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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, 1999
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 jurisdication 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: $35.1 million
Based upon the last sale price quoted by The American Stock Exchange as of
December 17, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, on that date was $40.3 million.
At December 20, 1999, there were 4,405,214 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, 1999, in
Exhibit 13.
Part III of Form 10-KSB: Proxy Statement for 2000 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. As a unitary
savings and loan holding company, WFC, through Winton, is engaged in the savings
and loan business.
On June 11, 1999, BenchMark Federal Savings Bank ("BMF") merged with and
into Winton (the "Merger"). As a result of the Merger, Winton acquired $54.6
million in assets, $38.9 million in deposits and branch offices in Montgomery
and Finneytown, Ohio. The Merger was accounted for as a pooling of interests
and, accordingly, all financial information herein has been restated to reflect
such merger as of October 1, 1994.
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 seven 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 $427.5 million, in the aggregate, at September
30, 1999, and represented 91.7% of total assets.
Loan and Mortgage-Backed Securities Maturity Schedule. The following
table sets forth certain information, as of September 30, 1999, 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 over
Due in Due in Due in 5 years after 10 years after 10 years after
2000 2001 2002 9/30/99 9/30/99 9/30/99 Total
(In thousands)
Mortgage loans (1):
One- to-four family
residential (2)(3) $17,581 $ 309 $ 716 $ 2,248 $18,975 $186,757 $226,586
Multifamily residential 955 589 17 3,788 11,814 63,146 80,309
Land and lot 1,769 394 263 735 71 1,314 4,546
Nonresidential 5,034 776 554 1,775 15,974 50,120 74,233
Construction 32,025 630 - - - - 32,655
Mortgage-backed securities -
held to maturity - 1 6 449 186 12,891 13,533
Mortgage-backed securities -
available for sale - - - - - 410 410
Nonmortgage loans:
Consumer and other
loans (4) 5,788 537 945 3,055 816 568 11,709
------ ----- ----- ------ ------ ------- -------
Total loans and mortgage-
backed securities $63,152 $3,236 $2,501 $12,050 $47,836 $315,206 $443,981
====== ===== ===== ====== ====== ======= =======
- -----------------------------
(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, 1999, 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 $281,583 $134,254
Loans held for sale 2,492 -
Consumer and other loans (1) 7,331 4,378
Mortgage-backed securities - held to maturity 280 13,253
Mortgage-backed securities - available for sale - 410
------- -------
Total $291,686 $152,295
======= =======
- -----------------------------
(1) Includes lines of credit in the aggregate amount of $4.1 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
1999 1998 1997
Amount % Amount % Amount %
(Dollars in thousands)
Type of loan or investment:
Conventional real estate loans:
One- to four-family
Interim construction $ 20,312 4.8% $ 18,569 5.0% $ 14,855 4.4%
Loans on existing properties (1) 224,094 52.3 181,662 49.3 178,650 52.9
Loans held for sale 2,492 .6 8,253 2.2 4,210 1.3
Multifamily
Interim construction 2,614 .6 1,715 .5 1,500 .4
Loans on existing properties 80,309 18.8 76,399 20.8 72,757 21.5
Land and lot 4,546 1.1 5,941 1.6 5,024 1.5
Nonresidential real estate
Interim construction 9,729 2.3 9,782 2.7 1,401 .4
Loans on existing properties 74,233 17.4 56,294 15.3 44,671 13.2
Mobile home loans 259 - 134 - 97 -
Consumer and other loans (2) 11,450 2.7 8,269 2.2 5,209 1.6
Mortgage-backed securities - held
to maturity 13,533 3.2 16,236 4.4 19,350 5.7
Mortgage-backed securities - available
for sale 410 .1 565 .2 799 .2
------- ----- ------- ----- ------- -----
443,981 103.9 383,819 104.2 348,523 103.1
Less:
Loans in process (15,070) (3.6) (14,321) (3.9) (8,986) (2.7)
Deferred loan origination fees (486) (.1) (411) (.1) (652) (.1)
Allowance for loan losses (932) (.2) (917) (.2) (906) (.3)
------- ----- ------- ----- ------- -----
Total loans and mortgage-backed
securities $427,493 100.0% $368,170 100.0% $337,979 100.0%
======= ===== ======= ===== ======= =====
Type of security:
Residential
One- to four-family $244,406 57.2% $200,231 54.3% $193,505 57.3%
Multifamily residential 82,923 19.4 78,114 21.3 74,257 21.9
Loans held for sale 2,492 .6 8,253 2.2 4,210 1.3
Nonresidential real estate 83,962 19.6 66,076 17.9 46,072 13.6
Land and lot 4,546 1.1 5,941 1.6 5,024 1.5
Mortgage-backed securities 13,943 3.3 16,801 4.6 20,149 5.9
Deposit accounts 478 .1 390 .1 584 .2
Other 11,231 2.6 8,013 2.2 4,722 1.4
------- ----- ------- ----- ------- -----
443,981 103.9 383,819 104.2 348,523 103.1
Less:
Loans in process (15,070) (3.6) (14,321) (3.9) (8,986) (2.7)
Deferred loan origination fees (486) (.1) (411) (.1) (652) (.1)
Allowance for loan losses (932) (.2) (917) (.2) (906) (.3)
------- ----- ------- ----- ------- -----
Total loans and mortgage-backed securities $427,493 100.0% $368,170 100.0% $337,979 100.0%
======= ===== ======= ===== ======= =====
- -----------------------------
(1) Includes first and second mortgage loans and home equity lines of credit.
