Back to GetFilings.com
U.S. 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 September 30, 1998
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
(Name of small business issuer in its charter)
Ohio 31-1303854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5511 Cheviot Road, Cincinnati, Ohio 45247
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (513) 385-3880
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Shares, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
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]
State the issuer's revenues for its most recent fiscal year: $29.3 million
Based upon the last sale price quoted by The American Stock Exchange as of
December 10, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, on that date was $35.3 million.
At December 3, 1998, there were 4,015,304 of the Registrant's Common Shares
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part I of Form 10-KSB: Safe Harbor Under the Private Securities Litigation
Reform Act of 1995 in Exhibit 99.1.
Part II of Form 10-KSB: Portions of the Annual Report to Shareholders for
the fiscal year ended September 30, 1998, in
Exhibit 13.
Part III of Form 10-KSB: Proxy Statement for 1999 Annual Meeting of
Shareholders in Exhibit 20.
PART I
Item 1. Description of Business
General
Winton Financial Corporation ("WFC") was incorporated as an Ohio
corporation in 1989 and, in 1990, acquired all of the issued and outstanding
common shares of The Winton Savings and Loan Co. ("Winton"), a savings and loan
association incorporated under the laws of the State of Ohio, in connection with
the holding company reorganization of Winton. As a unitary savings and loan
holding company, WFC, through Winton, is engaged in the savings and loan
business.
On January 5, 1996, Blue Chip Savings Bank ("Blue Chip") merged with and
into Winton (the "Merger"). As a result of the Merger, Winton acquired $33.9
million in assets, $27.3 million in deposits and a downtown Cincinnati branch.
The Merger was accounted for as a pooling of interests.
WFC's activities have been limited primarily to holding the common shares
of Winton. Consequently, the following discussion focuses primarily on the
business of Winton.
Winton is principally engaged in the business of making first mortgage
loans to finance the purchase, construction or improvement of one- to
four-family residential real estate or other real property located in Winton's
primary market area. Loan funds are obtained primarily from savings deposits,
which are insured up to applicable limits by the Federal Deposit Insurance
Corporation (the "FDIC") in the Savings Association Insurance Fund ("SAIF"),
loan repayments, Federal Home Loan Bank ("FHLB") advances and the sale of loans.
Interest earned on loans is Winton's primary source of revenue. In addition to
originating loans, Winton invests in U.S. Government and agency obligations,
interest-bearing deposits in other financial institutions and mortgage-backed
securities.
Winton conducts business from its five full-service offices in Hamilton
County, Ohio, and serves a market area which includes the Ohio counties of
Hamilton, Butler, Clinton, Clermont, Montgomery, Brown, Adams, Franklin and
Warren, the Indiana counties of Ripley, Franklin, Union and Dearborn and the
Kentucky counties of Boone, Campbell, Gallatin and Kenton. In August 1998,
Winton opened its first loan production office, located in Western Hills.
As a savings and loan holding company, WFC is subject to regulation,
supervision and examination by the Office of Thrift Supervision of the United
States Department of the Treasury (the "OTS"). As a savings and loan association
incorporated under the laws of the State of Ohio, Winton is subject to
regulation, supervision and examination by the OTS, the FDIC and the Ohio
Division of Financial Institutions (the "Division"). Winton is also a member of
the FHLB of Cincinnati.
Forward-Looking Statements
When used in this Form 10-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 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. Such risks and uncertainties could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. Factors listed above could affect WFC's financial performance and
could cause WFC's actual results for future periods to differ materially from
any statements expressed with respect to future periods. See Exhibit 99 hereto,
"Safe Harbor Under the Private Securities Litigation Reform Act of 1995," which
is incorporated herein by reference.
WFC does not undertake, and specifically disclaims any obligation, to
publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
2
Lending Activities
General. Winton's principal lending activity is the origination of
conventional fixed-rate and variable-rate mortgage loans for the acquisition or
construction of one- to four-family residences located in Winton's primary
market area, as well as loans secured by nonresidential properties and loans
secured by multifamily properties, including construction and permanent mortgage
loans on condominiums and multi-unit properties. 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. Loans
secured by nonresidential properties, including retail, office and other types
of business facilities, are also originated by Winton. In addition to
residential and nonresidential real estate lending, Winton originates consumer
loans, including passbook, automobile, secured, unsecured, home improvement and
home equity line of credit loans.
Winton maintains a portfolio of mortgage-backed pass-through securities in
the form of Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National
Mortgage Association ("FNMA") and Government National Mortgage Association
("GNMA") participation certificates. Mortgage-backed pass-through securities
generally entitle Winton to receive a portion of the cash flows from an
identified pool of mortgages and gives Winton an interest in the pool of
mortgages. FHLMC, FNMA and GNMA securities are each guaranteed by their
respective agencies as to principal and interest. See "Mortgage-Backed
Securities."
Winton's portfolio of loans, loans held for sale and mortgage-backed
securities totaled approximately $318.3 million, in the aggregate, at September
30, 1998, and represented 90% of total assets.
Loan and Mortgage-Backed Securities Maturity Schedule. The following table
sets forth certain information, as of September 30, 1998, regarding the dollar
amount of loans and mortgage-backed securities maturing in Winton's portfolio
based on their contractual terms to maturity, before giving effect to net items.
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 over
3 years to 5 years to
Due in Due in Due in 5 years after 10 years after Due over
1999 2000 2001 9/30/98 9/30/98 10 years Totals
(In thousands)
Mortgage loans (1):
One- to-four family
residential (2)(3) $13,806 $ 456 $ 703 $1,979 $10,690 $114,154 $141,788
Multifamily residential 1,357 3 595 3,505 10,889 59,093 75,442
Land and lot 3,495 122 1,170 681 197 276 5,941
Nonresidential 329 166 502 1,259 14,274 38,251 54,781
Construction 27,187 2,100 - - - - 29,287
Mortgage-backed securities -
held to maturity - - 2 7 12 12,397 12,418
Mortgage-backed securities -
available for sale - - - - - 565 565
Nonmortgage loans:
Consumer and other
loans (4) 5,170 358 767 1,616 214 51 8,176
------ ----- ----- ----- ------ -------- -------
Total loans and
mortgage-backed securities $51,344 $3,205 $3,739 $9,047 $36,276 $224,787 $333,278
====== ===== ===== ===== ====== ======= =======
- -----------------------------
(1) Includes second mortgages.
(2) Includes home equity line of credit loans underwritten on the same basis as
first mortgage loans.
(3) Includes loans held for sale, which are recorded at the lower of cost or
market value.
(4) Includes lines of credit made to businesses which are secured by assets
other than real estate.
3
The following table sets forth, at September 30, 1998, the dollar amount of
all loans and mortgage-backed securities, before net items, which have
predetermined interest rates and floating or adjustable interest rates:
Predetermined Floating or
rates adjustable rates
(In thousands)
Real estate mortgage loans $173,768 $130,172
Loans held for sale 8,253 -
Consumer and other loans (1) 8,102 -
Mortgage-backed securities - held to maturity 26 12,392
Mortgage-backed securities - held for sale - 565
------- -------
Total $190,149 $143,129
======= =======
- -----------------------------
(1) Includes lines of credit in the aggregate amount of $3.6 million made to
businesses which are secured by assets other than real estate.
