9%, compared to net
earnings of $5.7 million in net earnings for fiscal 2003. The decrease in net
earnings was comprised of a $751,000 decrease in other income and a $1.5 million
increase in general, administrative and other expense, which were partially
offset by a $526,000 decrease in provision for federal income taxes, a $472,000
increase in net interest income and a $305,000 decrease in the provision for
losses on loans.
Net Interest Income
Total interest income amounted to $30.8 million for fiscal 2004, a decrease of
$816,000, or 2.6%, from fiscal 2003. The decrease resulted primarily from a 52
basis point decrease in the weighted-average yield to 5.72% in fiscal 2004,
which was partially offset by a $32.2 million, or 6.4%, increase in average
interest-earning assets year to year.
Interest income on loans and mortgage-backed securities totaled $29.9 million
for the year ended September 30, 2004, a decrease of $870,000, or 2.8%, compared
to fiscal 2003. The decrease resulted primarily from a reduction in the
weighted-average yield of 66 basis points, to 5.94% for the fiscal year ended
September 30, 2004, which was partially offset by a $37.1 million, or 8.0%,
increase in the average balance outstanding.
Interest income on investment securities and interest-bearing deposits increased
by $54,000, or 5.9%, for the fiscal year ended September 30, 2004, compared to
fiscal 2003, due primarily to an increase of 45 basis points in the
weighted-average yield, to 2.68% for fiscal 2004, which was partially offset by
an $4.9 million, or 11.9% decrease in the average balance outstanding year to
year.
Interest expense on deposits decreased by $1.0 million, or 10.5%, for the fiscal
year ended September 30, 2004, compared to fiscal 2003. The decrease was
primarily attributable to a 45 basis point decrease in the weighted-average cost
of deposits, which was partially offset by a $22.9 million, or 6.7%, increase in
the average balance of deposits outstanding year to year. The weighted-average
cost of deposits amounted to 2.34% and 2.79% for the fiscal years ended
September 30, 2004 and 2003, respectively.
Net Interest Income
Interest expense on borrowings decreased by $286,000, or 4.2%, during the fiscal
year ended September 30, 2004, compared to fiscal 2003, due to a 53 basis point
decrease in the weighted-average cost of borrowings, to 4.83% for fiscal 2004,
which was partially offset by a $8.3 million increase in the average balance of
borrowings outstanding year to year.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $472,000, or 3.1%, to $15.7 million for the
fiscal year ended September 30, 2004, compared to fiscal 2003. The interest rate
spread decreased by 4 basis points, to 2.70% for fiscal 2004, while the net
interest margin declined by 9 basis points, to 2.92% for fiscal 2004, compared
to 3.01% for fiscal 2003.
Provision for Losses on Loans
Winton charges a provision for losses on loans 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
28
by the Company, the status of past due principal and interest payments, and
general economic conditions, particularly as such conditions relate to the
Company's loan portfolio and market area. As a result of such analysis,
management recorded a $300,000 provision for losses on loans during the fiscal
year ended September 30, 2004, compared to a provision of $605,000 recorded in
fiscal 2003. The provision is based on an internal matrix which evaluates
reserves based upon delinquency levels, risk classification of credits and
inherent factors within the portfolio. 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.
The following table sets forth information regarding the Company's delinquent
loans, nonperforming assets and the allowance for loan losses.
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
(Dollars in thousands)
Loans delinquent
30 to 89 days $ 8,079 $ 4,999
90 or more days 1,245 3,759
------------- -------------
Total delinquent loans $ 9,324 $ 8,758
============= =============
Loans accounted for on non-accrual basis $ 349 $ 3,195
Loans greater than 90 days delinquent and still accruing 896 564
------------- -------------
Total nonperforming loans 1,245 3,759
Real estate acquired through foreclosure 4,217 846
------------- -------------
Total nonperforming assets $ 5,462 $ 4,605
============= =============
Allowance for loan losses $ 2,448 $ 2,265
============= =============
Allowance for loan losses to total loans 0.51% 0.45%
Allowance for loan losses to nonperforming loans 196.63% 60.26%
Allowance for loan losses to nonperforming assets 44.82% 49.19%
Nonperforming loans to total loans 0.26% 0.75%
While management believes that, based on information currently available, the
allowance for loan losses is sufficient to cover losses inherent in the
Company's loan portfolio at this time, no assurance can be given that the level
of the allowance will be sufficient to cover future loan losses or that future
adjustments to the allowance will not be necessary if economic and/or other
conditions differ substantially from the economic and other conditions
considered by management in evaluating the adequacy of the current level of the
allowance.
Other Income
Other income totaled $3.7 million for the fiscal year ended September 30, 2004,
a decrease of $751,000, or 17.0%, compared to fiscal 2003, due primarily to a
$1.1 million, or 34.8%, decrease in mortgage banking income and a $282,000
reduction in gains on sale of office premises, which were partially offset by a
$537,000 increase in gains on sale of investment securities, an $89,000 increase
in gains on sale of real estate acquired through foreclosure and a $49,000
increase in other operating income. The decrease in mortgage banking income was
due primarily to the decrease in sales volume of $116.0 million, or 46.3%, over
the year ended September 30, 2003.
General, Administrative and Other Expense
General, administrative and other expense totaled $12.1 million for the fiscal
year ended September 30, 2004, an increase of $1.5 million, or 14.4%, compared
to fiscal 2003. The increase was due primarily to an increase in employee
compensation and benefits of $740,000, or 12.7%, an increase in other operating
expenses of $147,000, or 6.9%, an increase in occupancy and equipment expense of
$364,000, or 27.0%, an increase in data processing expense of $80,000, or 17.9%,
and an increase in franchise tax expense of $77,000, or 17.5%. Employee
compensation and benefits increased primarily due to the decline in deferred
salary cost as a result of decreased loan production year to year. The increase
in other operating expense was due primarily to increased costs related to
foreclosure activity, an increase in professional fees related to the
implementation of Sarbanes-Oxley Act of 2002 and pro-rata increases in other
operating expenses related to the Corporation's growth year to year. The
increase in occupancy and equipment expense was due to lease costs associated
with the opening of a new
29
mortgage operations facility and non-capitalizable costs associated with a
restructuring and remodeling of the corporate administrative offices and opening
a new branch.
Federal Income Taxes
The provision for federal income taxes amounted to $2.3 million for the fiscal
year ended September 30, 2004, a decrease of $526,000, or 18.9%, compared to
fiscal 2003. The reduction was due primarily to a decline in earnings before
taxes of $1.5 million, or 17.5%, which was enhanced by the fiscal 2004 increase
in nontaxable interest income. The effective tax rates were 32.3% and 32.8% for
the fiscal years ended September 30, 2004 and 2003, respectively.
Pending Acquisition
On August 25, 2004, WesBanco, Inc. ("WesBanco"), WesBanco Bank, Inc., WFC and
The Winton and Loan Co. entered into an Agreement and Plan of Merger (the
"Merger Agreement") providing for the merger of WFC with and into WesBanco.
Pursuant to the Merger Agreement, Winton shareholders will receive for each
Winton share owned $20.75 in cash or 0.755 shares of WesBanco common stock,
subject to the requirement that 60% of Winton's outstanding shares will be paid
in stock and 40% in cash, via a pro ration formula described in the Merger
Agreement. The transaction was approved by both companies and the regulatory
authorities currently is valued at approximately $102.5 million. The
consummation of the merger is subject to regulatory and Winton shareholder
approval.
Comparison of Results of Operations for the Fiscal Years Ended September 30,
2003 and 2002
General
The Corporation recorded net earnings totaling $5.7 million for the fiscal year
ended September 30, 2003, an increase of $683,000 or 13.6%, compared to net
earnings of $5.0 million in net earnings for fiscal 2002. The increase in net
earnings was comprised of a $736,000 increase in net interest income, a $655,000
decrease in the provision for losses on loans and a $936,000 increase in other
income, which were partially offset by a $1.4 million increase in general,
administrative and other expense and a $266,000 increase in the provision for
federal income taxes.
Net Interest Income
Total interest income amounted to $31.6 million for fiscal 2003, a decrease of
$2.3 million, or 6.8%, from fiscal 2002. The decrease resulted primarily from an
85 basis point decrease in the weighted-average yield to 6.24% in fiscal 2003,
which was partially offset by a $28.0 million, or 5.9%, increase in average
interest-earning assets year to year.
Interest income on loans and mortgage-backed securities totaled $30.7 million
for the year ended September 30, 2003, a decrease of $2.2 million, or 6.6%,
compared to fiscal 2002. The decrease resulted primarily from a decrease in the
weighted-average yield of 72 basis points, to 6.60% for the fiscal year ended
September 30, 2003, which was partially offset by a $16.5 million, or 3.7%,
increase in the average balance outstanding.
Interest income on investment securities and interest-bearing deposits decreased
by $139,000, or 13.2%, for the fiscal year ended September 30, 2003, compared to
fiscal 2002, due primarily to a decrease of 136 basis points in the
weighted-average yield, to 2.23% for fiscal 2003, which was partially offset by
an $11.6 million, or 39.6%, increase in the average balance outstanding year to
year.
Interest expense on deposits decreased by $2.8 million, or 23.0%, for the fiscal
year ended September 30, 2003, compared to fiscal 2002. The decrease was
primarily attributable to a 110 basis point decrease in the weighted-average
cost of deposits, which was partially offset by a $23.3 million, or 7.3%,
increase in the average balance of deposits outstanding year to year. The
weighted-average cost of deposits amounted to 2.79% and 3.89% for the fiscal
years ended September 30, 2003 and 2002, respectively.
30
Net Interest Income
Interest expense on borrowings decreased by $198,000, or 2.8%, during the fiscal
year ended September 30, 2003, compared to fiscal 2002, due to a 26 basis point
decrease in the weighted-average cost of borrowings, to 5.36% for fiscal 2003,
which was partially offset by a $2.5 million increase in the average balance of
borrowings outstanding year to year. The decreases in yields on interest-earning
assets and costs of interest-bearing liabilities were due primarily to the
overall decrease in interest rates in the economy.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $736,000, or 5.1%, to $15.2 million for the
fiscal year ended September 30, 2003, compared to fiscal 2002. The interest rate
spread increased by 3 basis points, to 2.74% for fiscal 2003, while the net
interest margin declined by 2 basis points, to 3.01% for fiscal 2003, compared
to 3.03% for fiscal 2002.
Provision for Losses on Loans
As stated previously, Winton charges a provision for losses on loans 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, and general economic conditions, particularly as such conditions
relate to the Company's loan portfolio and market area. As a result of such
analysis, management recorded a $605,000 provision for losses on loans during
the fiscal year ended September 30, 2003, compared to a provision of $1.3
million recorded in fiscal 2002. The provision is based on an internal matrix
which evaluates reserves based upon delinquency levels, risk classification of
credits and inherent factors within the portfolio. 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.
The following table sets forth information regarding the Company's delinquent
loans, nonperforming assets and the allowance for loan losses.
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
(Dollars in thousands)
Loans delinquent
30 to 89 days $4,999 $4,730
90 or more days 3,759 3,398
------ ------
Total delinquent loans $8,758 $8,128
====== ======
Loans accounted for on non-accrual basis $3,195 $ 885
Loans greater than 90 days delinquent and still accruing 564 2,513
------ ------
Total nonperforming loans 3,759 3,398
Real estate acquired through foreclosure 846 2,462
------ ------
Total nonperforming assets $4,605 $5,860
====== ======
Allowance for loan losses $2,265 $1,850
====== ======
Allowance for loan losses to total loans 0.45% 0.42%
Allowance for loan losses to nonperforming loans 60.26% 54.44%
Allowance for loan losses to nonperforming assets 49.19% 31.57%
Nonperforming loans to total loans 0.75% 0.76%
31
While management believes that, based on information currently available, the
allowance for loan losses is sufficient to cover losses inherent in the
Company's loan portfolio at this time, no assurance can be given that the level
of the allowance will be sufficient to cover future loan losses or that future
adjustments to the allowance will not be necessary if economic and/or other
conditions differ substantially from the economic and other conditions
considered by management in evaluating the adequacy of the current level of the
allowance.