(2) Includes lines of credit in the aggregate amount of $4.1 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 these loans is secured by a
mortgage on the underlying real estate and improvements thereon. At September
30, 1999, $226.6 million, or 52.9% of Winton's total outstanding loans and
mortgage-backed securities, consisted of loans (excluding construction 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, 1999, 11.4% were ARMs and 88.6% 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, 1999, Winton had nonperforming loans totaling $200,000
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 $169.7 million (excluding
construction loans), or 59.2%, of the $286.5 million of loans originated in
fiscal 1999.
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, 1999,
loans secured by multifamily properties (excluding construction loans) totaled
approximately $80.3 million, or 18.8% of total loans and mortgage-backed
securities.
Multifamily lending is generally considered to involve a higher degree
of risk because the loan amounts are larger and the borrower typically depends
upon income generated by the project to cover operating expenses and debt
service. The profitability of a project can be affected by economic conditions,
government policies and other factors beyond the control of the borrower. Winton
attempts to reduce the risk associated with multifamily lending by evaluating
the credit-worthiness of the borrower and the projected income from the project
and by obtaining personal guarantees on loans made to corporations and
partnerships. Winton requires that the borrower agrees to submit rent rolls and
financial statements annually to enable Winton to monitor the loan.
Multifamily loans generally have terms of up to 25 years and a maximum
LTV of 75%, although a higher LTV occasionally is approved for an established
borrower. 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.
-6-
Winton had no nonperforming loans secured by multifamily properties at
September 30, 1999, which were classified as real estate owned. Multifamily
loans (excluding construction loans) constituted $23.4 million, or 8.2%, of the
$286.5 million of loans originated in fiscal 1999.
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 $4.5 million in land loans
outstanding at September 30, 1999, 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 1.1% of the total loans and mortgage-backed securities portfolio
at September 30, 1999. The largest land and lot loan outstanding at September
30, 1999, was a $1.5 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, 1999. Land and lot loans constituted $2.6 million, or
.9%, of the $286.5 million of loans originated in fiscal 1999.
Nonresidential Real Estate Loans. At September 30, 1999, 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, 1999, was a $2.2 million loan secured by a golf course. Nonresidential
permanent loans (excluding construction loans) comprised $74.2 million, or 17.4%
of total loans and mortgage-backed securities at September 30, 1999.
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, 1999. Nonresidential loans (excluding construction loans)
constituted $20.6 million, or 7.2%, of the $286.5 million of loans originated in
fiscal 1999.
Federal regulations limit the amount of nonresidential mortgage loans
which an association may make to 400% of its capital. At September 30, 1999,
Winton's nonresidential permanent mortgage loans totaled 231.0% of Winton's
capital.
Construction Loans. Winton offers residential construction loans both to
owner-occupants and to builders for loans being built under contract with
owner-occupants. To a very limited extent, Winton also makes construction loans
to persons constructing projects for investment purposes. At September 30, 1999,
a total of $32.7 million, or approximately 7.7%, of Winton's total loans and
mortgage-backed securities, consisted of construction loans.
-7-
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,
1999.
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, 1999, Winton had no nonperforming construction loans.
Construction loans constituted $42.8 million, or 14.9%, of the $286.5 million of
loans originated in fiscal 1999.
Mobile Home Loans. To a very limited extent, Winton originates loans on
both new and used mobile homes. At September 30, 1999, the aggregate outstanding
principal balance of mobile home loans in Winton's portfolio was approximately
$259,000, 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, 1999, consumer and other loans
constituted $11.5 million, or 2.7%, of Winton's total loans and mortgage-backed
securities and 2.5% of total assets.