4
Loan and Mortgage-Backed Securities Portfolio Composition. The following
table sets forth certain information concerning the composition of Winton's loan
and mortgage-backed securities portfolio at the dates indicated:
At September 30,
1998 1997 1996
Amount % Amount % Amount %
(Dollars in thousands)
Type of loan or investment:
Conventional real estate loans:
One- to four-family
Interim construction $ 17,790 5.6% $ 13,536 4.6% $ 15,049 5.6%
Loans on existing properties (1) 138,415 43.5 145,039 49.0 144,306 53.5
Loans held for sale 8,253 2.6 4,210 1.4 2,735 1.0
Multifamily
Interim construction 1,715 .5 1,500 .5 2,475 .9
Loans on existing properties 75,442 23.7 71,798 24.3 55,507 20.6
Land and lot 5,941 1.9 5,024 1.7 2,326 .9
Nonresidential real estate
Interim construction 9,782 3.1 1,401 .5 450 .1
Loans on existing properties 54,781 17.2 42,950 14.5 37,001 13.7
Mobile home loans 74 - 17 - 3 -
Consumer and other loans (2) 8,102 2.5 4,986 1.7 2,405 .9
Mortgage-backed securities - held
to maturity 12,418 3.9 14,614 4.9 16,414 6.1
Mortgage-backed securities - available
for sale 565 .2 799 .3 2,942 1.1
------- ----- -------- ----- ------- -----
333,278 104.7 305,874 103.4 281,613 104.4
Less:
Loans in process (13,616) (4.2) (8,364) (2.8) (10,150) (3.8)
Deferred loan origination fees (529) (.2) (726) (.3) (760) (.3)
Allowance for loan losses (842) (.3) (827) (.3) (857) (.3)
------- ----- ------- ----- ------- -----
Total loans and mortgage-backed
securities $318,291 100.0% $295,957 100.0% $269,846 100.0%
======= ===== ======= ===== ======= =====
Type of security:
Residential
One- to four-family $156,205 49.1% $158,575 53.6% $159,355 59.1%
Multifamily residential 77,157 24.2 73,298 24.8 57,982 21.5
Loans held for sale 8,253 2.6 4,210 1.4 2,735 1.0
Nonresidential real estate 64,563 20.3 44,351 15.0 37,451 13.9
Land and lot 5,941 1.9 5,024 1.7 2,326 .9
Mortgage-backed securities 12,983 4.1 15,413 5.2 19,356 7.2
Deposit accounts 299 .1 467 .2 389 .1
Other 7,877 2.4 4,536 1.5 2,019 .7
------- ----- ------- ----- ------- -----
333,278 104.7 305,874 103.4 281,613 104.4
Less:
Loans in process (13,616) (4.2) (8,364) (2.8) (10,150) (3.8)
Deferred loan origination fees (529) (.2) (726) (.3) (760) (.3)
Allowance for loan losses (842) (.3) (827) (.3) (857) (.3)
------- ----- ------- ----- ------- -----
Total loans and mortgage-backed securities $318,291 100.0% $295,957 100.0% $269,846 100.0%
======= ===== ======= ===== ======= =====
- -----------------------------
(1) Includes first and second mortgage loans and home equity lines of credit.
(2) Includes lines of credit in the aggregate amount of $3.6 million made to
businesses which are secured by assets other than real estate.
5
One- to Four-Family Residential Real Estate Loans. The primary lending
activity of Winton has been the origination of conventional loans for the
acquisition or construction of one- to four-family residential properties
located within Winton's primary market area. Each of such loans is secured by a
mortgage on the underlying real estate and improvements thereon. At September
30, 1998, $146.7 million, or 46.1% of Winton's total outstanding loans and
mortgage-backed securities (excluding construction loans) consisted of loans
secured by first and second mortgage loans and home equity lines of credit
secured by one- to four-family residential real estate, including loans held for
sale. Second mortgages and home equity lines of credit are subject to a higher
degree of risk than first mortgage loans, because, in the event of default or
foreclosure, amounts due on first mortgages have a prior claim to available
funds. Most of the second mortgages and home equity lines of credit made by
Winton are secured by property on which Winton holds the first mortgage.
OTS regulations and Ohio law limit the amount which Winton may lend in
relationship to the appraised value of the real estate and improvements thereon
at the time of loan origination. In accordance with such regulations, Winton
makes loans on single-family residences up to 95% of the value of the real
estate and improvements (the "Loan-to-Value Ratio" or "LTV"). Winton also makes
loans over the 95% LTV, though most of those loans are sold in the secondary
market with recourse. Generally, Winton requires private mortgage insurance
and/or charges premium interest rates for loans over 80% LTV.
Winton offers adjustable-rate mortgage loans ("ARMs") with interest rate
adjustment periods of generally one or three years. The interest rates initially
charged on ARMs and the new rate at each adjustment date are determined by
adding a stated margin to the one-year or three-year United States Treasury bill
rate at the time the loan is originated. The initial interest rate for a
three-year ARM is set slightly higher than for the one-year ARM to compensate
Winton for the increased exposure to risk resulting from interest-rate
fluctuations during the adjustment period. The maximum adjustment at each
adjustment date for one-year ARMs is usually 2%, with a maximum adjustment of 6%
over the term of the loan. The maximum adjustment on three-year ARMs presently
originated by Winton is 2% at each adjustment date, with a maximum adjustment of
6% over the life of the loan. None of Winton's ARMs have negative amortization
features. Of the total mortgage loans originated by Winton during the fiscal
year ended September 30, 1998, 12.7% were ARMs and 87.3% were fixed-rate.
Residential mortgage loans offered by Winton are usually for terms of 10 to
30 years. Due to the general long-term nature of an investment in mortgage
loans, such loans could have an adverse effect upon the earnings spread of an
association if such loans do not reprice as quickly as the association's cost of
funds. To minimize such effect, Winton emphasizes the origination of ARMs.
Furthermore, experience during recent years reveals that, as a result of
prepayments in connection with refinancings and sales of the underlying
properties, residential loans generally remain outstanding for periods which are
substantially shorter than the maturity of such loans.
At September 30, 1998, Winton had nonperforming loans totaling $204,000 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.
One- to four-family loans constituted $129.3 million, or 56.8%, of the $227.8
million of loans originated in fiscal 1998.
Multifamily Residential Real Estate Loans. In addition to loans on one- to
four-family properties, Winton makes adjustable- and fixed-rate loans secured by
multifamily properties containing over four units. At September 30, 1998, loans
secured by multifamily properties (excluding construction loans) totaled
approximately $75.4 million, or 23.7% of total loans and mortgage-backed
securities.
Multifamily lending is generally considered to involve a higher degree of
risk because the loan amounts are larger and the borrower typically depends upon
income generated by the project to cover operating expenses and debt service.
The profitability of a project can be affected by economic conditions,
government policies and other factors beyond the control of the borrower. Winton
attempts to reduce the risk associated with multifamily lending by evaluating
the credit-worthiness of the borrower and the projected income from the project
and by obtaining personal guarantees on loans made to corporations and
partnerships. Winton requires that the borrower agrees to submit rent rolls and
financial statements annually to enable Winton to monitor the loan.
Multifamily loans generally have terms of up to 25 years and a maximum LTV
of 75%, although a higher LTV occasionally is approved for an established
6
borrower. 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.
Winton had $495,000 in nonperforming loans secured by multifamily
properties at September 30, 1998, which were classified as real estate owned.
Multifamily loans constituted $29.3 million, or 12.9%, of the $227.8 million of
loans originated in fiscal 1998.
Land and Lot Loans. Winton originates loans to individuals and to builders
secured by mortgages on unimproved developed real estate upon which residential
properties will be constructed. The $5.9 million in land loans outstanding at
September 30, 1998, consisted of loans to a large residential subdivision
developer, and loans to individuals and builders used for the acquisition of
residential building lots. Such land and lot loans comprised approximately 1.9%
of the total loans and mortgage-backed securities portfolio at September 30,
1998. The largest land and lot loan outstanding at September 30, 1998, was a
$3.2 million loan secured by property to be developed for multifamily,
condominium and single-family dwellings.
Loans on unimproved developed real estate are generally considered to be
subject to a higher degree of risk because the borrower typically depends on a
sale of the property or the later improvement of the property to cover debt
service. The ability to sell or develop unimproved real estate is affected by
economic conditions, government policies and other factors beyond the control of
the borrower. These risks are increased if the unimproved real estate is for an
entire subdivision rather than a single residential lot. Winton reviews the
viability of the unimproved real estate for improvement and sale and evaluates
the credit-worthiness of the borrowers for these loans.
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%.
Winton had no nonperforming loans secured by unimproved developed real
estate at September 30, 1998. Land and lot loans constituted $5.2 million, or
2.3%, of the $227.8 million of loans originated in fiscal 1998.
Nonresidential Real Estate Loans. At September 30, 1998, Winton has
nonresidential real estate loans in its portfolio, all in its primary market
area, including loans secured by retail, office and other types of business
facilities. The largest nonresidential real estate loan outstanding at September
30, 1998, was a $1.8 million loan secured by a warehouse. Nonresidential
permanent loans (excluding construction loans) comprised $54.8 million, or 17.2%
of total loans and mortgage-backed securities at September 30, 1998.