Other Income
Other income totaled $4.4 million for the fiscal year ended September 30, 2003,
an increase of $936,000, or 26.9%, compared to fiscal 2002, due primarily to a
$972,000, or 42.1%, increase in mortgage banking income, a $282,000 gain on sale
of office premises and a $112,000, or 16.8%, increase in other operating income,
which were partially offset by a $13,000 increase in loss on sale of real estate
acquired through foreclosure, a $167,000 reduction in gains on sale of
investment securities and the absence of a $250,000 gain on sale of deposits
recorded in fiscal 2002. The increase in mortgage banking income was due
primarily to the increase in sales volume of $126.6 million, or 102.4%, over the
year ended September 30, 2002. The Company sold its former Central Parkway
branch and a tract of land next to its Harrison Branch, realizing gains of
$243,000 and $39,000, respectively. The deposits related to the Central Parkway
branch were sold in the fiscal year ended September 30, 2002, with the Company
recognizing a $250,000 gain. The increase in other income was primarily
attributable to prepayment fees on nonresidential real estate loans, loan payoff
statement fees and growth in deposit service charges due to overall fee
increases and fees on "Generations Gold," a new checking product introduced in
fiscal 2002.
General, Administrative and Other Expense
General, administrative and other expense totaled $10.6 million for the fiscal
year ended September 30, 2003, an increase of $1.4 million, or 15.0%, compared
to fiscal 2002. The increase was due primarily to an increase in employee
compensation and benefits of $631,000, or 12.1%, an increase in other operating
expenses of $389,000, or 22.4%, and an increase in occupancy and equipment
expense of $266,000, or 24.6%. Employee compensation and benefits increased
primarily due to normal merit increases, an overall increase in staffing levels
related primarily to the branch addition and increased loan production during
the year, and expenses related to increased awards under the incentive bonus and
401(k) plan contributions year to year. The increase in other operating expense
was due primarily to increased costs related to foreclosure activity, an
increase in professional fees related to the implementation of Sarbanes-Oxley
Act of 2002 and pro-rata increases in other operating expenses related to the
Corporation's growth year to year. The increase in occupancy and equipment
expense was due to lease costs associated with the opening of the new mortgage
operations facility and non-capitalizable costs associated with a restructuring
and remodeling of the corporate administrative offices and opening of the new
branch.
Federal Income Taxes
The provision for federal income taxes amounted to $2.8 million for the fiscal
year ended September 30, 2003, an increase of $266,000, or 10.5%, compared to
fiscal 2002. The increase was due primarily to an increase in earnings before
taxes of $949,000, or 12.6%, partially offset by an increase in nontaxable
interest income in fiscal 2003. The effective tax rates were 32.8% and 33.4% for
the fiscal years ended September 30, 2003 and 2002, respectively.
32
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
The following table sets forth certain information relating to WFC'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.
YEAR ENDED SEPTEMBER 30,
2004 2003 2002
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/OUTSTANDING EARNED/ YIELD/OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1) $ 493,444 $ 29,519 5.98% $459,342 $ 30,456 6.63% $443,225 $ 32,616 7.36%
Mortgage-backed securities 9,571 344 3.59 6,614 277 4.19 6,252 279 4.46
Investment securities 19,603 579 2.95 16,361 462 2.82 14,418 616 4.27
Interest-bearing deposits and other 16,338 386 2.36 24,430 449 1.84 14,808 434 2.93
----------- --------- ------ -------- -------- ------ -------- -------- ------
Total interest-earning assets 538,956 30,828 5.72 506,747 31,644 6.24 478,703 33,945 7.09
Non-interest-earning assets 13,084 11,735 9,052
----------- -------- --------
Total assets $ 552,040 $518,482 $487,755
=========== ======== ========
Interest-bearing liabilities:
Deposits $ 363,458 8,503 2.34 $340,535 9,505 2.79 $317,227 12,344 3.89
FHLB advances and other borrowings 136,778 6,605 4.83 128,519 6,891 5.36 126,053 7,089 5.62
----------- --------- ------ -------- -------- ------ -------- -------- ------
Total interest-bearing liabilities 500,236 15,108 3.02 469,054 16,396 3.50 443,280 19,433 4.38
--------- ------ -------- ------ -------- ------
Non-interest-bearing liabilities 6,277 6,771 5,983
----------- -------- --------
Total liabilities 506,513 475,825 449,263
Shareholders' equity 45,527 42,657 38,492
----------- -------- --------
Total liabilities and shareholders' equity $ 552,040 $518,482 $487,755
=========== ======== ========
Net interest income/interest rate spread $ 15,720 2.70% $ 15,248 2.74% $ 14,512 2.71%
========= ====== ======== ====== ======== ======
Net interest margin (net interest income as a
percent of average interest-earning assets) 2.92% 3.01% 3.03%
====== ====== ======
Average interest-earning assets to interest
-bearing liabilities 107.74% 108.04% 107.99%
====== ====== ======
- ---------------------------
(1) Includes loans held for sale and nonaccrual loans, net of the allowance
for loan losses.
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 WFC'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.
YEAR ENDED SEPTEMBER 30,
2004 VS. 2003 2003 VS. 2002
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO DUE TO
VOLUME RATE TOTAL VOLUME RATE TOTAL
(In thousands)
Interest income attributable to:
Loans receivable (1) $ 2,166 $(3,103) $ (937) $ 1,155 $(3,315) $(2,160)
Mortgage-backed securities 110 (43) 67 16 (18) (2)
Investment securities 95 22 117 75 (229) (154)
Other interest-earning assets (2) (172) 109 (63) 215 (200) 15
------- ------- ------- ------- ------- -------
Total interest income 2,199 (3,015) (816) 1,461 (3,762) (2,301)
Interest expense attributable to:
Deposits 609 (1,611) (1,002) 854 (3,693) (2,839)
Borrowings 426 (712) (286) 137 (335) (198)
------- ------- ------- ------- ------- -------
Total interest expense 1,035 (2,323) (1,288) 991 (4,028) (3,037)
------- ------- ------- ------- ------- -------
Increase in net interest income $ 1,164 $ (692) $ 472 $ 470 $ 266 $ 736
======= ======= ======= ======= ======= =======
- ------------------------------
(1) Includes loans held for sale.
(2) Includes interest-bearing deposits.
Liquidity and Capital Resources
Winton, like other financial institutions, is required under applicable federal
regulations to maintain sufficient funds to meet deposit withdrawals, loan
commitments and expenses. Liquid assets consist of cash and interest bearing
deposits in other financial institutions, investments and mortgage-backed
securities. Management monitors and assesses liquidity needs daily in order to
meet deposit withdrawals, loan commitments and expenses.
The primary sources of funds include deposits, borrowings, principal and
interest repayments on loans and proceeds from the sale of mortgage loans. The
Company's first preference is to fund liquidity needs with core deposits, if
available, in the marketplace. Core deposits include non-interest bearing and
interest-bearing retail deposits. Other funding sources included Federal Home
Loan Bank advances and brokered deposits through the capital markets.
The following table sets forth information regarding the Corporation's
obligations and commitments to make future payments under contract as of
September 30, 2004.
PAYMENTS DUE BY PERIOD
LESS MORE
THAN 1-3 3-5 THAN
1 YEAR YEARS YEARS 5 YEARS TOTAL
(In thousands)
Contractual obligations:
Operating lease obligations $ 262 $ 413 $ 72 $ 18 $ 765
Advances from the Federal Home Loan
Bank and other borrowings 39,500 32,000 22,500 37,088 131,088
Certificates of deposit 144,483 96,077 8,298 23 248,881
Amount of commitments expiration per period
Loans commitments to originate:
Home equity lines of credit 25,848 - - - 25,848
Commercial lines of credit 8,581 - - - 8,581
One- to four-family and multi-family loans 28,254 - - - 28,254
Non-residential real estate and land loans 3,073 - - - 3,073
Commitments to sell loans in the secondary market (8,218) - - - (8,218)
--------- -------- ------- ------- ---------
Total contractual obligations $ 241,783 $128,490 $30,870 $37,129 $ 438,272
========= ======== ======= ======= =========
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.
FOR THE YEAR ENDED SEPTEMBER 30,
2004 2003 2002
(In thousands)
Net earnings $ 4,742 $ 5,706 $ 5,023
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities (465) 22,539 (23,306)
-------- -------- --------
Net cash provided by (used in) operating activities 4,277 28,245 (18,283)
Net cash used in investing activities (11,866) (63,390) (2,352)
Net cash provided by financing activities 3,371 32,676 26,991
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (4,218) (2,469) 6,356
Cash and cash equivalents at beginning of year 9,496 11,965 5,609
-------- -------- --------
Cash and cash equivalents at end of year $ 5,278 $ 9,496 $ 11,965
======== ======== ========
WFC believes that the Company's liquidity posture at September 30, 2004, is
adequate to meet outstanding loan commitments and other cash requirements.
Winton 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, 2004, Winton's tangible capital of $48.6 million,
or 8.8% of adjusted total assets, exceeded the 1.5% requirement by $40.3
million; its core capital of $48.6 million, or 8.8% of adjusted total assets,
exceeded the minimum 4.0% requirement by $26.5 million; and its risk-based
capital of $51.0 million, or 12.7% of risk-weighted assets, exceeded the 8%
requirement by $18.9 million.
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability Management
WFC'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,
WFC's earnings will be affected differently under various interest rate
scenarios. Management believes that the steps which WFC has taken in
asset/liability management may reduce the overall vulnerability of WFC's
interest rate risk. WFC's principal financial objective is to enhance long-term
profitability while reducing exposure to increases in interest rates. To
accomplish this objective, WFC has formulated an asset and liability management
policy, the principal elements of which are (1) to emphasize the origination of
adjustable-rate mortgage loans, (2) 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, and (3) to lengthen the maturities of
liabilities to the extent practicable by marketing longer term certificates of
deposit. In order to better compete for deposits, however, Winton has offered
market-sensitive certificates of deposit, which result in increased interest
expense in rising rate environments. Because interest-rate-sensitive liabilities
continue to exceed interest-rate-sensitive assets, Winton would be negatively
affected by a rising or protracted high interest rate environment and would be
beneficially affected by a declining interest rate environment. At September 30,
2004, approximately $220.3 million, or 40.9%, of Winton's portfolio of
interest-earning assets had adjustable rates.
The management and Board of Directors of Winton attempt to manage Winton's
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
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
utilizes the "net portfolio value" ("NPV") methodology to assess its exposure to
interest rate risk. Generally, NPV is the discounted present value of the
difference between incoming cash flows on interest-earning and other assets and
outgoing cash flows on interest-bearing liabilities. The application of the
methodology attempts to quantify interest rate risk as the change in the NPV
which would result from theoretical 100 basis point (100 basis points equals 1%)
incremental changes in market interest rates.
The following tables express 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.
BOARD LIMIT
CHANGE IN INTEREST RATE NPV RATIO (1) SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
(BASIS POINTS) NOT LESS THAN NPV RATIO NPV RATIO
+300 4.00% 6.82% 4.14%
+200 6.00 8.48 6.05
+100 6.50 9.98 7.93
- 7.00 11.22 9.79
-100 7.50 11.91 10.64
-200 (2) 8.00 N/A N/A
-300 (2) 8.50 N/A N/A
(1) NPV Ratio represents the net portfolio value divided by the present
value of assets.
(2) Not meaningful because some market rates would compute to a rate less
than zero.
36
Asset/Liability Management (continued)
As 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 would receive on its loans would increase
relatively slowly as loans are slowly prepaid and new loans at higher rates are
made. Moreover, the interest Winton would pay on its deposits would increase
rapidly because Winton's deposits generally have shorter periods to repricing.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities, and
early withdrawal levels from certificates of deposit, would likely deviate
significantly from those assumed in making the risk calculations.