Consumer loans are generally made at fixed rates of interest tied to the
prime rate, generally for terms of from 90 days to five years. Consumer loans,
particularly consumer loans that are unsecured or are secured by rapidly
depreciating assets such as automobiles, may entail greater risk than
residential loans. Repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance. The
risk of default on consumer loans increases during periods of recession, high
unemployment and other adverse economic conditions.
Although Winton has not had significant delinquencies on consumer loans,
no assurance can be provided that delinquencies will not increase. At September
30, 1999, Winton had nonperforming loans totaling $46,000 in its consumer loan
portfolio. Consumer loans constituted $27.4 million, or 9.6%, of the $286.5
million of loans originated in fiscal 1999.
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
conditions favor such a portfolio investment. At September 30, 1999,
mortgage-backed securities totaled approximately $13.9 million, or 3.3% of total
loans and mortgage-backed securities. All but $410,000 of Winton's
-8-
mortgage-backed securities at September 30, 1999, 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
$13.5 million in mortgage-backed securities held to maturity at September 30,
1999, was $13.1 million. The remaining $410,000 in mortgage-backed securities at
September 30, 1999, 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, 1999, $13.7 million, or 98.0%, 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, 1999 At September 30, 1998
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 $ 4,589 $ 9 $(228) $ 4,370 $ 6,808 $11 $ (95) $ 6,724
FNMA participation 3,995 - (180) 3,815 4,033 1 (98) 3,936
GNMA participation 655 10 (7) 658 889 9 (1) 897
CMOs 4,294 - (79) 4,215 4,506 - (40) 4,466
------ -- ---- ------ ------ -- ---- ------
13,533 19 (494) 13,058 16,236 21 (234) 16,023
Mortgage-backed securities
available for sale:
GNMA participation 403 7 - 410 561 4 - 565
------ -- ---- ------ ------ -- ---- ------
$13,936 $26 $(494) $13,468 $16,797 $25 $(234) $16,588
====== == ==== ====== ====== == ==== ======
-9-
The combined amortized cost of mortgage-backed and related securities
designated as held to maturity or available for sale at September 30, 1999 and
1998, 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, 1999 September 30, 1998
(In thousands)
Due after one through three years $ 7 $ 2
Due after three years through five years 449 62
Due after five years through ten years 186 456
Due after ten years through twenty years 3,754 3,160
Due after twenty years 9,540 13,117
------ ------
$13,936 $16,797
====== ======
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 occasionally
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.
Management sold $99.3 million of fixed-rate loans during fiscal 1999, as
compared to sales of $104.7 million of fixed-rate loans and $47.3 million of
fixed- and adjustable-rate loans in fiscal 1998 and fiscal 1997, respectively.
-10-
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, 1999,
1998 and 1997, Winton sold participation interests in loans totaling $2.7
million, $6.7 million and $11.4 million, respectively. Winton held
participations in loans originated by other lenders of approximately $2.6
million at September 30, 1999. 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
1999 1998 1997
Amount % Amount % Amount %
(Dollars in thousands)
Loans originated:
Conventional real estate loans:
One- to four-family
Construction (1) $ 33,943 11.8% $ 24,951 10.1% $23,737 14.9%
Fixed-rate loans on existing property 146,704 51.2 124,509 50.5 42,391 26.6
Adjustable-rate loans on existing
property 17,475 6.1 18,168 7.4 19,371 12.1
FHA/VA 5,518 1.9 3,478 1.4 - -
Multifamily
Construction 1,694 0.6 1,000 0.4 1,500 0.9
Fixed-rate loans on existing property 15,477 5.4 15,455 6.3 11,564 7.3
Adjustable-rate loans on existing
property 7,954 2.8 13,886 5.6 23,957 15.0
Nonresidential real estate, land and
loans
Construction 7,206 2.5 5,386 2.2 1,367 0.9
Fixed-rate loans on existing property 15,978 5.6 16,879 6.8 9,801 6.1
Adjustable-rate loans on existing
property 7,129 2.5 6,058 2.5 7.791 4.9
Consumer and other loans (2) 9.6 16,653 6.8 18,003 11.3
------- ----- ------- ----- ------- -----
Total loans originated $286,492 100.0% $246,423 100.0% $159,482 100.0%
======= ===== ======= ===== ======= =====
Loans and mortgage-backed securities sold:
Loans $ 99,255 97.3% $104,704 94.0% $ 47,337 80.6%
Participations 2.7 6,729 6.0 1,385 19.4
------- ----- ------- ----- ------- -----
Total $101,985 100.0% $111,433 100.0% $ 58,722 100.0%
======= ===== ======= ===== ======= =====
Principal Repayments:
Loans $122,174 97.7% $101,551 96.9% $ 74,001 94.1%
Mortgage-backed securities 2,813 2.3 3,288 3.1 4,620 5.9
------- ----- ------- ----- ------- -----
Total $124,987 100.0% $104,839 100.0% $ 78,621 100.0%
======= ===== ======= ===== ======= =====
- ----------------------------
(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.