Nonresidential real estate lending is generally considered to involve a
higher degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. If the cash flow on the property is
reduced, for example, as leases are not obtained or renewed, the borrower's
ability to repay may be impaired. Winton has endeavored to reduce such risk by
evaluating the credit history and past performance of the borrower, the location
of the real estate, the quality of the management constructing and operating the
property, the debt service ratio, the quality and characteristics of the income
stream generated by the property and appraisals supporting the property's
valuation.
In recent years, nonresidential real estate loans have been made primarily
on an adjustable-rate basis, with loan terms generally up to a maximum of 25
years, although Winton has made a limited number of fixed-rate nonresidential
real estate loans during that period. These loans are typically made at a
maximum 75% LTV, although a higher Loan-to-Value Ratio is occasionally approved
for established borrowers. Adjustable-rate nonresidential real estate loans have
the same adjustment schedules, index and caps as the residential ARMs described
above in "One- to Four-Family Residential Real Estate Loans."
Winton had no nonperforming loans in its nonresidential loan portfolio at
September 30, 1998. Nonresidential loans constituted $16.8 million, or 7.4%, of
the $227.8 million of loans originated in fiscal 1998.
Federal regulations limit the amount of nonresidential mortgage loans which
an association may make to 400% of its capital. At September 30, 1998, Winton's
nonresidential permanent mortgage loans totaled 207.3% of Winton's capital.
Construction Loans. Winton offers residential construction loans both to
owner-occupants and to builders for loans being built under contract with
7
owner-occupants. To a very limited extent, Winton also makes construction loans
to persons constructing projects for investment purposes. At September 30, 1998,
a total of $29.3 million, or approximately 9.2%, of Winton's total loans and
mortgage-backed securities, consisted of construction loans.
Construction loans generally involve greater underwriting and default risks
than do loans secured by mortgages on existing properties due to the
concentration of principal in a limited number of loans and borrowers and the
effects of general economic conditions on real estate developments, developers,
managers and builders. In addition, such loans are more difficult to evaluate
and monitor. Loan funds are advanced upon the security of the project under
construction, which is more difficult to value before the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, it is relatively difficult to evaluate accurately the LTVs
and the total loan funds required to complete a project. In the event a default
on a construction loan occurs and foreclosure follows, Winton would have to take
control of the project and attempt either to arrange for completion of
construction or dispose of the unfinished project. Almost all of Winton's
construction loans are secured by properties in Hamilton County; the other Ohio
counties of Clinton, Clermont, Warren, Butler, Montgomery, Brown, Adams and
Franklin; the Indiana counties of Ripley, Franklin, Union and Dearborn; and the
Kentucky counties of Boone, Campbell, Gallatin and Kenton. The economy of such
lending area has been relatively stable over the three years ended September 30,
1998.
Generally, construction loans have terms ranging from 6 to 12 months at
fixed rates of interest over the construction period. Residential construction
loans and nonresidential construction loans are interim loans which are replaced
by permanent fixed- or adjustable-rate loans at the end of the construction
period. Such permanent loans may or may not be obtained from Winton.
At September 30, 1998, Winton had nonperforming loans totaling $859,000 in
construction loans. Construction loans constituted $30.5 million, or 13.4%, of
the $227.8 million of loans originated in fiscal 1998.
Mobile Home Loans. To a very limited extent, Winton originates loans on
both new and used mobile homes. At September 30, 1998, the aggregate outstanding
principal balance of mobile home loans in Winton's portfolio was approximately
$74,000, or less than .1% of total loans and mortgage-backed securities. Such
loans are generally made at fixed rates of interest, with the rate charged on
loans for used mobile homes generally set higher than for new mobile homes. The
maximum term of mobile home loans is 10 years for new homes and seven years for
used homes. Winton usually obtains a security interest in the mobile home to
which the loan pertains.
Loans that are secured by rapidly depreciating assets such as mobile homes
may entail greater risk than residential loans. The repossessed collateral may
not provide an adequate source of repayment of the outstanding loan balance. The
risk of default on such loans increases during periods of recession, high
unemployment and other adverse economic conditions.
Federal regulations permit an association to invest without limitation in
mobile home loans.
Consumer and Other Loans. Winton makes various types of consumer loans,
including loans made to depositors on the security of their savings deposits,
automobile loans, commercial loans, loans secured by stock of entities other
than WFC, lines of credit to businesses secured by non-real estate assets and
unsecured personal loans. At September 30, 1998, consumer and other loans
constituted 2.5% of Winton's total loans and mortgage-backed securities and 2.3%
of total assets.
Consumer loans are generally made at fixed rates of interest tied to the
prime rate, generally for terms of from 90 days to five years. Consumer loans,
particularly consumer loans that are unsecured or are secured by rapidly
depreciating assets such as automobiles, may entail greater risk than
residential loans. Repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance. The
risk of default on consumer loans increases during periods of recession, high
unemployment and other adverse economic conditions.
Although Winton has not had significant delinquencies on consumer loans, no
assurance can be provided that delinquencies will not increase. At September 30,
1998, Winton had nonperforming loans totaling $4,000 in its consumer loan
portfolio. Consumer loans constituted $16.7 million, or 7.2%, of the $227.8
million of loans originated in fiscal 1998.
Mortgage-Backed Securities. In the recent past, Winton has purchased
mortgage-backed securities insured or guaranteed by government agencies in order
to improve Winton's asset portfolio yield by profitably investing excess funds.
Winton intends to continue to purchase such mortgage-backed securities when
8
conditions favor such a portfolio investment. At September 30, 1998,
mortgage-backed securities totaled approximately $13.0 million, or 4.1% of total
loans and mortgage-backed securities. All but $565,000 of Winton's
mortgage-backed securities at September 30, 1998, were designated as being held
to maturity. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, those mortgage-backed securities designated as being held to
maturity are carried on Winton's balance sheet at cost. The market value of the
$12.4 million in mortgage-backed securities held to maturity at September 30,
1998, was $12.3 million. The remaining $565,000 in mortgage-backed securities at
September 30, 1998, was designated as available for sale. In accordance with
SFAS No. 115, the mortgage-backed securities available for sale are carried on
Winton's balance sheet at market value, with unrealized gains or losses carried
as an adjustment to shareholders' equity, net of applicable taxes.
Winton maintains a portfolio of mortgage-backed pass-through securities in
the form of FHLMC, FNMA and GNMA participation certificates. Mortgage-backed
pass-through securities generally entitle Winton to receive a portion of the
cash flows from an identified pool of mortgages and gives Winton an interest in
the pool of mortgages. FHLMC, FNMA and GNMA securities are each guaranteed by
their respective agencies as to principal and interest.
Winton has also invested in collateralized mortgage obligations ("CMOs").
CMOs are mortgage derivative products, secured by an underlying pool of
mortgages. Winton has no ownership interest in the mortgages, except to the
extent they serve as collateral. Payment streams from the mortgages serving as
collateral are reconfigured with varying terms and timing of payment to the CMO
investor. Though they can be used for hedging and investment, CMOs can expose
investors to higher risk of loss than direct investments in mortgage-backed
pass-through securities, particularly with respect to price volatility and the
lack of a broad secondary market in such securities. The OTS has deemed certain
CMOs and other mortgage derivative products to be "high-risk." None of Winton's
CMOs are in such "high-risk" category.
Although mortgage-backed securities and CMOs generally yield less than
individual loans originated by Winton, they present less credit risk, because
mortgage-backed securities are guaranteed as to principal repayment by the
issuing agency and CMOs are secured by the underlying collateral. Because CMOs
and other mortgage-backed securities have a lower yield relative to current
market rates, retention of such investments could adversely affect Winton's
earnings, particularly in a rising interest rate environment. Although CMOs and
other mortgage-backed securities designated as available for sale are a
potential source of liquid funds for loan originations and deposit withdrawals,
the prospect of a loss on the sale of such investments limits the usefulness of
these investments for liquidity purposes.
In addition, Winton has purchased adjustable-rate mortgage-backed
securities and CMOs as part of its effort to reduce its interest rate risk. In a
period of declining interest rates, Winton is subject to prepayment risk on such
adjustable-rate mortgage-backed securities and CMOs. Winton attempts to mitigate
this prepayment risk by purchasing mortgage-backed securities at or near par. If
interest rates rise in general, the interest rates on the loans backing the
mortgage-backed securities and CMOs will also adjust upward, subject to the
interest rate caps in the underlying adjustable-rate mortgage loans. However,
Winton is still subject to interest rate risk on such securities if interest
rates rise faster than the 1% to 2% maximum annual interest rate adjustments on
the underlying loans.