In the event that interest rates rise, Winton's net interest income could be
expected to be negatively affected. Moreover, rising interest rates could
negatively affect Winton's earnings due to diminished loan demand.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CONSOLIDATED STATEMENTS OF EARNINGS
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All financial statement schedules are omitted because the required information
either is not applicable or is shown in the financial statements or in the
notes thereto.
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Winton Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Winton Financial Corporation as of September 30, 2004 and 2003, 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, 2004. 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 the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Winton Financial
Corporation as of September 30, 2004 and 2003, and the results of its operations
and its cash flows for each of the years in the three year period ended
September 30, 2004, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Grant Thornton LLP
Cincinnati, Ohio
November 5, 2004
39
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30,
ASSETS 2004 2003
(In thousands)
Cash and due from banks $ 2,425 $ 1,848
Interest-bearing deposits in other financial institutions 2,853 7,648
--------- ---------
Cash and cash equivalents 5,278 9,496
Investment securities available for sale - at market 18,226 21,466
Mortgage-backed securities available for sale - at market 15,762 2,103
Mortgage-backed securities held to maturity - at amortized cost,
approximate market value of $2,998 and $4,204 at
September 30, 2004 and 2003, respectively 3,006 4,269
Loans receivable - net 479,152 481,364
Loans held for sale - at lower of cost or market 5,603 6,116
Office premises and equipment - at depreciated cost 7,046 6,131
Real estate acquired through foreclosure 4,217 846
Federal Home Loan Bank stock - at cost 8,493 8,156
Accrued interest receivable 2,807 2,571
Prepaid expenses and other assets 1,064 786
Intangible assets - net of amortization 36 97
Prepaid federal income taxes 1,152 501
--------- ---------
Total assets $ 551,842 $ 543,902
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 364,833 $ 354,296
Advances from the Federal Home Loan Bank 129,088 136,612
Other borrowed money 2,000 2,000
Accounts payable on mortgage loans serviced for others 731 401
Advance payments by borrowers for taxes and insurance 3,085 2,433
Other liabilities 1,976 2,459
Deferred federal income taxes 1,717 1,479
--------- ---------
Total liabilities 503,430 499,680
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;
4,987,140 and 4,592,884 shares issued at September 30, 2004 and
2003, respectively - -
Additional paid-in capital 14,071 11,285
Retained earnings 35,880 33,213
Treasury stock - 117,630 and 40,300 shares at September 30, 2004 and
2003, respectively - at cost (1,534) (529)
Accumulated comprehensive income (loss), unrealized gains (losses) on
securities designated as available for sale, net of related tax effects (5) 253
--------- ---------
Total shareholders' equity 48,412 44,222
--------- ---------
Total liabilities and shareholders' equity $ 551,842 $ 543,902
========= =========
The accompanying notes are an integral part of these statements.
40
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED SEPTEMBER 30,
2004 2003 2002
(In thousands, except share data)
Interest income
Loans $29,519 $ 30,456 $ 32,616
Mortgage-backed securities 344 277 279
Investment securities 579 462 616
Interest-bearing deposits and other 386 449 434
------- -------- --------
Total interest income 30,828 31,644 33,945
Interest expense
Deposits 8,503 9,505 12,344
Borrowings 6,605 6,891 7,089
------- -------- --------
Total interest expense 15,108 16,396 19,433
------- -------- --------
Net interest income 15,720 15,248 14,512
Provision for losses on loans 300 605 1,260
------- -------- --------
Net interest income after provision for losses on loans 15,420 14,643 13,252
Other income
Mortgage banking income 2,139 3,283 2,311
Gain on sale of investment and mortgage-backed securities designated
as available for sale 634 97 264
Gain on sale of office premises - 282 -
Gain on sale of deposits - - 250
Gain (loss) on sale of real estate acquired through foreclosure 65 (24) (11)
Other operating 826 777 665
------- -------- --------
Total other income 3,664 4,415 3,479
General, administrative and other expense
Employee compensation and benefits 6,582 5,842 5,211
Occupancy and equipment 1,712 1,348 1,082
Franchise taxes 517 440 383
Amortization of intangible assets 61 61 61
Advertising 406 298 286
Data processing 526 446 423
Other operating 2,275 2,128 1,739
------- -------- --------
Total general, administrative and other expense 12,079 10,563 9,185
------- -------- --------
Earnings before income taxes 7,005 8,495 7,546
Federal income taxes
Current 1,892 2,933 2,472
Deferred 371 (144) 51
------- -------- --------
Total federal income taxes 2,263 2,789 2,523
------- -------- --------
NET EARNINGS $ 4,742 $ 5,706 $ 5,023
======= ======== ========
EARNINGS PER SHARE
Basic $ 1.03 $ 1.27 $ 1.13
======= ======== ========
Diluted $ 1.01 $ 1.23 $ 1.10
======= ======== ========
The accompanying notes are an integral part of these statements.
41
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED SEPTEMBER 30,
2004 2003 2002
(In thousands)
Net earnings $ 4,742 $ 5,706 $ 5,023
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during
the period, net of taxes (benefits) of $82, $(12) and $(25) in
2004, 2003 and 2002, respectively 160 (23) (49)
Reclassification adjustment for realized gains
included in earnings, net of taxes of $216, $33 and $90 in
2004, 2003 and 2002, respectively (418) (64) (174)
------- ------- -------
Comprehensive income $ 4,484 $ 5,619 $ 4,800
======= ======= =======
Accumulated comprehensive income (loss) $ (5) $ 253 $ 340
======= ======= =======
The accompanying notes are an integral part of these statements.
42
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNREALIZED
GAINS (LOSSES)
ADDITIONAL ON SECURITIES
COMMON PAID-IN RETAINED TREASURY AVAILABLE
STOCK CAPITAL EARNINGS STOCK FOR SALE TOTAL
(In thousands, except share data)
Balance at October 1, 2001 $- $10,142 $ 25,985 $ - $ 563 $ 36,690
Proceeds from exercise of
stock options - 179 - - - 179
Purchase of treasury shares - - - (5) - (5)
Net earnings for the year
ended September 30, 2002 - - 5,023 - - 5,023
Unrealized losses on securities
designated as available for
sale, net of related tax effects - - - - (223) (223)
Cash dividends of $.37 per share - - (1,648) - - (1,648)
-- ------- -------- ------- ----- --------
Balance at September 30, 2002 - 10,321 29,360 (5) 340 40,016
Proceeds from exercise of
stock options - 964 - - - 964
Purchase of treasury shares - - - (524) - (524)
Net earnings for the year
ended September 30, 2003 - - 5,706 - - 5,706
Unrealized losses on securities
designated as available for
sale, net of related tax effects - - - - (87) (87)
Cash dividends of $.41 per share - - (1,853) - - (1,853)
-- ------- -------- ------- ----- --------
Balance at September 30, 2003 - 11,285 33,213 (529) 253 44,222
Proceeds from exercise of
stock options - 2,786 - - - 2,786
Purchase of treasury shares - - - (1,005) - (1,005)
Net earnings for the year
ended September 30, 2004 - - 4,742 - - 4,742
Unrealized losses on securities
designated as available for
sale, net of related tax effects - - - - (258) (258)
Cash dividends of $.45 per share - - (2,075) - - (2,075)
-- ------- -------- ------- ----- --------
Balance at September 30, 2004 $- $14,071 $ 35,880 $(1,534) $ (5) $ 48,412
== ======= ======== ======= ===== ========
The accompanying notes are an integral part of these statements.
43
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
2004 2003 2002
(In thousands)
Cash flows from operating activities:
Net earnings for the year $ 4,742 $ 5,706 $ 5,023
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Amortization of premiums and discounts on investments and
mortgage-backed securities - net 106 65 87
Amortization of deferred loan origination fees (240) (199) (188)
Depreciation and amortization 724 471 433
Amortization of intangible assets 61 61 61
Gain on sale of office premises - (282) -
Gain on sale of deposits - - (250)
Gain on sale of investment and mortgage-backed securities designated
as available for sale (634) (97) (264)
(Gain) loss on sale of real estate acquired through foreclosure (65) 24 11
Provision for losses on loans 300 605 1,260
Gain on sale of mortgage loans (1,906) (3,217) (1,936)
Loans disbursed for sale in the secondary market (133,812) (227,786) (148,445)
Proceeds from sale of loans in the secondary market 136,231 253,497 125,610
Federal Home Loan Bank stock dividends (337) (328) (370)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (236) 296 338
Prepaid expenses and other assets (278) (263) 144
Accounts payable on mortgage loans serviced for others 330 (274) (7)
Other liabilities (429) 314 521
Federal income taxes
Current (651) (204) (362)
Deferred 371 (144) 51
--------- --------- ---------
Net cash provided by (used in) operating activities 4,277 28,245 (18,283)
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 8,000 11,315 6,675
Proceeds from sale of investment securities designated as available for sale 11,121 3,622 5,179
Purchase of investment securities designated as available for sale (15,629) (23,395) (10,815)
Proceeds from sale of mortgage-backed securities designated as
available for sale - - 1,927
Principal repayments on mortgage-backed securities 2,052 1,574 2,310
Purchase of mortgage-backed securities designated as available for sale (14,563) (2,000) (1,917)
Purchase of mortgage-backed securities designated as held to maturity - - (1,013)
Loan principal repayments 155,506 227,155 161,748
Loan disbursements (157,441) (283,634) (166,841)
Proceeds from sale of loan participations 125 3,029 1,100
Purchase and renovation of office premises and equipment (1,621) (3,260) (739)
Proceeds from sale of office premises and equipment - 529 -
Proceeds from sale of real estate acquired through foreclosure 603 1,847 34
Additions to real estate acquired through foreclosure (19) (172) -
--------- --------- ---------
Net cash used in investing activities (11,866) (63,390) (2,352)
--------- --------- ---------
Net cash used in operating and investing
activities (balance carried forward) (7,589) (35,145) (20,635)
--------- --------- ---------
44
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED SEPTEMBER 30,
2004 2003 2002
(In thousands)
Net cash used in operating and investing
activities (balance brought forward) $ (7,589) $(35,145) $(20,635)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts, including purchased deposits 10,537 21,301 24,091
Sale of deposit accounts - - (7,806)
Proceeds from Federal Home Loan Bank advances and
other borrowings 97,000 64,000 95,500
Repayment of Federal Home Loan Bank advances (104,524) (51,815) (83,741)
Advances by borrowers for taxes and insurance 652 603 421
Proceeds from exercise of stock options 2,786 964 179
Dividends paid on common stock (2,075) (1,853) (1,648)
Purchase of treasury shares (1,005) (524) (5)
--------- -------- --------
Net cash provided by financing activities 3,371 32,676 26,991
--------- -------- --------
Net increase (decrease) in cash and cash equivalents (4,218) (2,469) 6,356
Cash and cash equivalents at beginning of year 9,496 11,965 5,609
--------- -------- --------
Cash and cash equivalents at end of year $ 5,278 $ 9,496 $ 11,965
========= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 1,737 $ 2,882 $ 2,792
========= ======== ========
Interest on deposits and borrowings $ 15,227 $ 16,395 $ 19,566
========= ======== ========
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through
foreclosure $ 3,962 $ 47 $ 2,039
========= ======== ========
Issuance of mortgage loans upon sale of real estate
acquired through foreclosure $ 151 $ 1,307 $ 50
========= ======== ========
Unrealized losses on securities designated as
available for sale, net of related tax effects $ (258) $ (87) $ (223)
========= ======== ========
Recognition of mortgage servicing rights in
accordance with SFAS No. 140 $ 619 $ 334 $ 364
========= ======== ========
The accompanying notes are an integral part of these statements.