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,
-11-
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 $4.8
million to one borrower at September 30, 1999. Winton had no outstanding loans
in excess of such limit at September 30, 1999.
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,
1999 1998 1997 1996 1995
(Dollars in thousands)
Loans delinquent
30 to 59 days $6,259 $7,153 $2,730 $3,620 $2,955
60 to 89 days 384 720 913 1,024 1,356
90 or more days 246 1,144 599 1,845 845
----- ----- ----- ----- -----
Total delinquent loans $6,889 $9,017 $4,242 $6,489 $5,156
===== ===== ===== ===== =====
Ratio of total delinquent loans to total
loans (1) 1.67% 2.57% 1.33% 2.23% 2.17%
==== ==== ==== ==== ====
- -----------------------------
(1) Includes loans held for sale.
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, 1999, is approximately $8,000.
-12-
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, 1999, 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,
1999 1998 1997 1996 1995
(Dollars in thousands)
Loans accounted for on a non-accrual
basis: (1)
Real estate:
Construction $ - $ 859 $ - $ - $ -
Residential 104 150 264 1,416 209
Nonresidential and land - - 179 57 591
Consumer and other - - - 3 5
--- ----- --- ----- ---
Total 104 1,009 443 1,476 805
Accruing loans which are
contractually past due 90 days or
more:
Real estate:
Construction - - - - -
Residential 96 127 154 173 -
Nonresidential - - - 182 24
Consumer and other 46 8 2 14 16
--- ----- --- ----- ---
Total 142 135 156 369 40
--- ----- --- ----- ---
Total of non-accrual and 90 days past
due loans $246 $1,144 $599 $1,845 $834
=== ===== === ===== ===
Percentage of total loans .06% .33% .19% .63% .35%
=== === === === ===
Other nonperforming assets(2) $492 $ 595 $647 $ 745 $398
=== ===== === ===== ===
- ----------------------------
(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 and other repossessed
assets which are carried at the lower of cost or fair value less estimated
selling expenses.
The 118.3% increase in nonperforming loans at the end of fiscal 1996 resulted
from the increased size of the loan portfolio and increased loan delinquencies.
The 67.5% decline in nonperforming loans during fiscal 1997 resulted primarily
from collections on loan accounts acquired through the Blue Chip merger and BMF
resolving non-accrual multi-family and investment property loans. The 91.0%
increase in nonperforming loans at the end of fiscal 1998 resulted primarily
from construction loans to one borrower of approximately $859,000. The 78.5%
decrease in non-performing loans at the end of fiscal 1999 resulted primarily
from the resolution of the construction loans to one borrower.
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
-13-
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, 1999, Winton had approximately $630,000 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.
The aggregate amount of Winton's classified assets at September 30,
1999, was as follows:
At September 30, 1999
(In thousands)
Substandard $680,824
Doubtful 51,088
Loss -
-------
Total classified assets $731,912
=======
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, 1999,
Winton's allowance for loan losses totaled $932,000.
-14-
The following table sets forth an analysis of Winton's allowance for
losses on loans for the periods indicated.
Year ended September 30,
1999 1998 1997 1996 1995
(Dollars in thousands)
Balance at beginning of period $917 $905 $954 $764 $723
Charge-offs:
One- to four-family (48) (64) (72) (71) (45)
Multifamily and nonresidential
real estate (35) - - (12) (104)
Construction (81) (4) - - -
Consumer (24) (8) (5) (10) (4)
--- --- --- --- ---
Total (188) (76) (77) (93) (153)
Total recoveries 43 2 22 4 106
--- --- --- --- ---
Net charge-offs (145) (74) (55) (89) (47)
Provision for loan losses 160 86 6 279 88
--- --- --- --- ---
Balance at end of period $932 $917 $905 $954 $764
=== === === === ===
Ratio of net charge-offs during the
period to average loans
outstanding during the period (1) .04% .02% .02% .03% .02%
=== === === === ===
- --------------------------
(1) During the respective periods there were $382.7 million, $342.1 million,
$302.5 million, $260.6 million and $233.0 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:
At September 30,
1999 1998 1997 1996 1995
(In thousands)
Specific allowances
One- to four-family $ 48 $ 53 $ 40 $ 80 $ -
Commercial business - - 24 25 -
--- --- --- --- ---
Total specific allowances 48 53 64 105 -
General allowances
One- to four-family 379 396 388 405 378
Multifamily and nonresidential
real estate 375 350 346 339 308
Construction and development 15 10 - - -
Consumer 110 100 100 100 75
Commercial business 5 8 7 5 3
--- --- --- --- ---
Total general allowances 884 864 841 849 764
--- --- --- --- ---
Total allowance for
possible loan losses $932 $917 $905 $954 $764
=== === === === ===
-15-
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 needs.