At September 30, 1998, $13.0 million, or 99.8%, of Winton's mortgage-backed
securities and CMOs had adjustable rates. Although adjustable-rate securities
generally have a lower yield at the time of origination than fixed-rate
securities, the interest rate risk associated with adjustable-rate securities is
lower. See "Asset/Liability Management." The following table sets forth certain
information regarding Winton's investment in mortgage-backed securities at the
dates indicated:
At September 30, At September 30,
1998 1997
Gross Gross Gross Gross
Amortized unrealized unrealized Estimated Amortized unrealizedunrealized Estimated
cost gains losses fair value losses fair value
cost gains
(In thousands)
Mortgaged-backed securities
held to maturity:
FHLMC participation $ 4,402 $11 $ (68) $ 4,345 $ 5,371 $34 $ (92) $ 5,313
certificates
FNMA participation 2,912 1 (65) 2,848 3,449 5 (63) 3,391
certificates
GNMA participation 598 9 - 607 811 25 - 836
certificates
CMOs 4,506 - (40) 4,466 4,983 - (178) 4,805
------ -- ---- ------ ------ -- ---- ------
12,418 21 (173) 12,266 14,614 64 (333) 14,345
Mortgage-backed securities
available for sale:
GNMA participation
certificates 561 4 - 565 782 17 - 799
------ -- ---- ------ ------ -- ---- ------
$12,979 $25 $(173) $12,831 $15,396 $81 $(333) $15,144
====== == ==== ====== ====== == ==== ======
9
The combined amortized cost of mortgage-backed and related securities
designated as held to maturity or available for sale at September 30, 1998 and
1997, 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, 1998 September 30, 1997
(In thousands)
Due after one through three years $ 2 $ -
Due after three years through five years 7 3
Due after five years through ten years 12 26
Due after ten years through twenty years 2,943 1,841
Due after twenty years 10,015 13,526
------ ------
$12,979 $15,396
====== ======
Loan Solicitation and Processing. Loan originations are developed from a
number of sources, including commissioned loan originators, loan brokers,
continuing business with depositors, other borrowers and real estate developers,
solicitations by Winton's directors, officers and lending staff and walk-in
customers.
Loan applications for permanent mortgage loans are taken by loan personnel.
Winton obtains a credit report, verification of employment and other
documentation concerning the credit-worthiness of the borrower. An appraisal of
the fair market value of the real estate which will be given as security for the
loan is generally prepared by an independent fee appraiser approved by the Board
of Directors. An environmental study is conducted only if the appraiser or
management has reason to believe that an environmental problem may exist. For
multifamily and nonresidential mortgage loans, a personal guarantee is generally
required. Winton also obtains information with respect to prior projects
completed by the borrower. Upon the completion of the appraisal and the receipt
of information on the borrower, the application for a loan is submitted either
to the Loan Committee and/or the Board of Directors or to the secondary market
for approval or rejection. Any loan applications which are not accepted by the
secondary market are reviewed and accepted or rejected by Winton's Loan
Committee.
If a mortgage loan application is approved, an attorney's opinion of title
or a title insurance policy is obtained on the real estate which will secure the
mortgage loan. Borrowers are required to carry fire and casualty insurance and
flood insurance, if applicable, and to name Winton as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent mortgage loans, except that an appraiser evaluates the building plans,
construction specifications and estimates of construction costs. Winton also
evaluates the feasibility of the proposed construction project and the
experience and record of the builder.
Consumer loans are underwritten on the basis of the borrower's credit
history and an analysis of the borrower's income and expenses, ability to repay
the loan and the value of the collateral, if any.
Winton's loans carry provisions that the entire balance of the loan is due
upon sale of the property securing the loan.
Loan Originations, Purchases and Sales. Winton has been actively
originating new 30-year, 20-year and 15-year fixed-rate and adjustable-rate
loans. Virtually all residential fixed-rate loans made by Winton are originated
on documentation which will permit a possible sale of such loans to FHLMC or
other secondary mortgage market participants. When mortgage loans are sold to
FHLMC or other secondary mortgage market participants, Winton generally retains
the servicing on such loans by collecting monthly payments of principal and
interest and forwarding such payments to the FHLMC or other secondary mortgage
market participants, net of a servicing fee; though certain loans originated
with the assistance of loan brokers are sold with the servicing rights released.
Fixed-rate loans not sold in the secondary market and generally all of the ARMs
originated by Winton are held in Winton's loan portfolio.
10
Management sold $104.1 million of fixed-rate loans during fiscal 1998, as
compared to sales of $42.4 million and $34.6 million of fixed- and
adjustable-rate loans in fiscal 1997 and fiscal 1996, respectively. Management
believes secondary market activities will continue to increase if interest rates
decline.
From time to time, Winton sells participation interests in mortgage loans
originated by Winton or purchases participation interests in loans originated by
other lenders. During the fiscal years ended September 30, 1998, 1997 and 1996,
Winton sold participation interests in loans totaling $6.3 million, $11.4
million and $1.7 million, respectively. Winton held participations in loans
originated by other lenders of approximately $1.7 million at September 30, 1998.
Loans in which Winton purchases participation interests must meet or exceed the
underwriting standards for the loans which Winton originates.
The following table presents Winton's mortgage loan origination, purchase,
sale and principal repayment activity for the periods indicated:
Year ended September 30,
1998 1997 1996
Amount % Amount % Amount %
(Dollars in thousands)
Loans originated:
Conventional real estate loans:
One- to four-family
Construction (1) $ 24,336 10.7% $ 22,877 15.5% $ 21,013 17.3%
Fixed-rate loans on existing property 116,103 51.0 38,268 25.9 50,975 41.9
Adjustable-rate loans on existing
property 9,761 4.3 12,645 8.6 15,127 12.5
FHA/VA 3,478 1.5 - - - -
Multifamily
Construction 1,000 0.4 1,500 1.0 1,075 0.9
Fixed-rate loans on existing property 15,455 6.8 11,564 7.8 1,252 1.0
Adjustable-rate loans on existing
property 13,886 6.1 23,957 16.2 14,637 12.0
Nonresidential real estate, land and
lot loans
Construction 5,161 2.3 1,367 0.9 330 0.3
Fixed-rate loans on existing property 16,879 7.4 9,801 6.7 5,021 4.1
Adjustable-rate loans on existing
property 5,128 2.3 7,682 5.2 8,524 7.0
Consumer and other loans (2) 16,653 7.2 18,003 12.2 3,589 3.0
------- ----- ------- ----- ------- -----
Total loans originated $227,840 100.0% $147,664 100.0% $121,543 100.0%
======= ===== ======= ===== ======= =====
Loans and mortgage-backed securities
purchased
Mortgage-backed securities $ - -% $ - -% $ 3,380 100.0%
======= ====== ======== ===== ======= =====
Loans and mortgage-backed securities sold:
Loans $104,144 94.3% $ 42,413 78.8% $ 34,645 91.7%
Participations 6,329 5.7 11,385 21.2% 1,732 4.6
Mortgage-backed securities - - - - 1,397 3.7
------- ----- ------- ----- ------- -----
Total $110,473 100.0% $ 53,798 100.0% $ 37,774 100.0%
======= ===== ======= ===== ======= =====
Principal Repayments:
Loans $ 92,741 97.5% $ 63,990 94.2% $ 40,475 95.2%
Mortgage-backed securities 2.5 3,950 5.8 2,040 4.8
------ ----- ------- ----- ------- -----
2,389
Total $ 95,130 100.0% $ 67,940 100.0% $ 42,515 100.0%
======= ===== ======= ===== ======= =====
- ----------------------------
(1) Includes construction loans for which Winton has committed to a permanent
end-loan.
(2) Consists primarily of auto and line of credit disbursements and change in
loans in process.
11
Federal Lending Limit. OTS regulations impose a lending limit on the
aggregate amount that a savings association can lend to one borrower to an
amount equal to 15% of the association's total capital for risk-based capital
purposes plus any loan reserves not already included in total capital (the
"Lending Limit Capital"). A savings association may loan to one borrower an
additional amount not to exceed 10% of the association's Lending Limit Capital,
if the additional amount is fully secured by certain forms of "readily
marketable collateral." Real estate is not considered "readily marketable
collateral." In applying this limit, the regulations require that loans to
certain related or affiliated borrowers be aggregated. An exception to this
limit permits loans of any type to one borrower of up to $500,000. In addition,
the OTS, under certain circumstances, may permit exceptions to the lending limit
on a case-by-case basis.