45
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and southeastern Indiana, 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 accounting principles generally accepted in the United States of
America ("U.S. GAAP") and general accounting practices within the
financial services industry. In preparing consolidated financial
statements in accordance with U.S. 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 Winton
Financial, its wholly-owned subsidiary, Winton Savings, and its
wholly-owned subsidiary, Alpine Terrace II. In addition, during fiscal
2004, Winton Financial acquired 51% of Walnut Street Enterprises L.L.C., a
real estate rental company which has been consolidated in the fiscal 2004
consolidated financial statements. Winton Savings formed Alpine Terrace II
for the primary purpose of marketing and selling certain real estate
acquired through foreclosure. All significant intercompany balances and
transactions have been eliminated in the accompanying consolidated
financial statements.
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. Securities available for
sale are carried at fair value with resulting unrealized gains or losses
recorded to shareholders' equity. Investment and mortgage-backed
securities are classified as held-to-maturity or available for sale upon
acquisition.
Realized gains and losses on the sale of investment and mortgage-backed
securities are recognized using the specific identification method.
46
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2004 and 2003, loans held for sale were carried at cost.
Winton Savings accounts for mortgage servicing rights pursuant to the
provisions of SFAS No. 140, "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.
SFAS No. 140 requires that capitalized mortgage servicing rights 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. 140, are segregated into pools
for valuation purposes, using as pooling criteria the loan term and coupon
rate. Once pooled, each grouping of loans is 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 $159,000, $539,000 and $299,000 for the years ended
September 30, 2004, 2003 and 2002, respectively. At September 30, 2004,
the fair value and carrying value of the Company's mortgage servicing
rights totaled approximately $1.1 million and $978,000, respectively. At
September 30, 2003, the fair value and carrying value of the Company's
mortgage servicing rights totaled approximately $660,000 and $519,000,
respectively.
47
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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).
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, 2004 and 2003, the Company had no loans that would be
defined as impaired under SFAS No. 114.
48
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
6. Office Premises and Equipment
Office premises and equipment are carried at cost, net of accumulated
depreciation, and include expenditures which extend the useful lives of
existing assets. Maintenance, repairs and minor renewals are expensed as
incurred. For financial reporting, depreciation and amortization are
provided on the straight-line and accelerated methods over the useful
lives of the assets, estimated to be thirty to forty years for buildings,
five to fifteen years for building improvements and three to fifteen years
for furniture and equipment. An accelerated depreciation method is used
for tax reporting purposes.
7. Real Estate Acquired through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated
selling expenses at the date of acquisition. Real estate loss provisions
are recorded if the properties' fair value subsequently declines below the
value determined at the recording date. In determining the lower of cost
or fair value at acquisition, costs relating to development and
improvement of property are considered. Costs relating to holding real
estate acquired through foreclosure, net of rental income, are charged
against earnings as incurred.
8. Federal Income Taxes
The Corporation accounts for federal income taxes pursuant to SFAS No.
109, "Accounting for Income Taxes." 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.
49
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Employee Benefit Plans
The Company has a contributory 401(k) profit sharing plan covering all
employees who have attained the age of 21 and have completed six months of
service. Contributions to the plan are voluntary and are matched at the
discretion of the Board of Directors. Contributions to the plan by the
Company totaled $278,000, $314,000 and $126,000 for the years ended
September 30, 2004, 2003 and 2002, respectively.
The Corporation had an Employee Stock Ownership Plan ("ESOP") which
provided retirement benefits for substantially all employees who had
completed one year of service. Contributions of $137,000 were made to the
ESOP for the year ended September 30, 2002. Effective February 28, 2002,
the ESOP was merged into the Company's 401(k) profit sharing plan.
11. Earnings Per Share
Basic earnings per common share is computed based upon the
weighted-average number of common shares outstanding during the period.
Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under the Company's stock
option plans. The computations are as follows:
FOR THE YEARS ENDED SEPTEMBER 30,
2004 2003 2002
Weighted-average common shares
outstanding (basic) 4,577,292 4,506,995 4,451,737
Dilutive effect of assumed exercise
of stock options 101,645 123,360 116,216
--------- --------- ---------
Weighted-average common shares
outstanding (diluted) 4,678,937 4,630,355 4,567,953
========= ========= =========
Options to purchase 125,500 and 185,500 shares of common stock with a
respective weighted-average exercise price of $13.25 and $12.53 were
outstanding at September 30, 2003 and 2002, respectively, but were
excluded from the computation of common share equivalents for those
respective years because the exercise prices were greater than the average
market price of common shares.
12. Stock Option Plans
Shareholders of the Corporation have approved stock option plans that
provide for the issuance of up to 1,498,165 shares of authorized but
unissued shares of common stock to be granted at the discretion of the
Board of Directors at the fair value at the date of grant. Under the 1988
Stock Option Plan, 649,680 common shares were reserved for issuance to
directors, officers, and key employees of the Corporation and Winton
Savings. Additional options may not be granted under the 1988 Plan. At
September 30, 2004, 107,774 options under the 1988 Plan were subject to
exercise at the discretion of the grantees through fiscal 2008. The 1999
Stock Option Plan reserved 401,530 common shares for issuance to
directors, officers, and key employees of the Corporation and Winton
Savings. At September 30, 2004, 292,030 options under the 1999 Plan were
subject to exercise at the discretion of the grantees through fiscal 2013,
while 10,000 options were ungranted. The 2003 Stock Option Plan reserved
446,955 common shares for issuance to directors, officers and key
employers of the Corporation and Winton Savings. At September 30, 2004,
99,470 options under the 2003 Plan were
50
subject to exercise at the discretion of the grantees through fiscal 2013, while
347,485 options were ungranted.
51
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Stock Option Plans (continued)
The Corporation accounts for its stock option plans 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 companies 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." The ability to utilize
alternative accounting for stock options under APB Opinion No. 25 is
presently under review. However, in view of the pending business
combination discussed in Note M, management does not believe revisions to
the accounting literature will have a material effect on the Corporation's
results of operations. 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 reported at the pro-forma amounts
indicated below:
2004 2003 2002
Net earnings (In thousands) As reported $4,742 $5,706 $5,023
Stock-based compensation, net of tax (166) - -
------ ------ ------
Pro-forma $4,576 $5,706 $5,023
====== ====== ======
Earnings per share
Basic As reported $ 1.03 $ 1.27 $ 1.13
Stock-based compensation, net of tax (0.03) - -
------ ------ ------
Pro-forma $ 1.00 $ 1.27 $ 1.13
====== ====== ======
Diluted As reported $ 1.01 $ 1.23 $ 1.10
Stock-based compensation, net of tax (0.03) - -
------ ------ ------
Pro-forma $ 0.98 $ 1.23 $ 1.10
====== ====== ======
The fair value of each option grant was estimated on the date of grant
using the modified Black-Scholes options-pricing model. The following
assumptions were used for grants in fiscal 2004: dividend yield of 3.60%,
expected volatility of 54.8%, risk-free interest rate of 3.00% and an
expected life of ten years.
52
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
12. Stock Option Plans (continued)
A summary of the status of the Corporation's stock option plans as of
September 30, 2004, 2003 and 2002, and changes during the years ended on
those dates is presented below:
2004 2003 2002
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 674,130 $ 8.86 801,960 $8.33 831,000 $ 8.23
Granted 105,500 13.00 - - - -
Exercised (270,356) 7.32 (127,830) 5.41 (27,040) 5.00
Forfeited (10,000) 12.13 - - (2,000) 10.06
-------- ------- -------- ----- ------- --------
Outstanding at end of year 499,274 $ 10.51 674,130 $8.86 801,960 $ 8.33
======== ======= ======== ===== ======= ========
Options exercisable at year-end 499,274 $ 10.51 674,130 $8.86 801,960 $ 8.33
======== ======= ======== ===== ======= ========
Weighted-average fair value of
options granted during the year $ 2.38 $ - $ -
======= ===== ========
The following information applies to options outstanding at September 30,
2004:
Number outstanding 274,274
Range of exercise prices $ 6.75 - $9.94
Number outstanding 225,000
Range of exercise prices $13.00 - $13.25
Weighted-average exercise price $10.51
Weighted-average remaining contractual life 4.6
13. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks and interest-bearing deposits due from other
financial institutions with original maturities of less than ninety days.
14. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the fair value of financial instruments, both
assets and liabilities whether or not recognized in the consolidated
statement of financial condition, for which it is practicable to estimate
that value. When quoted market prices are not available for financial
instruments, fair values are based on estimates using present value and
other valuation methods.
53
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Fair Value of Financial Instruments (continued)
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, 2004 and 2003:
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.
Investment 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. 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 fair value of outstanding loan
commitments at September 30, 2004 and 2003, was not material.
54
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. 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:
2004 2003
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
Financial assets
Cash and cash equivalents $ 5,278 $ 5,278 $ 9,496 $ 9,496
Investment securities designated
as available for sale 18,226 18,226 21,466 21,466
Mortgage-backed securities designated
as available for sale 15,762 15,762 2,103 2,103
Mortgage-backed securities held to maturity 3,006 2,998 4,269 4,204
Loans receivable - net 484,755 510,215 487,480 503,510
Federal Home Loan Bank stock 8,493 8,493 8,156 8,156
---------- --------- --------- --------
$ 535,520 $ 560,972 $ 532,970 $548,935
========== ========= ========= ========
Financial liabilities
Deposits $ 364,833 $ 368,059 $ 354,296 $361,141
Advances from Federal Home Loan Bank and
other borrowed money 131,088 135,409 138,612 147,088
Advance payments and amounts due on loans
serviced for others 3,816 3,816 2,834 2,834
---------- --------- --------- --------
$ 499,737 $ 507,284 $ 495,742 $511,063
========== ========= ========= ========
15. Advertising
Advertising costs are expensed when incurred.
16. Reclassifications
Certain prior year amounts have been reclassified to conform to the 2004
consolidated financial statement presentation.
17. Recent Accounting Developments
In December 2003, the FASB issued FASB Interpretation No. 46(R) ("FIN
46(R)"), "Consolidation of Variable Interest Entities." FIN 46(R) requires
a variable interest entity to be consolidated by a company if that company
is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's
residual returns, or both. FIN 46(R) also requires disclosures about
variable interest entities that a company is not required to consolidate,
but in which it has a significant variable interest. The consolidation
requirements of FIN 46(R) apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements of FIN
46(R) apply to existing entities in the first fiscal year ending after
December 15,
55
2004. Winton Financial has consolidated all variable interest entities
without material effect on its financial condition or results of
operations.
56
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
17. Recent Accounting Developments (continued)
In March 2004, the Emerging Issues Task Force ("EITF") issued EITF 03-01,
"The Meaning of Other-than-Temporary Impairment and its Application to
Certain Investments." EITF 03-01 requires that unrealized losses on
investment securities that are deemed other-than-temporary be recorded as
an adjustment to operations. The Statement applies both to securities
designated as held to maturity and those designated as available for sale.
EITF 03-01 provides that unrealized losses may be viewed as
other-than-temporary as a result not only due to deterioration of the
credit quality of the issuer, but due to changes in the interest rate
environment as well. An investor must be able to demonstrate the positive
ability and intent to hold such securities until a forecasted recovery
takes place or until maturity of the security. EITF 03-01 requires
separate disclosure related to unrealized losses for securities that have
been in an unrealized loss position for a period of less than twelve
months and for those that have been in an unrealized loss position for a
period greater than twelve months, for financial statements issued for
years ending after December 15, 2003. The loss recognition provisions of
other-than-temporary losses under EITF 03-01 are effective September 30,
2004. It is management's belief that, given Winton Financial's liquidity
position, and assuming no credit quality concerns, EITF 03-01 will have no
material effect on Winton Financial's consolidated financial statements.
In March 2004, the FASB issued a proposed Statement, "Share-Based
Payment," that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange
for (a) equity instruments of the enterprise or (b) liabilities that are
based on the fair value of the enterprise's equity instruments or that may
be settled by the issuance of such equity instruments. The proposed
Statement would eliminate the ability to account for share-based
compensation transactions, including stock option grants, using APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and generally
would require instead that such transactions be accounted for using a
fair-value-based method. Issuance of the final standards are not expected
prior to the business combination in Note M.