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
13.8% at September 30, 1999. At September 30, 1999, Winton's "liquid" assets
totaled approximately $37.5 million, which was approximately $26.1 million in
excess of the current OTS minimum requirement. Winton believes that its
liquidity posture at September 30, 1999, was adequate to meet outstanding loan
commitments and other cash requirements.
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,
1999 1998 1997
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(In thousands)
Held to maturity:
U.S. government and agency
obligations $16,882 $16,774 $14,858 $15,185 $12,585 $12,679
Available for sale:
U.S. government and agency
obligations 4,491 4,528 4,587 4,855 3,088 3,149
Corporate equity securities 103 975 103 724 103 482
------ ------ ------ ------ ------ ------
4,594 5,503 4,690 5,579 3,191 3,631
------ ------ ------ ------ ------ ------
Total $21,476 $22,277 $19,548 $20,764 $15,776 $16,310
====== ====== ====== ====== ====== ======
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, 1999:
Maturing within Maturing within
one year after one to five years
September 30, 1999 after September 30, 1999 Total
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
(Dollars in thousands)
Held to maturity $2,355 5.38% $14,527 5.56% $16,882 5.53%
Available for sale 750 7.00 3,741 6.05 4,491 6.22
----- ---- ------ ---- ------ ----
Total $3,105 5.77% $18,268 5.66% $21,373 5.68%
===== ==== ====== ==== ====== ====
-16-
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, 1999, the total amount of brokered deposits equaled approximately
$27.3 million, or 8.7% 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.
At September 30, 1999, Winton's certificates of deposit totaled $233.6
million, or 74.9% of total deposits. Of such amount, approximately $153.9
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 1999, 1998 and 1997, 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 $6.6 million of these certificates of deposit were
outstanding at September 30, 1999. Because these certificates of deposit are
market rate sensitive, they increase Winton's interest rate risk. See
"Asset/Liability Management."
-17-
The following table sets forth the dollar amount of deposits in the
various types of savings programs offered by Winton at September 30, 1999:
Percent
of total
Amount deposits
(In thousands)
Transaction accounts:
Passbook accounts (1) $ 60,102 19.26%
Christmas Club accounts (2) 209 .07
NOW accounts (3) 18,129 5.81
------- ------
Total transaction accounts 78,440 25.14
Certificates of deposit (4):
2.00 - 3.99% 206 .07
4.00 - 5.99% 163,446 52.37
6.00 - 7.99% 69,713 22.34
8.00 - 9.99% 267 .08
------- ------
Total certificates of deposit 233,632 74.86
------- ------
Total deposits $312,072 100.00%
======= ======
- -----------------------------
(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 3.36% at September 30, 1999.
(2) Winton's weighted average interest rate paid on Christmas Club accounts
fluctuates with the general movement of interest rates. At September 30,
1999, 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, 1999, the
weighted average rate on NOW accounts was 1.07%.
(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.
The following table shows rate and maturity information for Winton's
certificates of deposit as of September 30, 1999:
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% $ 180 $ 12 $ - $ 14 $ 206
4.00 - 5.99 120,147 27,370 12,852 3,077 163,446
6.00 - 7.99 33,272 26,446 6,353 3,642 69,713
8.00 - 9.99 259 - - 8 267
------- ------ ------ ----- -------
Total certificates
of deposit $153,858 $53,828 $19,205 $6,741 $233,632
======= ====== ====== ===== =======
-18-
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, 1999:
Maturity At September 30, 1999
(In thousands)
Three months or less $12,205
Over 3 months to 6 months 13,548
Over 6 months to 12 months 19,995
Over twelve months 23,020
------
Total $68,768
======
Borrowings. During the year ended September 30, 1999, 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,
1999 1998 1997
(In thousands)
Maximum amount of FHLB advances $116,532 $87,129 $62,761
======= ====== ======
Average amount of FHLB advances outstanding during period $ 90,365 $68,824 $55,705
======= ====== ======
The following table sets forth certain information as to Winton's FHLB
advances at the dates indicated:
At September 30,
1999 1998 1997
(In thousands)
FHLB advances $116,532 $67,404 $61,754
======= ====== ======
Weighted average interest cost of FHLB advances during
period based on month end balances 5.62% 5.89% 5.91%
==== ==== ====
-19-
Yields Earned and Rates Paid
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. See also the information in
those portions of the 1999 Annual Report under the captions "AVERAGE BALANCE,
YIELD, RATE AND VOLUME DATA" "ASSET AND LIABILITY MANAGEMENT."