Based on the 15% limit, Winton was able to lend approximately $4.1 million
to one borrower at September 30, 1998. Winton had no outstanding loans in excess
of such limit at September 30, 1998.
Loan Origination and Other Fees. Winton realizes loan origination fee and
other fee income from its lending activities and also realizes income from late
payment charges, application fees, and fees for other miscellaneous services.
Loan origination fees and other fees are a volatile source of income,
varying with the volume of lending, loan repayments and general economic
conditions. All nonrefundable loan origination fees and certain direct loan
origination costs are deferred and recognized in accordance with SFAS No. 91, as
an adjustment to yield over the life of the related loan.
Delinquent Loans, Nonperforming Assets and Classified Assets. When a
borrower fails to make a required payment on a loan, Winton attempts to cause
the deficiency to be cured by contacting the borrower. In most cases,
deficiencies are cured promptly.
Winton attempts to minimize loan delinquencies through the assessment of
late charges and adherence to its established collection procedures. After a
mortgage loan payment is 15 days delinquent, a late charge of 5% of the amount
of the payment is assessed and Winton will contact the borrower by mail or phone
to request payment. In certain limited instances, Winton may modify the loan or
grant a limited moratorium on loan payments to enable the borrower to reorganize
his financial affairs. If the loan continues in a delinquent status for 90 days
or more, Winton generally will initiate foreclosure proceedings.
Real estate acquired by Winton as a result of foreclosure or by deed in
lieu of foreclosure is classified as "real estate owned" until it is sold. When
property is so acquired, it is recorded at the lower of the loan's unpaid
principal balance or fair value at the date of foreclosure less estimated
selling expenses. Periodically, real estate owned is reviewed to ensure that
fair value is not less than carrying value, and any allowance resulting
therefrom is charged to earnings as a provision for losses on real estate
acquired through foreclosure. All costs incurred from the date of acquisition
are expensed in the period paid.
The following table reflects the amount of loans in delinquent status as of
the dates indicated:
At September 30,
1998 1997 1996 1995 1994
(Dollars in thousands)
Loans delinquent
30 to 59 days $6,925 $1,909 $3,186 $2,350 $1,905
60 to 89 days 629 672 692 337 348
90 or more days 1,067 472 923 602 432
----- ----- ----- ----- -----
Total delinquent loans $8,621 $3,053 $4,801 $3,289 $2,685
===== ===== ===== ===== =====
Ratio of total delinquent loans to total
loans (1) 2.69% 1.05% 1.83% 1.52% 1.29%
==== ==== ==== ==== ====
- -----------------------------
(1) Includes loans held for sale.
12
All delinquent loans are reviewed on a regular basis and are placed on
non-accrual status when, in the opinion of management, the collection of
additional interest is doubtful. Residential mortgage loans are placed on
non-accrual status when either principal or interest is considered
uncollectible. Consumer loans generally are charged off when the loan becomes
over 120 days delinquent. Nonresidential real estate loans are evaluated for
non-accrual status when the loan is 90 days or more past due. Interest accrued
and unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan. The amount of interest which would have
been earned on nonaccruing loans, had such loans been current, for the year
ended September 30, 1998, is approximately $31,000.
The following table sets forth information with respect to Winton's
nonperforming assets for the periods indicated. During the periods shown, Winton
had no restructured loans within the meaning of SFAS No. 15. In addition, as of
September 30, 1998, Winton had no loans which were not reflected in the table as
non-accrual, 90 days past due or restructured, which may become so in the near
future because management has concerns as to the ability of the borrowers to
comply with repayment terms.
At September 30,
1998 1997 1996 1995 1994
(Dollars in thousands)
Loans accounted for on a non-accrual
basis:(1)
Real estate:
Construction $ 859 $ - $ - $ - $ -
Residential 77 214 548 130 311
Nonresidential and land - 179 57 448 -
Consumer and other - - - - -
----- --- --- --- ---
Total 936 393 605 578 311
Accruing loans which are contractually
past due 90 days or more:
Real estate:
Construction - - - - -
Residential 127 77 132 - 114
Nonresidential - - 182 24 -
Consumer and other 4 2 4 - 7
----- --- --- --- ---
Total 131 79 318 24 121
----- --- --- --- ---
Total of non-accrual and 90 days past
due loans $1,067 $472 $923 $602 $432
===== === === === ===
Percentage of total loans 0.35% 0.16% 0.35% 0.28% 0.21%
==== ==== ==== ==== ====
Other nonperforming assets(2) $495 $513 $561 $343 $206
=== === === === ===
- ----------------------------
(1) Non-accrual status denotes loans on which, in the opinion of management,
the collection of additional interest is unlikely, or loans that meet
non-accrual criteria as established by regulatory authorities. Payments
received on a non-accrual loan are either applied to the outstanding
principal balance or recorded as interest income, depending on management's
assessment of the collectibility of the loan.
(2) Consists of real estate acquired through foreclosure which is carried at
the lower of cost or fair value less estimated selling expenses.
The 39% increase in nonperforming assets to $602,000 at the end of fiscal 1995
was primarily attributable to one delinquent commercial loan of approximately
$448,000 which was paid current in October 1995. The 53% increase in
13
nonperforming loans at the end of fiscal 1996 resulted from the increased size
of the loan portfolio and increased loan delinquencies. The 49% decline in
nonperforming loans during fiscal 1997 resulted primarily from collections on
loan accounts acquired through the Blue Chip merger. The 126% increase in
nonperforming loans at the end of fiscal 1998 resulted primarily from
construction loans to one borrower of approximately $859,000.
OTS regulations require that each thrift institution classify its own
assets on a regular basis. Problem assets are classified as "substandard,"
"doubtful" or "loss." "Substandard" assets have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. "Doubtful" assets
have the same weaknesses as "substandard" assets, with the additional
characteristics that (i) the weaknesses make collection or liquidation in full
on the basis of currently existing facts, conditions and values questionable and
(ii) there is a high possibility of loss. An asset classified "loss" is
considered uncollectible and of such little value that its continuance as an
asset of the institution is not warranted. The regulations also contain a
"special mention" category, consisting of assets which do not currently expose
an institution to a sufficient degree of risk to warrant classification but
which possess credit deficiencies or potential weaknesses deserving management's
close attention.
Generally, Winton classifies as "substandard" all loans that are delinquent
more than 60 days, unless management believes the delinquency status is
short-term due to unusual circumstances. Loans delinquent fewer than 60 days may
also be classified if the loans have the characteristics described above
rendering classification appropriate.
The aggregate amount of Winton's classified assets at September 30, 1998
was as follows:
At September 30, 1998
(In thousands)
Substandard $2,102
Doubtful 174
Loss -
-----
Total classified assets $2,276
=====
Federal examiners are authorized to classify an association's assets. If an
association does not agree with an examiner's classification of an asset, it may
appeal this determination to the appropriate Regional Director of the OTS.
Winton had no disagreements with the examiners regarding the classification of
assets at the time of the last examination.
OTS regulations require that Winton establish prudent general allowances
for loan losses for any loan classified as substandard or doubtful. If an asset,
or portion thereof, is classified as loss, the association must either establish
specific allowances for losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount.
Allowance for Loan Losses. The Board of Directors reviews on a quarterly
basis the allowance for loan losses as it relates to a number of relevant
factors, including, but not limited to, trends in the level of nonperforming
assets and classified loans, current and anticipated economic conditions in the
primary lending area, past loss experience and possible losses arising from
specific problem assets. To a lesser extent, management also considers loan
concentrations to single borrowers and changes in the composition of the loan
portfolio. While the Board of Directors believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in adjustments, and net earnings could be
significantly affected if circumstances differ substantially from the
assumptions used in making the final determination. At September 30, 1998,
Winton's allowance for loan losses totaled $842,000.
14
The following table sets forth an analysis of Winton's allowance for losses
on loans for the periods indicated.