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:
2004
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
AVAILABLE FOR SALE:
U.S. Government and agency obligations $11,254 $ 29 $ (59) $11,224
Corporate equity securities 145 - - 145
Municipal bonds 6,772 101 (16) 6,857
------- ----- ----- -------
Total investment securities $18,171 $ 130 $ (75) $18,226
======= ===== ===== =======
57
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
2003
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
AVAILABLE FOR SALE:
U.S. Government and agency obligations $ 8,046 $ 58 $ (1) $ 8,103
Corporate equity securities 209 397 - 606
Municipal bonds 12,850 119 (212) 12,757
-------- ----- ------- --------
Total investment securities $ 21,105 $ 574 $ (213) $ 21,466
======== ===== ======= ========
The amortized cost and estimated fair value of U.S. Government and agency
obligations and municipal bonds at September 30, 2004 and 2003, by term to
maturity are shown below.
2004 2003
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
Due in one year or less $ - $ - $ 4,025 $ 4,033
Due in one to three years 6,072 6,050 3,020 3,059
Due in three to five years 5,048 5,077 421 430
Due in five to ten years 6,512 6,563 8,978 8,993
Due after ten years 394 391 4,452 4,345
----------- ----------- --------- ---------
$ 18,026 $ 18,081 $ 20,896 $ 20,860
=========== =========== ========= =========
At September 30, 2004, investment securities with a carrying value of $1.0
million were pledged to secure public deposits.
Proceeds from sales of investment securities totaled $11.1 million, $3.6
million and $5.2 million in fiscal 2004, 2003 and 2002, respectively,
resulting in gross realized gains of $634,000, $97,000 and $264,000 in
those respective years.
58
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 2004
and 2003, are shown below.
2004
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
Federal Home Loan Mortgage Corporation
participation certificates $ 1,194 $ 2 $ (18) $ 1,178
Government National Mortgage Association
participation certificates 93 3 - 96
Federal National Mortgage Association
participation certificates 1,719 15 (10) 1,724
--------- ---------- ---------- ---------
Total mortgage-backed securities
held to maturity 3,006 20 (28) 2,998
AVAILABLE FOR SALE:
Federal Home Loan Mortgage Corporation
participation certificates 3,812 10 (36) 3,786
Government National Mortgage Association
participation certificates 6,535 19 (81) 6,473
Federal National Mortgage Association
participation certificates 5,478 31 (6) 5,503
--------- ---------- ---------- ---------
Total mortgage-backed securities
available for sale 15,825 60 (123) 15,762
--------- ---------- ---------- ---------
Total mortgage-backed securities $ 18,831 $ 80 $ (151) $ 18,760
========= ========== ========== =========
2003
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(In thousands)
HELD TO MATURITY:
Federal Home Loan Mortgage Corporation
Participation certificates $ 1,643 $ - $ (39) $ 1,604
Government National Mortgage Association
Participation certificates 151 2 - 153
Federal National Mortgage Association
Participation certificates 2,287 2 (30) 2,259
Residential Funding Corporation
Collateralized mortgage obligations 188 - - 188
--------- ---------- ---------- ---------
Total mortgage-backed securities
held to maturity 4,269 4 (69) 4,204
AVAILABLE FOR SALE:
Government National Mortgage Association
Participation certificates 137 1 - 138
Federal National Mortgage Association
Participation certificates 1,944 21 - 1,965
--------- ---------- ---------- ---------
Total mortgage-backed securities
available for sale 2,081 22 - 2,103
--------- ---------- ---------- ---------
Total mortgage-backed securities $ 6,350 $ 26 $ (69) $ 6,307
========= ========== ========== =========
59
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost of mortgage-backed securities, including those
designated as available for sale, by contractual terms to maturity are
shown below. Expected maturities will differ from contractual maturities
because borrowers may generally prepay obligations without prepayment
penalties.
SEPTEMBER 30,
2004 2003
(In thousands)
Due within three years $ 2 $ 33
Due after three years through five years 28 -
Due after five years through ten years 4,144 48
Due after ten years through twenty years 2,603 3,289
Due after twenty years 12,054 2,980
----------- --------
$ 18,831 $ 6,350
=========== ========
Mortgage-backed securities with a carrying value of $620,000 were pledged
to secure public deposits at September 30, 2004.
There were no sales of mortgage-backed securities in either fiscal 2004 or
fiscal 2003.
The table below indicates the length of time individual securities have
been in a continuous unrealized loss position at September 30, 2004.
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
DESCRIPTION OF NUMBER OF FAIR UNREALIZED NUMBER OF FAIR UNREALIZED NUMBER OF FAIR UNREALIZED
SECURITIES INVESTMENTS VALUE LOSSES INVESTMENTS VALUE LOSSES INVESTMENTS VALUE LOSSES
(Dollars in thousands)
Municipal obligations - $ - $ - 4 $ 1,556 $ (16) 4 $ 1,556 $ (16)
U.S. Government
agency obligations 4 6,195 (59) - - - 4 6,195 (59)
Mortgage-backed
securities 5 6,959 (123) - - - 5 6,959 (123)
---- -------- ---------- ---- -------- ---------- -- -------- ---------
Total temporarily
impaired securities 9 $ 13,154 $ (182) 4 $ 1,556 $ (16) 13 $ 14,710 $ (198)
==== ======== ========== ==== ======== ========== == ======== =========
Management has the intent to hold these securities for the foreseeable
future and the decline in the fair value is primarily due to an increase
in market interest rates. The fair values are expected to recover as
securities approach maturity dates.
60
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
2004 2003
(In thousands)
Residential real estate
One- to four-family $280,180 $283,998
Multi-family 73,891 76,552
Construction 26,370 30,002
Nonresidential real estate and land 95,612 97,015
Nonresidential construction 3,795 3,644
Consumer and other 17,846 10,096
-------- --------
497,694 501,307
Less:
Undisbursed portion of loans in process 15,477 17,134
Deferred loan origination fees 617 544
Allowance for loan losses 2,448 2,265
-------- --------
$479,152 $481,364
======== ========
The Company's lending efforts have historically focused on one- to
four-family residential and multi-family residential real estate loans,
which comprise approximately $365.0 million, or 76%, and $373.4 million,
or 78%, of the total loan portfolio at September 30, 2004 and 2003,
respectively. 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, periodically
retaining servicing on the loans sold. Loans sold and serviced for others
totaled approximately $158.6 million and $87.7 million at September 30,
2004 and 2003, respectively. At September 30, 2004, loans sold with
recourse totaled $947,000.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
2004 2003 2002
(In thousands)
Beginning balance $ 2,265 $ 1,850 $ 1,194
Provision for losses on loans 300 605 1,260
Charge-off of loans (162) (242) (670)
Recoveries of loan losses 45 52 66
------- ------- -------
Ending balance $ 2,448 $ 2,265 $ 1,850
======= ======= =======
61
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D - ALLOWANCE FOR LOAN LOSSES (continued)
At September 30, 2004, the Company's allowance for loan losses was solely
general in nature, which is includible as a component of regulatory
risk-based capital.
Nonperforming loans at September 30, 2004, 2003 and 2002, totaled $1.2
million, $3.8 million and $3.4 million, respectively. Interest income that
would have been recognized had nonperforming loans performed pursuant to
contractual terms totaled approximately $33,000, $146,000 and $49,000 for
the fiscal years ended September 30, 2004, 2003 and 2002, respectively.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment is comprised of the following at September
30:
2004 2003
(In thousands)
Land $ 740 $ 706
Office buildings and improvements 5,636 5,028
Furniture, fixtures and equipment 5,566 4,818
Construction in process 56 174
------- -------
11,998 10,726
Less accumulated depreciation and
amortization 4,952 4,595
------- -------
$ 7,046 $ 6,131
======= =======
During fiscal 2002, the Company began construction and remodeling projects
for two office locations. The Company completed these projects in fiscal
2003 at a total cost of $1.7 million. During fiscal 2004, the Company
finished a branch renovation project and relocated an existing branch to a
more strategic location.
The Company leases certain of its office locations and automobiles under
operating lease agreements. At September 30, 2004, the Company's
outstanding future lease obligations were as follows:
YEAR ENDED
SEPTEMBER 30, (In thousands)
2005 $262
2006 233
2007 180
2008 72
2009 and thereafter 18
----
$765
====
The Company recognized operating lease expense totaling $314,000, $309,000
and $177,000 for the fiscal years ended September 30, 2004, 2003 and 2002,
respectively.
62
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
Deposit type and weighted-average interest rate 2004 2003
(In thousands)
Checking accounts
2004 - 0.60% $ 36,370
2003 - 0.56% $ 38,375
Passbook and Club accounts
2004 - 1.17% 79,582
2003 - 1.26% 75,583
--------- --------
Total checking, passbook and club deposits 115,952 113,958
Certificates of deposit
Original maturities of:
12 months or less
2004 - 2.11% 34,074
2003 - 1.89% 28,463
More than 12 months through 36 months
2004 - 2.71% 145,208
2003 - 2.91% 142,871
More than 36 months
2004 - 4.79% 31,071
2003 - 5.01% 31,087
Individual Retirement and Keogh
2004 - 3.06% 38,528
2003 - 3.47% 37,917
--------- --------
Total certificates of deposit 248,881 240,338
--------- --------
Total deposit accounts $ 364,833 $354,296
========= ========
The Company had savings accounts with balances equal to or in excess of
$100,000 totaling $95.5 million and $74.9 million at September 30, 2004
and 2003, respectively.
Interest expense on deposits for the fiscal years ended September 30 is
summarized as follows:
2004 2003 2002
(In thousands)
Passbook and money market deposit accounts $ 914 $ 985 $ 1,332
NOW accounts 234 195 193
Certificates of deposit 7,355 8,325 10,819
------- ------- -------
$ 8,503 $ 9,505 $12,344
======= ======= =======
63
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F - DEPOSITS (continued)
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
2004 2003
(In thousands)
Less than one year $144,483 $113,907
One year to three years 96,077 107,373
More than three years 8,321 19,058
-------- --------
$248,881 $240,338
======== ========
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at September 30,
2004, by pledges of certain residential mortgage loans totaling $174.3
million and the Company's investment in Federal Home Loan Bank stock, are
summarized as follows:
MATURING FISCAL
INTEREST RATE YEAR ENDING IN 2004 2003
(Dollars in thousands)
2.65% - 6.90% 2004 $ - $ 38,021
2.03% - 6.90% 2005 39,500 33,000
2.75% - 6.92% 2006 13,000 13,000
3.33% - 6.97% 2007 17,000 16,000
3.31% - 5.87% 2008 13,500 5,500
2.50% - 5.87% Thereafter 46,088 31,091
-------- --------
$129,088 $136,612
======== ========
Weighted-average interest rate 4.74% 4.93%
======== ========
NOTE H - OTHER BORROWED MONEY
Winton Financial has a $6.0 million line of credit with another financial
institution, with interest payable at prime less 50 basis points. At
September 30, 2004 and 2003, the Corporation had $2.0 million outstanding
at an interest rate of 4.25% and 3.50%, respectively. This line of credit
expires in the first quarter of fiscal 2006. The loan is secured by
162,420, or 40.0% of Winton Savings' outstanding shares.