At September 30,
1999 1998 1997
Weighted average yield on loan portfolio 7.85% 8.17% 8.30%
Weighted average yield on mortgage-backed securities 5.99 6.45 6.48
Weighted average yield on investment securities 5.73 6.11 6.50
Weighted average yield on other interest-earning assets 6.86 6.18 6.48
Weighted average yield on all interest-earning assets 7.68 7.77 7.93
Weighted average interest rate paid on deposits 4.88 5.11 5.26
Weighted average interest rate paid on borrowings 5.91 5.89 6.20
Weighted average interest rate paid on all interest-bearing 5.16 5.26 5.42
Interest rate spread (spread between weighted average interest rate
on all interest-earning assets and all interest-bearing liabilities) 2.52 2.52 2.51
Competition
Winton competes for deposits with other savings associations, commercial
banks and credit unions and with the issuers of commercial paper and other
securities, such as shares in money market mutual funds. The primary factors in
competing for deposits are interest rates and convenience of office location. In
making loans, Winton competes with other savings associations, commercial banks,
consumer finance companies, credit unions, leasing companies, mortgage brokers
and other lenders. Winton competes for loan originations primarily through the
interest rates and loan fees it charges and through the efficiency and quality
of services it provides to borrowers. Competition is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable.
Due to Winton's size relative to the many other financial institutions
in its market area, management believes that Winton does not have a substantial
share of the deposit and loan markets.
The size of financial institutions competing with Winton is likely to
increase as a result of changes in statutes and regulations eliminating various
restrictions on interstate and inter-industry branching and acquisitions. Such
increased competition may have an adverse effect upon Winton.
Subsidiary Activities
Winton has no subsidiaries. WFC's only subsidiary is Winton.
Personnel
As of September 30, 1999, Winton had 109 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.
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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").
New Federal Legislation
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial services
in which various types of financial institutions may engage. The Glass-Steagall
Act, which had generally prevented banks from affiliating with securities and
insurance firms, was repealed. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including WFC, to continue to engage in all activities
that they were permitted to engage in prior to the enactment of the Act. Such
activities are essentially unlimited, provided that the thrift subsidiary
remains a qualified thrift lender. Any thrift holding company formed after May
4, 1999, will be subject to the same restrictions as a multiple thrift holding
company. In addition, a unitary thrift holding company in existence on May 4,
1999, may be sold only to a financial holding company engaged in activities
permissible for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities
in which the WFC and Winton currently engage, except to the extent that
competition with other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
Ohio Corporation Law
Merger Moratorium Statute. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) one of the specified exceptions applies, (2) the
holders of at least two-thirds of the voting shares, and of at least a majority
of the voting shares not beneficially owned by the Interested Shareholder,
approve the business combination at a meeting called for such purpose, or (3)
the business combination meets certain statutory criteria designed to ensure
that the issuing public corporation's remaining shareholders receive fair
consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
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the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. Neither
WFC nor Winton has opted out of the protection afforded by Chapter 1704.
Control Share Acquisition. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that, with certain
exceptions, acquisitions of voting securities which would result in the
acquiring shareholder owning 20%, 33-1/3% or 50% of the outstanding voting
securities of an Ohio corporation (a "Control Share Acquisition") must be
approved in advance by the holders of at least a majority of the outstanding
voting shares of such corporation represented at a meeting at which a quorum is
present and a majority of the portion of the outstanding voting shares
represented at such a meeting excluding the voting shares owned by the acquiring
shareholder, by certain other persons who acquire or transfer voting shares
after public announcement of the acquisition or by certain officers of the
corporation or directors of the corporation who are employees of the
corporation. The Control Share Acquisition Statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers.
Takeover Bid Statute. Ohio law provides that an offeror may not make
not make a tender offer or request or invitation for tenders that would result
in the offeror beneficially owning more than ten percent of any class of the
target company's equity securities unless such offeror files certain information
with the Ohio Division of Securities (the "Securities Division") and provides
such information to the target company and the offerees within Ohio. The
Securities Division may suspend the continuation of the control bid if the
Securities Division determines that the offeror's filed information does not
provide full disclosure to the offerees of all material information concerning
the control bid. The statue also provides that an offeror may not acquire any
equity security of a target company within two years of the offeror's previous
acquisition of any equity security of the same target company pursuant to a
control bid unless the Ohio offerees may sell such security to the offeror on
substantially the same terms as provided by the previous control bid. The
statute does not apply to a transaction if either the offeror or the target
company is a savings and loan holding company and the proposed transaction
requires federal regulatory approval.