Year ended September 30,
1998 1997 1996 1995 1994
(Dollars in thousands)
Balance at beginning of period $827 $857 $654 $582 $742
Charge-offs:
One- to four-family (36) (47) (28) (18) (84)
Multifamily and nonresidential
real estate - - (12) (104) (36)
Construction (4) - - - -
Consumer (7) (4) (10) - (143)
--- --- --- --- ---
Total (47) (51) (50) (122) (263)
Total recoveries 2 21 - 106 58
--- --- --- --- ---
Net charge-offs (45) (30) (50) (16) (205)
Provision for loan losses 60 - 253 88 45
--- --- --- --- ---
Balance at end of period $842 $827 $857 $654 $582
=== === === === ===
Ratio of net charge-offs during the
period to average loans
outstanding during the period (1) .02% .01% .02% .01% .11%
=== === === === ===
--------------------------
(1) During the respective periods there were $299.6 million, $263.3 million,
$225.2 million, $202.8 million and $184.8 million in average loans
outstanding.
15
The following table provides an allocation of Winton's allowance for loan
losses as of each of the following dates:
At September 30,
1998 1997 1996 1995 1994
(In thousands)
Specific allowances
One- to four-family $ 53 $ 40 $ 80 $ - $ -
Multifamily and nonresidential
real estate - - - - -
Construction and development
- - - - -
Consumer - - - - -
Commercial business - 24 25 - -
--- --- --- --- ---
Total specific allowances 53 64 105 - -
General allowances
One- to four-family 321 310 308 268 204
Multifamily and nonresidential
real estate 350 346 339 308 276
Construction and development
10 - - - -
Consumer 100 100 100 75 100
Commercial business 8 7 5 3 2
--- --- --- --- ---
Total general allowances 789 763 752 654 582
--- --- --- --- ---
Total allowance for
possible loan losses $842 $827 $857 $654 $582
=== === === === ===
Investment Activities
The OTS requires minimum levels of liquid assets. OTS regulations presently
require Winton to maintain specified levels of "liquid" investments in
qualifying types of United States Government and agency obligations and other
permissible investments having certain maturity limitations and marketability
requirements. Such minimum requirement which was revised by the OTS in fiscal
1998, is an amount equal to 4% of the sum of Winton's average daily balance of
net withdrawable deposit accounts and borrowings payable in one year or less.
The liquidity requirement, which may be changed from time to time by the OTS to
reflect changing economic conditions, is intended to provide a source of
relatively liquid funds upon which Winton may rely if necessary to fund deposit
withdrawals and other short-term funding need.
The liquidity of Winton, as measured by the ratio of cash, cash equivalents
(not committed, pledged or required to liquidate specific liabilities) and
qualifying investments, mortgage-backed securities and loans to the sum of net
withdrawable savings plus borrowings payable within one year was 19.3% at
September 30, 1998. At September 30, 1998, Winton's "liquid" assets totaled
approximately $37.4 million, which was approximately $29.5 million in excess of
the current OTS minimum requirement. Winton believes that its liquidity posture
at September 30, 1998, was adequate to meet outstanding loan commitments and
other cash requirements.
16
The following table presents the amortized cost and market values of
Winton's investment securities, including those designated as available for
sale, at the dates indicated:
September 30,
1998 1997 1996
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(In thousands)
Held to maturity:
U.S. government and agency
obligations $14,858 $15,185 $12,585 $12,679 $ 9,593 $ 9,623
Available for sale:
U.S. government and agency
obligations 4,587 4,855 3,088 3,149 2,098 2,120
Corporate equity securities 103 724 103 482 189 461
------ ------ ------ ------ ------ ------
4,690 5,579 3,191 3,631 2,287 2,581
------ ------ ------ ------ ------ ------
Total $19,548 $20,764 $15,776 $16,310 $11,880 $12,204
====== ====== ====== ====== ====== ======
The following table presents the contractual maturities or terms to
repricing of U.S. Government and agency obligations at carrying value and the
weighted-average yields at September 30, 1998:
Maturing within Maturing within
one year after one to five years
September 30, 1998 after September 30, 1998 Total
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
(Dollars in thousands)
Held to maturity $6,049 6.21% $ 8,809 5.89% $14,858 6.02%
Available for sale 100 5.13 4,487 6.24 4,587 6.22
----- ---- ------ ---- ------ ----
Total $6,149 6.20% $13,296 6.01 $19,445 6.07%
===== ==== ====== ==== ====== ====
Deposits and Borrowings
General. Deposits have traditionally been the primary source of Winton's
funds for use in lending and other investment activities. In addition to
deposits, Winton derives funds from interest payments and principal repayments
on loans and mortgage-backed securities, advances from the FHLB, income on
earning assets, service charges and gains on the sale of assets. Loan payments
are a relatively stable source of funds, while deposit inflows and outflows
fluctuate more in response to general interest rates and money market
conditions. FHLB advances are used on a short-term basis to compensate for
reductions in the availability of funds from other sources or on a longer term
basis for general business purposes.
Deposits. Historically, deposits have been attracted principally from
within Winton's primary market area through the offering of a broad selection of
deposit instruments, including negotiable order of withdrawal ("NOW") accounts,
regular passbook savings accounts, Christmas Club accounts, term certificate
accounts and individual retirement accounts. In the recent past Winton has
utilized the services of deposit brokers to market certificates of deposit. At
September 30, 1998, the total amount of brokered deposits equaled approximately
$28.5 million, or 10.7% of total deposits.
Interest rates paid, maturity terms, service fees and withdrawal penalties
for the various types of accounts are established periodically by management of
Winton based on Winton's liquidity requirements, growth goals and interest rates
paid by competitors. In a rising interest rate environment, Winton attempts to
manage its interest rate risk by lengthening the term to maturity or repricing
of more of its deposit liabilities.
17
At September 30, 1998, Winton's certificates of deposit totaled $199.3
million, or 74.9% of total deposits. Of such amount, approximately $118.1
million in certificates of deposit mature within one year. Based on past
experience and Winton's prevailing pricing strategies, management believes that
a substantial percentage of such certificates will renew with Winton at
maturity, 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 1998, 1997 and 1996, Winton offered certificates of deposit
with terms from 18 months to five years at rates which adjust monthly with
designated market indices, which were the prime rate or the three-year Treasury
rate. Approximately $13.3 million of these certificates of deposit were
outstanding at September 30, 1998. 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, 1998:
Percent
of total
Amount deposits
(In thousands)
Transaction accounts:
Passbook accounts (1) $ 48,175 18.1%
Christmas Club accounts (2) 187 .1
NOW accounts (3) 18,338 6.9
------- -----
Total transaction accounts 66,700 25.1
Certificates of deposit (4):
2.00 - 3.99% 100 -
4.00 - 5.99% 115,466 43.4
6.00 - 7.99% 83,353 31.3
8.00 - 9.99% 388 .2
------- -----
Total certificates of deposit 199,307 74.9
------- -----
Total deposits $266,007 100.0%
======= =====
- -----------------------------
(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 3.59% at September 30, 1998.
(2) Winton's weighted average interest rate paid on Christmas Club accounts
fluctuates with the general movement of interest rates. At September 30,
1998, the weighted average rate on club accounts was 3.25%.
(3) Winton's weighted average interest rate paid on NOW accounts fluctuates
with the general movement of interest rates. At September 30, 1998, the
weighted average rate on NOW accounts was .95%.
(4) Includes Individual Retirement Accounts and jumbo certificates of deposit
(those with balances in excess of $100,000). Terms of certificates of
deposit offered range from 30 days to 15 years, with the average accounts
ranging from 90 days to 5 years.