64
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
2004 2003 2002
(Dollars in thousands)
Federal income taxes computed at statutory rate $ 2,382 $ 2,888 $ 2,566
Increase (decrease) in taxes resulting from:
Interest income on municipal loans and obligations
of state and political subdivisions (90) (62) -
Nondeductible expenses 14 9 12
Nontaxable dividend income (2) (4) (4)
Low income housing investment tax credits (42) (42) (42)
Other 1 - (9)
------- ------- -------
Federal income tax provision per consolidated
financial statements $ 2,263 $ 2,789 $ 2,523
======= ======= =======
Effective tax rate 32.3% 32.8% 33.4%
======= ======= =======
The composition of the Corporation's net deferred tax liability at
September 30 is as follows:
Taxes (payable) refundable on temporary 2004 2003
differences at statutory rate: (In thousands)
Deferred tax assets:
General loan loss allowance $ 832 $ 770
Reserve for uncollected interest 11 54
Amortization of intangible assets 63 58
Loans held for sale 16 48
Unrealized losses on securities designated as available for sale 3 -
Other 11 -
------- -------
Total deferred tax assets 936 930
Deferred tax liabilities:
Federal Home Loan Bank stock dividends (1,442) (1,327)
Difference between book and tax depreciation (359) (153)
Percentage of earnings bad debt deduction - (48)
Unrealized gains on securities designated as available for sale - (130)
Deferred loan origination costs (511) (552)
Mortgage servicing rights (333) (177)
Deferred gain on sale of real estate acquired through foreclosure (7) (18)
Other (1) (4)
------- -------
Total deferred tax liabilities (2,653) (2,409)
------- -------
Net deferred tax liability $(1,717) $(1,479)
======= =======
65
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I - FEDERAL INCOME TAXES (continued)
Prior to fiscal 1997, 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 $1.8 million as of September 30, 2004. The amount of the
unrecognized deferred tax liability relating to the cumulative bad debt
deduction was approximately $600,000 at September 30, 2004.
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, 2004, the Company had total outstanding commitments of
approximately $28.2 million to originate residential one- to four-family
and multi-family real estate loans, of which $7.0 million were comprised
of adjustable-rate loans at rates ranging from 3.50% to 6.75%, and $21.2
million were comprised of fixed-rate loans at rates ranging from 3.50% to
7.75%. The Company also had total outstanding commitments of approximately
$3.1 million to originate nonresidential real estate and land loans, of
which approximately $800,000 were comprised of fixed-rate loans ranging
from 5.25% to 8.00%, and $2.3 million were comprised of adjustable rate
loans at rates ranging from 4.75% to 5.125%. Additionally, the Company had
unused lines of credit related to home equity loans and commercial loans
totaling $25.8 million and $8.6 million, respectively. In the opinion of
management, all loan commitments equaled or exceeded prevalent market
interest rates as of September 30, 2004, 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. Fees received in connection with these
commitments have not been recognized in earnings.
The Company has an outstanding commitment to sell $9.6 million of loans in
the secondary market at September 30, 2004.
66
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K - REGULATORY CAPITAL
Winton Savings 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 Winton Savings' 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, 2004. 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 fiscal 2004, the Company was notified by the OTS 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.
As of September 30, 2004 and 2003, management believes that the Company
met all capital adequacy requirements to which it was subject.
AS OF SEPTEMBER 30, 2004
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)
Tangible capital $48,551 8.8% > or = $ 8,266 > or = 1.5% > or = $27,555 > or = 5.0%
Core capital $48,551 8.8% > or = $ 22,044 > or = 4.0% > or = $33,066 > or = 6.0%
Risk-based capital $50,999 12.7% > or = $ 32,145 > or = 8.0% > or = $40,181 > or = 10.0%
67
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE K - REGULATORY CAPITAL (continued)
AS OF SEPTEMBER 30, 2003
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)
Tangible capital $45,007 8.3% > or = $ 8,149 > or = 1.5% > or = $27,163 > or = 5.0%
Core capital $45,007 8.3% > or = $ 21,730 > or = 4.0% > or = $32,596 > or = 6.0%
Risk-based capital $47,272 11.8% > or = $ 32,060 > or = 8.0% > or = $40,075 > or = 10.0%
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.
68
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L - CONDENSED FINANCIAL STATEMENTS OF WINTON FINANCIAL
CORPORATION
The following condensed financial statements summarize the financial
position of the Corporation as of September 30, 2004 and 2003, and the
results of its operations and its cash flows for each of the years ended
September 30, 2004, 2003 and 2002.
WINTON FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
September 30,
ASSETS 2004 2003
(In thousands)
Cash $ 501 $ 667
Investment in The Winton Savings and Loan Co. 48,680 45,147
Investment in Walnut Street Enterprises LLC 189 -
Corporate equity securities - at fair value 146 606
Prepaid expenses and other assets 249 19
Prepaid federal income taxes 1,197 390
-------- --------
Total assets $ 50,962 $ 46,829
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable $ 2,000 $ 2,000
Accrued expenses and other liabilities 16 472
Deferred federal income taxes 534 135
-------- --------
Total liabilities 2,550 2,607
Shareholders' equity
Additional paid-in capital 14,071 11,285
Retained earnings 35,880 33,213
Treasury stock - 117,630 and 40,300 shares respectively
at September 30, 2003 and 2002 - at cost (1,534) (529)
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects (5) 253
-------- --------
Total shareholders' equity 48,412 44,222
-------- --------
Total liabilities and shareholders' equity $ 50,962 $ 46,829
======== ========
69
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L - CONDENSED FINANCIAL STATEMENTS OF WINTON FINANCIAL
CORPORATION (continued)
WINTON FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Year ended September 30,
2004 2003 2002
(In thousands)
Revenue
Interest and dividends on investments $ 9 $ 16 $ 16
Gain on sale of investment securities 550 - 105
Equity in earnings of Winton Savings & Loan Co. 4,439 5,870 5,071
Equity in undistributed losses in Walnut Street
Enterprises LLC (3) - -
------- ------- -------
4,995 5,886 5,192
Expenses
General and administrative 253 180 169
------- ------- -------
Net earnings $ 4,742 $ 5,706 $ 5,023
======= ======= =======
WINTON FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Year ended September 30,
2004 2003 2002
(In thousands)
Cash flows provided by (used in) operating activities:
Net earnings for the year $ 4,742 $ 5,706 $ 5,023
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Undistributed earnings of Winton Savings & Loan Co. (2,039) (3,870) (3,646)
Undistributed loss of Walnut Street Enterprises LLC 3 - -
Gain on sale of investment securities (550) - (105)
Increases (decreases) in cash due to changes in:
Prepaid expenses and other assets (230) (6) (4)
Prepaid federal income taxes (807) (255) (43)
Other 90 60 47
------- ------- -------
Net cash provided by operating activities 1,206 1,635 1,272
Cash flows provided by (used in) investing activities:
Investment in Winton Savings & Loan Co. (1,500) - -
Investment in Walnut Street Enterprises LLC (192) - -
Proceeds from sale of investment securities 614 - 125
------- ------- -------
Net cash provided by (used in) investing activities (1,078) - 125
Cash flows provided by (used in) financing activities:
Payment of dividends on common stock (2,075) (1,853) (1,648)
Purchase of treasury shares (1,005) (524) (5)
Proceeds from exercise of stock options 2,786 964 179
------- -------
Net cash used in financing activities (294) (1,413) (1,474)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (166) 222 (77)
Cash and cash equivalents at beginning of year 667 445 522
------- ------- -------
Cash and cash equivalents at end of year $ 501 $ 667 $ 445
======= ======= =======
70
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L - 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.
NOTE M - PENDING ACQUISITION
On August 25, 2004, WesBanco, Inc. ("WesBanco"), WesBanco Bank, Inc.,
Winton Financial and The Winton Savings and Loan Co. entered into an
Agreement and Plan of Merger (the "Merger Agreement") providing for the
merger of Winton Financial with and into WesBanco.
Pursuant to the Merger Agreement, Winton shareholders will receive for
each Winton share owned $20.75 in cash or 0.755 shares of WesBanco common
stock, subject to the requirement that 60% of Winton's outstanding shares
will be paid in stock and 40% in cash, via a pro ration formula described
in the Merger Agreement. The transaction approved by both companies is
valued at approximately $102.5 million. The consummation of the merger is
subject to regulatory and Winton shareholder approval.
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Corporation's quarterly results for the
fiscal years ended September 30, 2004 and 2003. Certain amounts, as
previously reported, have been reclassified to conform to the 2004
presentation.
THREE MONTHS ENDED
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
2004: (In thousands, except per share data)
Total interest income $ 7,567 $ 7,661 $ 7,752 $ 7,848
Total interest expense 3,726 3,691 3,759 3,933
------------ ------- -------- -----------
Net interest income 3,841 3,970 3,993 3,916
Provision for losses on loans 75 75 75 75
Other income 1,289 685 1,021 669
General, administrative and other expense 3,329 2,774 2,782 3,194
------------ ------- -------- -----------
Earnings before income taxes 1,726 1,806 2,157 1,316
Federal income taxes 566 594 697 406
------------ ------- -------- -----------
Net earnings $ 1,160 $ 1,212 $ 1,460 $ 910
============ ======= ======== ===========
Earnings per share
Basic $ .25 $ .26 $ .32 $ .20
============ ======= ======== ===========
Diluted $ .24 $ .26 $ .31 $ .20
============ ======= ======== ===========
-71-
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (continued)
THREE MONTHS ENDED
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
2003: (In thousands, except per share data)
Total interest income $ 7,701 $ 7,786 $ 7,933 $ 8,224
Total interest expense 3,905 3,995 4,113 4,383
------------ ------- -------- -----------
Net interest income 3,796 3,791 3,820 3,841
Provision for losses on loans 150 150 150 155
Other income 729 1,223 982 1,481
General, administrative and other expense 2,936 2,676 2,491 2,460
------------ ------- -------- -----------
Earnings before income taxes 1,439 2,188 2,161 2,707
Federal income taxes 451 719 714 905
------------ ------- -------- -----------
Net earnings $ 988 $ 1,469 $ 1,447 $ 1,802
============ ======= ======== ===========
Earnings per share
Basic $ .22 $ .33 $ .32 $ .40
============ ======= ======== ===========
Diluted $ .21 $ .32 $ .31 $ .39
============ ======= ======== ===========
-72-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
The Corporation's management reviews the system of internal controls with
a view towards continuous improvement. In this regard, management became aware
that segregation of network access capabilities were not implemented. In
addition, management became aware of a number of passed adjustments in
connection with the audit of the consolidated financial statements. The
Corporation's Audit Committee was advised by its independent auditors that these
matters represented significant deficiencies as defined in the auditing
literature. Management has implemented corrective action with respect to these
matters. The Corporation's Chief Executive Officer and Chief Financial Officer
evaluated the disclosure controls and procedures (as defined under Rule
13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended)
as of the end of the period covered by this annual report. Based upon that
evaluation and the corrective actions which are in the implementation stages,
the Chief Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures are effective.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF WFC
DIRECTORS
The following are the current directors of WFC:
Age Position(s) Held Director Since
--- ---------------- --------------
Robert E. Hoeweler 57 Director and Vice Chairman 1989
of the Board
Timothy M. Mooney 57 Director 1996
J. Clay Stinnett 53 Director 1996
Robert L. Bollin (1) 53 Director and President 1989
Jill M. Burke 42 Director and CFO 2004
Henry L. Schulhoff 60 Director and Chairman 1989
of the Board
Thomas H. Humes 55 Director 1996
- ---------------------
(1) Robert L. Bollin, a director and the President of WFC, is the brother of
Gregory J. Bollin, a Vice President of WFC.
ROBERT E. HOEWELER, a certified public accountant, has served since 1990
as the President of the Hoeweler Group, a group of family-owned companies that
includes Aluminum Extruded Shapes, Inc.
TIMOTHY M. MOONEY has served as Vice President of Operations at St. Xavier
High School since August 2004 and previously served as Executive Vice President
and Chief Financial Officer of Kendle International Inc., a clinical research
organization in Cincinnati. Mr. Mooney is a director of Regent Communications,
Inc.
J. CLAY STINNETT has served since 1993 as the President and a director of
J.R. Concepts, Inc., a direct mail advertising company in Cincinnati.
ROBERT L. BOLLIN has served since 1988 as the President and a director of
Winton and since 1989 as the President and a director of WFC.