Ohio Savings and Loan Regulation
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the laws of
the State of Ohio and imposes assessments on Ohio associations based on their
asset size to cover the costs of supervision and examination. Ohio law
prescribes the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments in real estate, subsidiaries and corporate or government
securities that such associations may make. The ability of Ohio associations to
engage in these state-authorized investments and activities is subject to
oversight and approval by the FDIC, if such investments or activities are not
permissible for a federally-chartered savings association. The Ohio
Superintendent also has approval authority over any mergers involving, or
acquisitions of control of, Ohio savings and loan associations. The Ohio
Superintendent may initiate certain supervisory measures or formal enforcement
actions against Ohio associations. Ultimately, if the grounds provided by law
exist, the Superintendent may place an Ohio association in conservatorship or
receivership.
In addition to being governed by the laws of Ohio specifically
governing savings and loan associations, Winton is also governed by Ohio
corporate law, to the extent such law does not conflict with the laws
specifically governing savings and loan associations.
Office of Thrift Supervision
General. The OTS is an office of the Department of the Treasury and is
responsible for the regulation and supervision of all federally-chartered
savings associations and all other savings associations the deposits of which
are insured by the FDIC in the SAIF. The OTS issues regulations governing the
operation of savings associations, regularly examines such associations and
imposes assessments on savings associations based on their asset size to cover
the costs of general supervision and examination. The OTS also may initiate
enforcement actions against savings associations and certain persons affiliated
with them for violations of laws or regulations or for engaging in unsafe or
unsound practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
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reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests in its designated service area, with particular emphasis on low- to
moderate-income communities and borrowers in that area.
Regulatory Capital Requirements. Winton is required by OTS regulations
to meet certain minimum capital requirements. The tangible capital requirement
requires savings associations to maintain "tangible capital" of not less than
1.5% of their adjusted total assets. Tangible capital is defined in OTS
regulations as core capital minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 3% of their total assets. The
OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the association's examination rating and overall risk. Winton
does not anticipate that it will be adversely affected if the core capital
requirement regulation is amended as proposed.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of their risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of Winton includes a general loan loss allowance of $884,000
at September 30, 1999.
Winton met all of its capital requirements at September 30, 1999. See
"Management's Discussion and Analysis - Liquidity and Capital Resources."
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to the interest rate risk component, a savings association
will have to measure the effect of an immediate 200 basis point change in
interest rates on the value of its portfolio as determined under the methodology
of the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
such excess exposure from its total capital when determining its risk-based
capital. In general, an association with less than $300 million in assets and a
risk-based capital ratio in excess of 12% will not be subject to the interest
rate risk component. Pending implementation of the interest rate risk component,
the OTS has the authority to impose a higher individualized capital requirement
on any savings association it deems to have excess interest rate risk. The OTS
also may adjust the risk-based capital requirement on an individualized basis to
take into account risks due to concentrations of credit and non-traditional
activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and more numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. In addition, the OTS
generally can downgrade an association's capital category, notwithstanding its
capital level, if, after notice and opportunity for hearing, the association is
deemed to be engaging in an unsafe or unsound practice because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. All undercapitalized associations must submit a
capital restoration plan to the OTS within 45 days after becoming
undercapitalized. Such associations will be subject to increased monitoring and
asset growth restrictions and will be required to obtain prior approval for
acquisitions, branching and engaging in new lines of business. Furthermore,
critically undercapitalized institutions must be placed in conservatorship or
receivership within 90 days of reaching that capitalization level, except under
limited circumstances. Under such regulations, unless an association has
received the highest possible examination rating, the association will be
subject to restrictive action by the OTS if it does not maintain core capital of
at least 4%. Winton's capital at September 30, 1998, met the standards for the
highest category, a "well-capitalized" institution.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the association's total assets at the
time the institution became undercapitalized and (b) the amount that is
necessary to bring the association into compliance with all capital standards
applicable to such association at the time the association fails to comply with
its capital restoration plan.
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Liquidity. OTS regulations require that a savings association maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than 4.0% of its net
withdrawable savings deposits payable in one year plus borrowings payable in one
year or less. Monetary penalties may be imposed upon associations failing to
meet these liquidity requirements. The eligible liquidity of Winton at September
30, 1999, was approximately $37.5 million, or 13.8%, and exceeded the 4.0%
liquidity requirement by approximately $26.1 million.