18
The following table shows rate and maturity information for Winton's
certificates of deposit as of September 30, 1998:
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)
2.00 - 3.99% $ - $ 100 $ - $ - $ 100
4.00 - 5.99 86,285 24,076 4,974 131 115,466
6.00 - 7.99 31,652 28,433 18,001 5,267 83,353
8.00 - 9.99 142 239 - 7 388
------- ------ ------ ----- -------
Total certificates of
deposit $118,079 $52,848 $22,975 $5,405 $199,307
======= ====== ====== ===== =======
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, 1998:
Maturity At September 30, 1998
(In thousands)
Three months or less $ 9,135
Over 3 months to 6 months 9,645
Over 6 months to 12 months 16,605
Over twelve months 29,343
------
Total $64,728
======
Borrowings. During the year ended September 30, 1998, Winton's only
borrowings were FHLB advances. See "REGULATION - Federal Home Loan Banks." The
following table sets forth the maximum amount of Winton's FHLB advances
outstanding at any month-end, during the periods shown, and the average
aggregate balances of FHLB advances for such periods:
Year ended September 30,
1998 1997 1996
(In thousands)
Maximum amount of FHLB advances $77,882 $57,897 $46,376
======= ======= =======
Average amount of FHLB advances outstanding during period $61,136 $51,146 $35,292
======= ======= =======
The following table sets forth certain information as to Winton's FHLB
advances at the dates indicated:
At September 30,
1998 1997 1996
(In thousands)
FHLB advances $56,899 $57,425 $46,376
======= ======= =======
Weighted average interest cost of FHLB advances during
period based on month end balances 5.94% 5.92% 5.66%
==== ==== ====
19
Asset/Liability Management. Winton's earnings depend primarily upon its net
interest income, which is the difference between its interest income on its
interest-earning assets, such as mortgage loans, investment securities and
mortgage-backed securities, and its interest expense paid on its
interest-bearing liabilities, consisting of deposits and borrowings. As market
interest rates change, asset yields and liability costs do not change
simultaneously. Due to maturity, repricing and timing differences of
interest-earning assets and interest-bearing liabilities, earnings will be
affected differently under various interest rate scenarios. Winton has sought to
limit these net earnings fluctuations and manage interest rate risk by
originating adjustable-rate loans and purchasing relatively short-term and
variable-rate investments and securities.
20
The following table sets forth certain information relating to Winton's
average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the years indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of interest-earning assets or
interest-bearing liabilities, respectively, for the years presented. Average
balances are derived from month-end balances, which include nonaccruing loans in
the loan portfolio, net of the allowance for loan losses. Management does not
believe that the use of month-end balances instead of daily balances has caused
any material differences in the information presented.
Year ended September 30,
1998 1997
Average Interest Average Interest
outstanding earned/ Yield/ outstanding earned/ Yield/
balance paid rate balance paid rate
(Dollars in thousands)
Interest-earning assets:
Loans receivable (1) $299,643 $24,813 8.28% $263,344 $22,086 8.37%
Mortgage-backed securities -
available for sale 687 46 6.70 1,948 119 6.11
Mortgage-backed securities - held
to maturity 13,654 829 6.07 15,552 942 6.06
Investment securities - held to
maturity 13,424 826 6.15 11,785 757 6.42
Investment securities - available
for sale 4,889 279 5.71 2,007 122 6.08
Other interest-earning assets 4,331 278 6.42 3,544 5.84
-------- ------- ---- -------- ------- ----
207
Total interest-earning assets 336,628 27,071 8.04 298,180 24,233 8.13
Non-interest-earning assets 4,920 7,970
-------- --------
Total assets $341,548 $306,150
======== ========
Interest-bearing liabilities:
Deposits $251,393 13,118 5.22 $229,708 12,009 5.23
FHLB advances 61,136 3,630 5.94 51,146 3,027 5.92
-------- ------- ---- -------- -------- ----
Total interest-bearing
liabilities 312,529 16,748 5.36 280,854 15,036 5.35
-------- ------- ---- -------- -------- ----
Non-interest-bearing liabilities 3,786 3,275
-------- --------
Total liabilities 316,315 284,129
Shareholders' equity 25,233 22,021
-------- --------
Total liabilities and
shareholders' equity $341,548 $306,150
======== ========
Net interest income/
Interest rate spread $10,323 2.68% $ 9,197 2.78%
======= ==== ======== ====
Net interest margin (net interest
income as a percent of average
interest-earning assets) 3.05% 3.08%
==== ====
Average interest-earning assets to
interest-bearing liabilities 107.71% 106.17%
====== ======
Year ended September 30,
1996
Average Interest
outstanding earned/ Yield/
balance paid rate
Interest-earning assets:
Loans receivable (1) $225,164 $18,627 8.27%
Mortgage-backed securities -
available for sale 2,400 113 4.71
Mortgage-backed securities - held
to maturity 17,311 1,070 6.18
Investment securities - held to
maturity 9,927 636 6.41
Investment securities - available
for sale 3,228 185 5.73
Other interest-earning assets 3,049 199 6.53
--------- --------- ----
Total interest-earning assets 261,079 20,830 7.98
Non-interest-earning assets 7,283
--------
Total assets $268,362
========
Interest-bearing liabilities:
Deposits $209,879 10,700 5.10
FHLB advances 35,292 1,996 5.66
-------- -------- ----
Total interest-bearing
liabilities 245,171 12,696 5.18
-------- -------- ----
Non-interest-bearing liabilities 2,349
--------
Total liabilities 247,520
Shareholders' equity 20,842
--------
Total liabilities and
shareholders' equity $268,362
========
Net interest income/
Interest rate spread $ 8,134 2.80%
======== ====
Net interest margin (net interest
income as a percent of average
interest-earning assets) 3.02%
====
Average interest-earning assets to
interest-bearing liabilities 106.49%
======
- ---------------------------
(1) Includes loans held for sale and non-accrual loans.
21
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected Winton's interest income and expense during the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume multiplied by prior year rate), (ii) changes in rate (change in rate
multiplied by prior year volume) and (iii) total changes in rate and volume. The
combined effects of changes in both volume and rate, which cannot be separately
identified, have been allocated proportionately to the change due to volume and
the change due to rate.
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Increase (Decrease)
due to due to
Volume Rate Total Volume Rate Total
(In thousands)
Interest income attributable to:
Loans receivable(1) $2,968 $(241) $2,727 $3,244 $251 $3,495
Mortgage-backed securities- available for sale (83) 10 (73) (18) 24 6
Mortgage-backed securities- held to maturity (115) 2 (113) (107) (21) (128)
Investment securities - available for sale 165 (8) 157 (73) 10 (63)
Investment securities - held to maturity 101 (32) 69 120 1 121
Other interest-earning assets(2) 49 22 71 29 (21) 8
------ ----- ------ ------ ----- ------
Total interest-earning assets 3,085 (247) 2,838 3,195 244 3,439
Interest expense attributable to:
Deposits 1,132 (23) 1,109 1,031 278 1,309
Borrowings 593 10 603 933 98 1031
------ ------ ------- ------- ------ -------
Total interest-bearing liabilities 1,725 (13) 1,712 1,964 376 2,340
------ ------ ------ ------ ----- ------
Increase in net interest income $1,360 $(234) $1,126 $1,231 $(132) $1,099
====== ===== ====== ====== ===== ======
- ------------------------------
(1) Includes loans held for sale.
(2) Includes interest-bearing deposits and certificates of deposit in other
financial institutions.
Winton's interest rate spread is the principal determinant of income. The
interest rate spread, and therefore net interest income, can vary considerably
over time because asset and liability repricing do not coincide. Moreover, the
long-term or cumulative effect of interest rate changes can be substantial.
Interest rate risk is defined as the sensitivity of an institution's earnings
and net asset values to changes in interest rates. The management and Board of
Directors of Winton attempt to manage Winton's exposure to interest rate risk in
a manner to maintain the projected four-quarter percentage change in net
interest income and the projected change in the market value of portfolio equity
within the limits established by the Board of Directors, assuming a permanent
and instantaneous parallel shift in interest rates.
As a part of its effort to monitor its interest rate risk, Winton reviews
the reports of the OTS which set forth the application of the "net portfolio
value" ("NPV") methodology, adopted by the OTS as part of its capital
regulations, to the assets and liabilities of Winton. Although Winton is not
currently subject to the NPV regulation, because its implementation has been
delayed by the OTS, the application of the NPV methodology may illustrate
Winton's level of interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing liabilities. The application of the methodology attempts to
quantify interest rate risk as the change in the NPV which would result from a
theoretical 200 basis point (100 basis points equals 1%) change in market
interest rates. Both a 200 basis point increase in market interest rates and a
200 basis point decrease in market interest rates are considered. If the NPV
22
would decrease more than 2% of the present value of the institution's assets
with either an increase or a decrease in market rates, the institution would
have to deduct 50% of the amount of the decrease in excess of such 2% in the
calculation of the institution's risk-based capital, if the regulations were in
effect. Even before the regulation is in effect, OTS could increase Winton's
risk-based capital requirement on an individualized basis to address excess
interest rate risk. See "Regulation - Office of Thrift Supervision -- Regulatory
Capital Requirements."