-73-
JILL M. BURKE is the Chief Financial Officer of WFC and Winton, positions
she has held since 1989. She became a director in 2004.
HENRY L. SCHULHOFF has served since 1976 as the President of Schulhoff and
Company, Inc., a local investment counseling firm.
THOMAS H. HUMES has served since 1978 as the President of Great Traditions
Land and Development Co., a real estate and land development company in
Cincinnati.
The only committee of WFC is the Audit Committee. The Audit Committee of
the Board of Directors of WFC is comprised of three directors, all of whom are
considered "independent" under Section 121(A) of AMEX's listing standards. The
members of WFC's Audit Committee are Thomas H. Humes, Timothy M. Mooney and J.
Clay Stinnett. The Board of Directors has determined that Timothy M. Mooney is a
financial expert. The Audit Committee is responsible for overseeing WFC's
accounting functions and controls, as well as retaining an independent
accounting firm to audit WFC's financial statements. The Audit Committee has
adopted a revised written charter to set forth its responsibilities. The Audit
Committee met nine times during the fiscal year ended September 30, 2004.
EXECUTIVE OFFICERS
In addition to Robert L. Bollin, the following individuals are current
executive officers of WFC:
GREGORY J. BOLLIN, age 50, is a Vice President of WFC, a position he has
held since January 1994. Mr. Bollin also serves as Executive Vice President of
Winton, a position he has held since January 1993. Mr. Bollin is the brother of
Robert L. Bollin.
JILL M. BURKE is the Chief Financial Officer of WFC and Winton, positions
she has held since 1989. She became a director in 2004.
GREGORY P. NIESEN, age 38, a certified public accountant, has served as
Treasurer of WFC since February 2000 and as Secretary of WFC since October 2000.
Prior to his employment by WFC, Mr. Niesen served as the Senior Vice
President/Treasurer of Fidelity Financial of Ohio, Inc. for four years and as
the Senior Vice President/Chief Financial Officer of Centennial Savings Bank for
four years.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires WFC's
officers and directors and persons who own 10% or more of the shares of WFC to
file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the
Commission. Officers, directors and 10% or greater shareholders are required by
the Commission's regulations to furnish WFC with copies of all Forms 3, 4 and 5
they file.
Based on WFC's review of the copies of such forms it has received, WFC
believes that all of its officers, directors and 10% or greater shareholders
filed on a timely basis all reports required by Section 16(a) of the Exchange
Act during fiscal 2004.
CODE OF BUSINESS CONDUCT AND ETHICS
WFC's Board of Directors has adopted a Code of Business Conduct and Ethics
that applies to all employees and directors of WFC and Winton. A copy of the
Code of Business Conduct and Ethics will be available at no charge to any person
upon written request to:
Winton Financial Corporation
Attention: Jill M. Burke, Chief Financial Officer
5511 Cheviot Road
Cincinnati, Ohio 45247-7095
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ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
WFC does not pay any compensation to its executive officers. Winton
compensates its executive officers for services rendered to Winton. Except for
the persons set forth in the table below (the "Named Executive Officers"), no
director or executive officer of WFC received more than $100,000 in salary and
bonus payments from Winton during the year ended September 30, 2004:
Summary Compensation Table
Long Term
Compensation
Awards
----------
Annual Compensation Securities All Other
---------------------- Underlying Compensation
Name and Principal Position Year Salary($) Bonus($) Options (#) ($)(1)
- --------------------------- ---- --------- -------- ----------- ------------
Robert L. Bollin, 2004 215,088 17,000 12,500 11,668 (2)
President 2003 210,712 77,000 0 11,868 (2)
2002 201,278 77,000 0 10,877 (2)
Gregory J. Bollin, 2004 151,932 14,000 7,500 9,335 (3)
Vice President 2003 147,519 54,000 0 8,842 (3)
2002 142,746 49,000 0 8,560 (3)
Jill M. Burke, 2004 106,996 33,000 7,500 8,631 (4)
Chief Financial Officer 2003 103,115 42,400 0 8,570 (4)
2002 96,000 40,000 0 7,116 (4)
Gregory P. Niesen, 2004 83,763 9,665 (6) 5,000 5,991 (5)
Treasurer/Secretary 2003 82,712 18,000 0 5,472 (5)
2002 80,250 14,000 0 4,399 (5)
- -------------------------
(1) On February 28, 2002, The Winton Financial Corporation Employee Stock
Ownership Plan (the "ESOP") was terminated and merged into The Winton
Savings and Loan Co. 401(k) Profit Sharing Plan (the "401(k)"). Prior to
the termination, contributions were made to the ESOP for the benefit of
participants.
(2) Consists of cash or stock contributions to the ESOP of $0, $0, and $4,788
allocated to Mr. Robert L. Bollin's account and $11,668, $11,868 and
$6,089 in matching and profit sharing contributions to the 401(k) Plan for
Mr. Robert L. Bollin's account for the years ended September 30, 2004,
2003, and 2002, respectively.
(3) Consists of cash or stock contributions to the ESOP of $0, $0, and $4,788
allocated to Mr. Gregory J. Bollin's account and $9,335, $8,842 and $3,772
in matching and profit sharing contributions to the 401(k) Plan for Mr.
Gregory J. Bollin's account for the years ended September 30, 2004, 2003,
and 2002, respectively.
(4) Consists of cash or stock contributions to the ESOP of $0, $0, and $3,681
allocated to Ms. Burke's account and $8,631, $8,570, and $3,435 in
matching and profit sharing contributions to the 401(k) Plan for Ms.
Burke's account for the years ended September 30, 2004, 2003, and 2002,
respectively.
(5) Consists of cash or stock contributions to the ESOP of $0, $0, and $2,526
allocated to Mr. Niesen's account and $5,991, $5,472, and $1,873 in
matching and profit sharing contributions to the 401(k) Plan for Mr.
Niesen's account for the years ended September 30, 2004, 2003, and 2002,
respectively.
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(6) Includes $4,665 awarded under the cost analysis revenue enhancement
program in which Mr. Niesen contributed significantly.
The following table sets forth information regarding the number and value
of unexercised options granted pursuant to the 1988 Option Plan and the 1999
Option Plan and held by the Named Executive Officers. No options were granted
under the 2003 Option Plan during fiscal 2004.
Aggregate Option/SAR Exercises in Last Fiscal Year and 9/30/04 Option Values
---------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 9/30/04(#) at 9/30/04($)(1)
---------------------- --------------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized ($) Unexercisable Unexercisable
- ---- -------------- ------------ ------------- -------------
Robert L. Bollin 49,370 454,661 60,500/0 640,635/0
Gregory J. Bollin 21,186 230,398 47,314/0 536,152/0
Jill M. Burke 34,300 232,140 15,000/0 153,675/0
Gregory P. Niesen 12,500 112,563 7,500/0 64,963/0
- -----------------------
(1) An option is "in-the-money" if the fair value of the underlying stock
exceeds the exercise price of the option. The figure represents the value
of such unexercised options, determined by multiplying the number of
unexercised options by the difference between the exercise price of such
options and the $21.12 closing bid price for the WFC shares reported by
the American Stock Exchange ("AMEX"), on September 30, 2004.
EMPLOYMENT AGREEMENTS
WFC and Winton have entered into employment agreements with Robert L.
Bollin, President of WFC and Winton, Gregory J. Bollin, Vice President of WFC
and Executive Vice President of Winton, and Jill M. Burke, Chief Financial
Officer of WFC and Winton. Each employment agreement has a term of three years
and provides for an annual salary and annual bonus of not less than $230,000 for
Robert L. Bollin, $163,000 for Gregory J. Bollin and $119,400 for Jill M. Burke,
and an annual salary and performance review by the Boards of Directors. The
employment agreements require the inclusion of Robert L. Bollin, Gregory J.
Bollin and Jill M. Burke in any formally established employee benefit, bonus,
pension and profit sharing plans for which senior management personnel are
eligible and also provide for vacation and sick leave.
WFC and Winton may terminate the employment agreements at any time. If the
employment of Robert L. Bollin, Gregory J. Bollin or Jill M. Burke is terminated
during the three-year term of his or her respective agreement for any reason
other than "just cause" or a "change of control" of WFC or Winton (as defined in
the agreements), he or she will be entitled to receive his or her annual
compensation for the remainder of the three-year term of the agreement and a
continuation of benefits substantially equal to those being provided at the date
of termination of employment until the earliest to occur of the expiration of
the term of the employment agreement or the date on which the employee becomes
employed full-time by another employer.
If WFC or Winton terminates the employment of Robert L. Bollin, Gregory J.
Bollin or Jill M. Burke, or if their positions or responsibilities are
substantially changed in connection with or within one year of a change of
control of WFC or Winton, he or she will be entitled to receive an amount
approximately equal to three times his or her then current annual
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compensation, subject to any necessary reduction to comply with certain
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
regulations of the Internal Revenue Service and regulations of the Office of
Thrift Supervision ("OTS"). He or she will also be entitled to continued
benefits under all benefit plans until the earliest to occur of the expiration
of the term of the employment agreement or the date on which the employee
becomes employed full-time by another employer.
SEVERANCE AGREEMENT
Winton has entered into a Severance Agreement with Gregory P. Niesen, the
Secretary and Treasurer of WFC and Winton. The Severance Agreement has a
one-year term and provides that if Winton terminates Gregory P. Niesen's
employment within six months before or within one year after a "change of
control" of Winton (as defined in the Agreement), or Gregory P. Niesen
voluntarily terminates his employment with Winton within one year after a change
in control due to certain material changes in his employment (as set forth in
the Agreement), he shall be entitled to receive $88,250, subject to any
necessary reduction to comply with certain provisions of the Code, regulations
of the Internal Revenue Service and regulations of the OTS. He will also be
entitled to continued benefits under all benefit plans until the earliest to
occur of the expiration of the term of the employment agreement or the date on
which he becomes employed full-time by another employer.
COMPENSATION COMMITTEE REPORT
As a unitary savings and loan holding company, the business of WFC
consists principally of holding the stock of Winton. The functions of the
executive officers of WFC, who are also the executive officers of Winton,
pertain primarily to the operations of Winton. The executive officers receive
their compensation, therefore, from Winton, rather than from WFC. The
Compensation Committee of Winton has furnished the following report concerning
executive compensation:
Process for Determining Compensation
Decisions on cash compensation of Winton's executive officers are made by
the three-member Compensation Committee of Winton's Board of Directors. Each
member of the Compensation Committee is an independent director.
The Compensation Committee reviews the compensation levels of the
executive officers of Winton, including the CEO, each year. The Compensation
Committee utilizes independent surveys of compensation of officers in the thrift
industry, taking into account comparable asset bases and geographic locations.
The Compensation Committee also assesses each particular executive officer's
contribution to WFC and Winton, the skills and experiences required by his/her
position and the potential of the executive officer. The Compensation Committee
determines the compensation for the senior executive officers based on the
foregoing factors.
Compensation Policies toward Executive Officers Generally
The Compensation Committee's executive compensation policies are designed
to provide competitive levels of compensation that will attract and retain
qualified executives and will reward individual performance, initiative and
achievement, while enhancing overall corporate performance and shareholder
value. The cash compensation program for executive officers consists of the
following three elements: a base salary component, a discretionary cash bonus
and an incentive component payable under an incentive plan (the "Incentive
Plan").
The objectives of the discretionary cash bonuses are to motivate and
reward the executive officers based on each individual's contribution to the
total performance of Winton and WFC and to reinforce a strong performance
orientation.
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The Incentive Plan was established to motivate and reward the executive
officers and employees in connection with the accomplishment of annual
objectives of Winton and WFC, to reinforce a strong performance orientation with
differentiation and variability in individual awards based on contribution to
annual and long range business results and to provide a competitive compensation
package that will attract, reward and retain individuals of the highest quality.