Qualified Thrift Lender Test. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, the QTL test required savings
associations to maintain a specified level of investments in assets that are
designated as qualifying thrift investments ("QTI"), which are generally related
to domestic residential real estate and manufactured housing and include credit
card, student and small business loans and stock issued by any FHLB, the FHLMC
or the FNMA. Under such test, 65% of an institution's "portfolio assets" (total
assets less goodwill and other intangibles, property used to conduct business
and 20% of liquid assets) must consist of QTI on a monthly average basis in nine
out of every 12 months. Effective September 30, 1996, a savings association may
also qualify as a QTL by meeting the definition of "domestic building and loan
association" under the Internal Revenue Code of 1986, as amended (the "Code").
In order for an institution to meet the definition of a "domestic building and
loan association" under the Code, at least 60% of such institution's assets must
consist of specified types of property, including cash loans secured by
residential real estate or deposits, educational loans and certain governmental
obligations. The OTS may grant exceptions to the QTL test under certain
circumstances. If a savings association fails to meet the QTL test, the
association and its holding company become subject to certain operating and
regulatory restrictions. A savings association that fails to meet the QTL test
will not be eligible for new FHLB advances. At September 30, 1999, Winton met
the QTL test.
Lending Limit. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to 15% of
the association's Lending Limit Capital. A savings association may lend to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." Certain types of loans are not subject to the lending
limit. A general exception to the 15% limit provides that an association may
lend to one borrower up to $500,000, for any purpose. In applying the limit on
loans to one borrower, the regulations require that loans to certain related
borrowers be aggregated. At September 30, 1999, Winton was in compliance with
this lending limit.
Transactions with Insiders and Affiliates. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's Lending Limit Capital (or 200% of
Lending Limit Capital for qualifying institutions with less than $100 million in
deposits). Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of the board of directors of the association, with any "interested"
director not participating. All loans to directors, executive officers and
principal shareholders must be made on terms substantially the same as offered
in comparable transactions with the general public or as offered to all
employees in a company-wide benefit program, and loans to executive officers are
subject to additional limitations. Winton was in compliance with such
restrictions at September 30, 1999.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. WFC is an
affiliate of Winton. Generally, Sections 23A and 23B of the FRA (i) limit the
extent to which a savings association or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, (ii) limit the aggregate of all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as those
provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchasing of assets, issuance of a guarantee and
other similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. Winton was in
compliance with these requirements and restrictions at September 30, 1999.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
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distributions, including dividend payments. An association which has converted
from mutual to stock form is prohibited from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the net worth of the
association would be reduced below the amount required to be maintained for the
liquidation account established in connection with its mutual to stock
conversion. OTS regulations also establish a three-tier system limiting capital
distributions according to ratings of associations based on their capital level
and supervisory condition.
Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations in
this category may make capital distributions during any calendar year up to the
greater of (i) 100% of net income, current year-to-date, plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, and (ii) the amount authorized
for a Tier 2 association. A Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association. Winton meets the requirements for a Tier 1 association and has not
been notified of any need for more than normal supervision.
As a subsidiary of WFC, Winton is required to give the OTS 30 days'
notice prior to declaring any dividend on its stock. The OTS may object to the
distribution during such 30-day period based on safety and soundness concerns.
Holding Company Regulation. WFC is a savings and loan holding company
within the meaning of the HOLA. As such, WFC has registered with the OTS and is
subject to OTS regulations, examination, supervision and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by WFC.
Except with the prior approval of the OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such holding company's stock may also acquire control of any
savings institution, other than a subsidiary institution, or any other savings
and loan holding company.
As a unitary savings and loan holding company, WFC generally has no
restrictions on its activities. Such companies are the only financial
institution holding companies which may engage in any commercial, securities and
insurance activities without restriction. Congress is considering legislation
which may limit WFC's ability to engage in these activities. It cannot be
predicted whether and in what form these proposals might become law. However,
such limits would not impact WFC's current activities, which consist solely of
holding stock of Winton. The broad latitude to engage in activities under
current law can be restricted. If the OTS determines that there is reasonable
cause to believe that the continuation by a savings and loan holding company of
an activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association, the OTS may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings association, (ii) transactions between the
savings association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of WFC and its
affiliates may be imposed on the savings association. Notwithstanding the
foregoing rules as to permissible business activities of a unitary savings and
loan holding company, if the savings association subsidiary of a holding company
fails to meet the QTL test, then such unitary holding company would become
subject to the activities restrictions applicable to multiple holding companies.
At September 30, 1999, Winton met both those tests.
If WFC acquired control of another savings