At September 30, 1998, 2% of the present value of Winton's assets was
approximately $7.2 million. Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate risk
of a 200 basis point decrease) was $5.9 million at September 30, 1998, Winton
would not have been required to deduct approximately $650,000 (50% of the $1.3
million difference) from its capital in determining whether Winton met its
risk-based capital requirement, if the regulation had been in effect for Winton.
Presented below, as of September 30, 1998, is an analysis of Winton's
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis points in market interest rates.
September 30, 1998
Change in Interest Rate Board Limit $ Change % Change
(Basis Points) % change In NPV in NPV
(Dollars in thousands)
+300 (75)% $(9,674) (33)%
+200 (50) (5,907) (20)
+100 (20) (2,680) (9)
0 - - -
-100 (15) 2,311 8
-200 (25) 4,847 17
-300 (35) 8,105 28
As illustrated in the table, NPV is more sensitive to rising rates than
declining rates. Such difference in sensitivity occurs principally because, as
rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when
interest rates are declining. Thus, in a rising interest rate environment, the
amount of interest Winton would receive on its loans would increase relatively
slowly as loans are slowly prepaid and new loans at higher rates are made.
Moreover, the interest Winton would pay on its deposits would increase rapidly
because Winton's deposits generally have shorter periods to repricing.
Assumptions used in calculating the amounts in this table are OTS assumptions.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
In the event that interest rates rise, Winton's net interest income could
be expected to be negatively affected. Moreover, rising interest rates could
negatively affect Winton's earnings due to diminished loan demand.
23
The following table sets forth at the date indicated, the weighted
average yields on Winton's interest-earning assets, the weighted average
interest rates on interest-bearing liabilities, the interest rate spread and the
net interest margin on interest-earning assets.
At September 30,
1998 1997 1996
Weighted average yield on loan portfolio 8.28% 8.35% 8.18%
Weighted average yield on mortgage-backed securities 6.43 6.43 6.18
Weighted average yield on investment securities 6.11 6.50 6.43
Weighted average yield on other interest-earning assets 6.46 6.59 7.00
Weighted average yield on all interest-earning assets 8.05 8.14 7.96
Weighted average interest rate paid on deposits 5.18 5.31 5.18
Weighted average interest rate paid on borrowings 5.98 6.22 6.15
Weighted average interest rate paid on all interest-bearing 5.32 5.48 5.34
liabilities
Interest rate spread (spread between weighted average interest rate
on all interest-earning assets and all interest-bearing 2.73 2.66 2.62
liabilities)
Competition
Winton competes for deposits with other savings associations, commercial
banks and credit unions and with the issuers of commercial paper and other
securities, such as shares in money market mutual funds. The primary factors in
competing for deposits are interest rates and convenience of office location. In
making loans, Winton competes with other savings associations, commercial banks,
consumer finance companies, credit unions, leasing companies, mortgage brokers
and other lenders. Winton competes for loan originations primarily through the
interest rates and loan fees it charges and through the efficiency and quality
of services it provides to borrowers. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable.
Due to Winton's size relative to the many other financial institutions in
its market area, management believes that Winton does not have a substantial
share of the deposit and loan markets.
The size of financial institutions competing with Winton is likely to
increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions. Such
increased competition may have an adverse effect upon Winton.
Year 2000 Considerations
WFC is addressing the potential problems associated with the possibility
that the computers which control or operate Winton's operating systems may not
be programmed to read four-digit date codes and, upon arrival of the year 2000,
may recognize the two-digit code "00" as the year 1900, causing systems to fail
to function or to generate erroneous date. Other concerns have been raised
regarding February 29, 2000, as well as September 9, 1999, which are new
calculations challenges that may result in further problems.
Most significantly affected are all forms of financial accounting,
including interest computations, due dates, pensions, personnel benefits,
investments, legal commitments, valuations, fixed asset depreciation schedules,
tax filings and financial models. Additional problems may occur on other systems
using computers for processing, vault openings, check protectors and gas and
electric. The total impact is currently unknown; however, it is projected that
failure to address these programming code issues and make appropriate changes
may expose an institution to all types of risks, including credit, transaction,
liquidity, interest rate, compliance, reputation, strategic, price and foreign
exchange.
Winton has established a Year 2000 team, headed by the systems analyst, to
analyze the risk of potential problems that might arise from the failures of
computer programming to recognize the year 2000 and to develop a plan to
mitigate any such risk. Research by the team indicates that the greatest
24
potential impact upon Winton is the risk related to vendors used by Winton,
particularly its data processing service bureau. Quarterly progress reports from
the service bureau indicated levels of manpower and expertise sufficient to
amend and test the adequacy of their computer programming and systems prior to
the arrival of the year 2000. All other vendors and commercial customer's have
been identified and requests for year 2000 certificates have been forwarded by
Winton.
The year 2000 team submits quarterly progress reports to the Board of
Directors and has established a target date of December 31, 1998, for all
required internal testing of each system utilized, which is expected to be
minimal. The team estimates that the impact upon the Company's results of
operations, liquidity and capital resources will be immaterial.
Management has developed a contingency plan which includes manual
procedures along with certain off-line canned programs. Management has set a
budget of approximately $100,000 to ensure WFC and Winton are year 2000
compliant.
In addition, financial institutions may experience increases in problem
loans and credit losses in the event that borrowers fail to prepare properly for
Year 2000, and higher funding costs could result if consumers react to publicity
about the issue by withdrawing deposits. Winton is assessing such risks among
its customers. WFC could also be materially adversely affected if other third
parties, such as governmental agencies, clearing houses, telephone companies,
utilities and other service providers fail to prepare properly. Winton is
therefore attempting to assess these risks and take action to minimize their
effect.
Subsidiary Activities
Winton has no subsidiaries. WFC's only subsidiary is Winton.
Personnel
As of September 30, 1998, Winton had 93 full-time equivalent employees.
Winton believes that relations with its employees are excellent. Winton offers
health, disability, life and dependent care benefits. None of the employees of
Winton are represented by a collective bargaining unit.
REGULATION
General
WFC is a savings and loan holding company within the meaning of the Home
Owners Loan Act, as amended (the "HOLA"). Consequently, WFC is subject to
regulation, examination and oversight by the OTS and must submit periodic
reports to the OTS concerning its activities and financial condition. In
addition, as a corporation organized under Ohio law, WFC is subject to
provisions of the Ohio Revised Code applicable to corporations generally.
As a savings and loan association chartered under the laws of Ohio, Winton
is subject to regulation, examination and oversight by the Superintendent of the
Division (the "Ohio Superintendent"). Because Winton's deposits are insured by
the FDIC, Winton also is subject to regulatory oversight by the FDIC. Winton
must file periodic reports with the OTS concerning its activities and financial
condition. Examinations are conducted periodically by federal and state
regulators to determine whether Winton is in compliance with various regulatory
requirements and is operating in a safe and sound manner. Winton is a member of
the FHLB and is subject to certain regulations promulgated by the Board of
Governors of the Federal Reserve System (the "FRB").
Congress is considering legislation to eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the OTS and
Winton may be regulated under federal law as a bank or be required to change its
charter. Such change in regulation or charter would likely change the range of
activities in which Winton may engage and would probably subject Winton to more
regulation by the FDIC. In addition, WFC might become subject to a different set
of holding company regulations limiting the activities in which WFC may engage
25
and subjecting WFC to additional regulatory requirements, including separate
capital requirements. At this time, WFC cannot predict when or whether Congress
may actually pass legislation regarding WFC's and Winton's regulatory
requirements or charter. Although such legislation, if enacted, may change the
activities in which WFC or Winton are authorized to engage, it is not
anticipated that the current activities of either WFC or Winton will be
materially affected by those activity limits.
Ohio Corporation Law
Merger Moratorium Statute. Chapter 1704 of the Ohio Revised Code regulates
certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination may
not occur unless (1) one of the specified exceptions applies, (2) the holders of
at least two-thirds of the voting shares, and of at least a majority of the
voting shares not beneficially owned by the Interested Shareholder, approve the
business combination at a meeting called for such purpose, or (3) the business
combination meets certain statutory criteria designed to ensure that the issuing
public corporation's remaining shareholders receive fair consideration