The Incentive Plan provides that if WFC reaches a predetermined return on
equity, a percentage of WFC's net income before taxes is set aside to be used
for incentive awards. This incentive pool is distributed through cash awards as
follows: 40% of the incentive pool is divided between the President and the
Executive Vice President of Winton, 40% of the incentive pool is awarded to
other executive officers and employees of WFC and Winton as determined
appropriate by the President, and the remaining 20% of the incentive pool is
contributed to the Profit Sharing plan.
Determination of CEO's Compensation
The Compensation Committee based the compensation of Mr. Robert L. Bollin
in fiscal 2004 on the policies described above for executive officers. The
corporate profitability measurements considered were return on equity, net
income, earnings per WFC common share and return on assets. Additional corporate
goals considered were merger and acquisition activities, continued updating and
implementation of Winton's strategic plan and subsidiary oversight and progress.
The Compensation Committee believes that the level of compensation paid to Mr.
Robert L. Bollin in fiscal 2004 was fair and reasonable when compared with
compensation levels in the thrift industry reported in various independent
surveys. The compensation earned by Mr. Robert L. Bollin in 2004 reflects the
significant management and leadership responsibilities required of him and the
effective manner in which those responsibilities were fulfilled.
Submitted by the Compensation Committee of Winton's Board of Directors
Thomas H. Humes
Timothy M. Mooney
J. Clay Stinnett
COMPENSATION COMMITTEE INTERLOCKS
During fiscal 2004, no member of the Compensation Committee was a current
or former executive officer or employee of WFC or Winton or had a reportable
business relationship with WFC or Winton.
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PERFORMANCE GRAPH
The following graph compares the cumulative total return on WFC's shares
for the fiscal year ended September 30, 2004, with the cumulative total return
of the SNL Thrift Index, which is an index of thrifts whose shares are traded on
The New York Stock Exchange, AMEX or The Nasdaq Stock Market and the cumulative
total return of the Standard and Poor's 500 for the same period.
[GRAPH]
09/30/2000 09/30/2001 09/30/2002 09/30/2003 09/30/2004
---------- ---------- ---------- ---------- ----------
Winton Financial Corp. 61.51 60.25 65.27 87.70 141.39
SNL Thrift Index 117.91 156.59 161.59 218.49 254.44
S&P 500 Index 111.99 81.15 63.56 77.65 86.89
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The following table sets forth certain information with respect to
shareholders, other than directors and executive officers of WFC, known by WFC
to own beneficially more than five percent of the WFC common shares as of
December 15, 2004:
Amount and Nature Percentage of Common
Name and Address of Beneficial Ownership Shares Outstanding (1)
- ---------------- ----------------------- ----------------------
The Winton Savings and Loan Co. 328,101 (2) 6.47%
5511 Cheviot Road
Cincinnati, Ohio 45247
- ---------------------
(1) Assumes a total of 5,069,824 WFC common shares outstanding.
(2) All of the shares are held by Winton as Trustee for The Winton Savings and
Loan Co. 401(k) Profit Sharing Plan (the "401(k)"). Pursuant to the
401(k), Winton, as Trustee, has shared investment power with respect to
shares held in ESOP Transfer Accounts. The ESOP Transfer Accounts were
created when The Winton Financial Corporation Employee Stock Ownership
Plan (the "ESOP") was terminated and then merged into the 401(k).
As previously announced, pursuant to the Agreement and Plan of Merger
dated as of August 25, 2004 by and among WesBanco, Inc. ("WesBanco"), WesBanco
Bank, Inc., WFC and Winton, WesBanco will acquire all of the outstanding
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shares of WFC. As a result, WFC will be merged with and into WesBanco. It is
anticipated that this merger will become effective in January 2005.
The following table sets forth certain information with respect to the
number of WFC common shares beneficially owned by each director of WFC and by
all directors and executive officers of WFC as a group as of December 15, 2004:
Amount and Nature of
Beneficial Ownership
--------------------------------------------------
Sole Voting and/or Shared Voting and/or Percentage of Common
Name and Address (1) Investment Power Investment Power Shares Outstanding (2)
- ---------------------------- ---------------- ---------------- ----------------------
Robert L. Bollin 153,871 (3) 50,826 4.04%
Robert E. Hoeweler 72,500 (4) 91,400 3.20
Thomas H. Humes 32,500 (5) 2,000 .68
Timothy M. Mooney 32,500 (6) 0 .64
Henry L. Schulhoff 168,160 (7) 28,800 (7) .93
J. Clay Stinnett 1,000 0 3.86
Jill M. Burke 46,967 0 .93
All directors and executive
officers of WFC as a group (9
persons) 567,988 191,905 14.56
- --------------------------
(1) Each of the persons listed in this table may be contacted at the address
of WFC, 5511 Cheviot Road, Cincinnati, Ohio 45247.
(2) For each person, assumes a total of 5,069,824 WFC common shares
outstanding, plus the number of WFC shares such person may acquire in the
next 60 days pursuant to the Winton Financial Corporation Stock Option and
Incentive Plan, as amended (the "1988 Option Plan"), the Winton Financial
Corporation 1999 Stock Option and Incentive Plan (the "1999 Option Plan"),
and the Winton Financial Corporation 2003 Stock Option and Incentive Plan
(the "2003 Option Plan").
(3) Includes 52,500 shares that may be acquired upon the exercise of options.
(4) Includes 32,500 shares that may be acquired upon the exercise of options.
(5) Consists solely of shares that may be acquired upon the exercise of
options.
(6) Includes 30,560 shares that may be acquired upon the exercise of options.
(7) Includes 17,600 shares owned by the Cathleen Schulhoff Trust, the trustee
of which is Mr. Schulhoff's spouse, and as to which Mr. Schulhoff
disclaims beneficial ownership.
The following table shows, as of September 30, 2004, the number of shares
issuable upon the exercise of outstanding stock options under both the 1988
Option Plan, the 1999 Option Plan and the 2003 Option Plan, the weighted-average
exercise price of those stock options, and the number of common shares remaining
for future issuance under the 1999 Option Plan and the 2003 Option Plan,
excluding shares issuable upon the exercise of outstanding stock options:
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(a) (b) (c)
------------------- ------------------- ------------------------
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted-average equity compensation plans
exercise of exercise price of (excluding securities
Plan Category outstanding options outstanding options reflected in column (a))
- ------------------------- ------------------- ------------------- ------------------------
Equity compensation plans
approved by security
holders...................... 499,274 $10.51 357,485
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and officers of WFC and Winton were customers of
and had transactions with Winton in the ordinary course of Winton's business
during the two years ended September 30, 2004. All loans and commitments to loan
included in such transactions were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and, in
the opinion of the management of WFC, do not involve more than the normal risk
of collectibility or present other unfavorable features.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed by Grant Thornton LLP to WFC for the years ended
September 30, 2004 and 2003 are as follows:
2004 2003
---- ----
Audit Fees $63,425 $63,910
Tax Fees (1) 7,715 9,450
All Other Fees (2) 22,995 7,955
------- -------
Total Fees $94,135 $81,315
======= =======
- -------------------------
(1) Permissible tax services include preparation of tax returns.
(2) Includes reviews of Forms S-4 and 10-Q.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
3.1 Articles of Incorporation, as amended through 1999, of
Winton Financial Corporation
3.2 Regulations of Winton Financial Corporation, as amended
4 Instruments defining the rights of shareholders
10.1 The Winton Savings and Loan Co. 401(k) Profit Sharing
Plan
10.2 Winton Financial Corporation, Stock Option and Incentive
Plan, as Amended
10.3 The Winton Financial Corporation 1999 Stock Option and
Incentive Plan
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10.4 The Winton Financial Corporation 2003 Stock Option and
Incentive Plan
10.5 Employment Agreement between WFC, Winton and Robert L.
Bollin, dated January 1, 2004
10.6 Employment Agreement between WFC, Winton and Gregory J.
Bollin, dated January 1, 2004
10.7 Employment Agreement between WFC, Winton and Jill M.
Burke, dated January 1, 2004
10.8 Severance Agreement between Winton and Gregory P.
Niesen, dated January 1, 2004
10.9 Agreement and Plan of Merger dated as of August 25, 2004
by and among WesBanco, Inc., WesBanco Bank, Inc., WFC
and Winton
21 Subsidiaries of the Registrant
23 Consent of Grant Thornton LLP regarding WFC's
Consolidated Financial Statements and Forms S-8 for
WFC's 1988 Stock Option Plan, 1999 Stock Option Plan and
401(k) Profit Sharing Plan
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer
32.1 Certification of Chief Executive Officer
32.2 Certification of Chief Financial Officer
99.1 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on December 17, 2004.
WINTON FINANCIAL CORPORATION
By: /s/ Robert L. Bollin
------------------------------
Robert L. Bollin,
President, Chief Executive
Officer and a Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been duly signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By: /s/ Jill M. Burke By:/s/ Thomas H. Humes
-------------------------------- -------------------------------
Jill M. Burke, Thomas H. Humes,
Principal Financial Officer Director
and Principal Accounting
Officer
Date: December 17, 2004 Date: December 17, 2004
By: /s/ Robert E. Hoeweler By:/s/ Henry L. Schulhoff
-------------------------------- -------------------------------
Robert E. Hoeweler, Henry L. Schulhoff,
Director Director
Date: December 17, 2004 Date: December 17, 2004
By: /s/ Timothy M. Mooney By:/s/ J. Clay Stinnett
------------------------------- -------------------------------
Timothy M. Mooney, J. Clay Stinnett,
Director Director
Date: December 17, 2004 Date: December 17, 2004
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION LOCATION
3.1 Articles of Incorporation, as amended through 1999, of Incorporated by reference to the Annual
Winton Financial Corporation Report on Form 10-K for the fiscal year
ended September 30, 2001, filed
by WFC with the SEC on December
26, 2001 (the "2001 10-K"),
Exhibit 3.1.
3.2 Regulations of Winton Financial Corporation, as amended Incorporated by reference to Exhibit B of
the definitive Proxy Statement for the 2003
Annual Meeting of Shareholders filed by WFC
with the SEC on December 30, 2002 (the
"2003 Proxy").
4 Instruments defining the rights of shareholders
10.1 The Winton Savings and Loan Co. 401(k) Profit Sharing Plan Incorporated by reference to the Form S-8
Registration Statement filed by WFC with
the SEC on August 28, 2002, Exhibit 4.1.
10.2 Winton Financial Corporation, Stock Option and Incentive Incorporated by reference to the 2001 10-K,
Plan, as Amended Exhibit 10.4.
10.3 The Winton Financial Corporation 1999 Stock Option and Incorporated by reference to the definitive
Incentive Plan Proxy Statement for the 1999 Annual Meeting
of Shareholders filed by WFC with the SEC
on December 18, 1998.
10.4 The Winton Financial Corporation 2003 Stock Option and Incorporated by reference to Exhibit A of
Incentive Plan the 2003 Proxy.
10.5 Employment Agreement between WFC, Winton and Robert L.
Bollin, dated January 1, 2004
10.6 Employment Agreement between WFC, Winton and Gregory J.
Bollin, dated January 1, 2004
10.7 Employment Agreement between WFC, Winton and Jill M. Burke,
dated January 1, 2004
10.8 Severance Agreement between Winton and Gregory P. Niesen,
dated January 1, 2004
10.9 Agreement and Plan of Merger dated as of August 25, 2004 by Incorporated by reference to the Form 8-K
and among WesBanco, Inc., WesBanco Bank, Inc., WFC and filed by WFC with the SEC on August 30,
Winton 2004, Exhibit 2.
21 Subsidiaries of the Registrant Incorporated by reference to the 2002 Form
10-K, Exhibit 21.
23 Consent of Grant Thornton LLP regarding WFC's Consolidated
Financial Statements and Forms S-8 for WFC's 1988 Stock
Option Plan, 1999 Stock Option Plan and 401(k) Profit
Sharing Plan
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32.1 Certification of Chief Executive Officer
EXHIBIT
NUMBER DESCRIPTION LOCATION
32.2 Certification of Chief Financial Officer
99.1 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995
2