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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
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 No. 0-18993
WINTON FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1303854
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5511 Cheviot Road, Cincinnati, Ohio 45247
- --------------------------------------------------------------------------------
(Address of principal executive office)
Registrant's telephone number, including area code: (513) 385-3880
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of February 12, 2004, the latest practicable date, 4,584,938 shares of the
registrant's common stock, no par value, were issued and outstanding.
Page 1 of 20
Winton Financial Corporation
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive
Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II - OTHER INFORMATION 18
SIGNATURES 20
2
ITEM 1 FINANCIAL STATEMENTS
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
DECEMBER 31, SEPTEMBER 30,
2003 2003
(Unaudited)
ASSETS
Cash and due from banks $ 1,740 $ 1,848
Interest-bearing deposits in other financial institutions 12,922 7,648
--------- ---------
Cash and cash equivalents 14,662 9,496
Investment securities available for sale - at market 24,215 21,466
Mortgage-backed securities available for sale - at market 4,006 2,103
Mortgage-backed securities held to maturity - at amortized cost,
approximate market value of $3,653 and $4,204 at
December 31, 2003 and September 30, 2003, respectively 3,714 4,269
Loans receivable - net 485,944 481,364
Loans held for sale - at lower of cost or market 5,316 6,116
Office premises and equipment - at depreciated cost 6,327 6,131
Real estate acquired through foreclosure 771 846
Federal Home Loan Bank stock - at cost 8,238 8,156
Accrued interest receivable 2,553 2,571
Prepaid expenses and other assets 694 786
Intangible assets - net of amortization 81 97
Prepaid federal income taxes 123 501
--------- ---------
Total assets $ 556,644 $ 543,902
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 361,283 $ 354,296
Advances from the Federal Home Loan Bank 140,596 136,612
Other borrowed money 3,400 2,000
Accounts payable on mortgage loans serviced for others 382 401
Advance payments by borrowers for taxes and insurance 3,552 2,433
Other liabilities 2,062 2,459
Deferred federal income taxes 1,540 1,479
--------- ---------
Total liabilities 512,815 499,680
Shareholders' equity
Preferred stock - 2,000,000 shares without par value authorized;
no shares issued - -
Common stock - 18,000,000 shares without par value authorized;
4,603,884 and 4,592,884 shares issued at December 31, 2003 and
September 30, 2003, respectively - -
Additional paid-in capital 11,374 11,285
Retained earnings 33,617 33,213
Treasury stock - 117,630 and 40,300 at December 31, 2003 and
September 30, 2003, respectively - at cost (1,534) (529)
Accumulated comprehensive income, unrealized gains on securities
designated as available for sale, net of related tax effects 372 253
---------
Total shareholders' equity 43,829 44,222
--------- ---------
Total liabilities and shareholders' equity $ 556,644 $ 543,902
========= =========
3
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended December 31,
(In thousands, except per share data)
2003 2002
(Unaudited)
Interest income
Loans $ 7,530 $ 7,966
Mortgage-backed securities 72 59
Investment securities 159 83
Interest-bearing deposits and other 87 116
------- -------
Total interest income 7,848 8,224
Interest expense
Deposits 2,205 2,633
Borrowings 1,728 1,750
------- -------
Total interest expense 3,933 4,383
------- -------
Net interest income 3,915 3,841
Provision for losses on loans 75 155
------- -------
Net interest income after provision
for losses on loans 3,840 3,686
Other income
Mortgage banking income 481 943
Gain on sale of office premises - 243
Gain on sale of investment securities designated as available for sale - 97
Gain on sale of real estate acquired through foreclosure 2 23
Other operating 187 175
------- -------
Total other income 670 1,481
General, administrative and other expense
Employee compensation and benefits 1,770 1,363
Occupancy and equipment 428 272
Data processing 120 113
Franchise and local taxes 134 100
Amortization of intangible assets 16 15
Advertising 112 60
Other operating 614 537
------- -------
Total general, administrative and other expense 3,194 2,460
------- -------
Earnings before income taxes 1,316 2,707
Federal income taxes
Current 406 999
Deferred - (94)
------- -------
Total federal income taxes 406 905
------- -------
NET EARNINGS $ 910 $ 1,802
======= =======
EARNINGS PER SHARE
Basic $ .20 $ .40
======= =======
Diluted $ .20 $ .39
======= =======
DIVIDENDS PAID PER COMMON SHARE $0.1125 $0.1025
======= =======
4
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended December 31,
(In thousands)
2003 2002
(Unaudited)
Net earnings $ 910 $ 1,802
Other comprehensive income (loss), net of taxes:
Unrealized holding gains (losses) on securities during
the period, net of taxes (benefits) of $61 and ($7)
for 2003 and 2002, respectively 119 (14)
Reclassification adjustment for realized gains included
in earnings, net of taxes $33 for 2002 - (64)
------- -------
Comprehensive income $ 1,029 $ 1,724
======= =======
Accumulated comprehensive income $ 372 $ 262
======= =======
5
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31,
(In thousands)
2003 2002
(Unaudited)
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 910 $ 1,802
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Amortization of premiums and discounts on investment and
mortgage-backed securities 23 10
Amortization of deferred loan origination fees (80) (51)
Depreciation and amortization 173 94
Amortization of intangible assets 16 15
Provision for losses on loans 75 155
Gain on sale of office premises - (243)
Gain on sale of securities designated as available for sale - (97)
Gain on sale of real estate acquired through foreclosure (2) (23)
Gain on sale of mortgage loans (399) (931)
Loans disbursed for sale in the secondary market (26,885) (69,282)
Proceeds from sale of loans in the secondary market 28,084 79,379
Federal Home Loan Bank stock dividends (82) (89)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 18 287
Prepaid expenses and other assets 92 52
Accounts payable on mortgage loans serviced for others (19) (85)
Other liabilities (397) (414)
Federal income taxes
Current 378
992
Deferred - (94)
-------- --------
Net cash provided by operating activities 1,905 11,477
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 625 444
Proceeds from maturity of investment securities 2,500 3,765
Proceeds from sale of investment securities designated as
available for sale - 3,622
Purchase of mortgage-backed securities available for sale (2,001) -
Purchase of investment securities designated as available for sale (5,064) (8,342)
Loan principal repayments 42,552 51,107
Loan disbursements (47,127) (61,135)
Proceeds from sale of real estate acquired through foreclosure 72 261
Purchase of office premises and equipment (364) (478)
Proceeds from sale of office premises - 366
-------- --------
Net cash used in investing activities (8,807) (10,390)
-------- --------
Net cash provided by (used in) operating and investing
activities (balance carried forward) (6,902) 1,087
-------- --------
6
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended December 31,
(In thousands)
2003 2002
(Unaudited)
Net cash provided by (used in) operating and investing
activities (balance brought forward) $ (6,902) $ 1,087
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 6,987 1,233
Repayments of Federal Home Loan Bank advances and
other borrowings (17,516) (7,662)
Proceeds from Federal Home Loan Bank advances and
other borrowings 22,900 15,000
Advances by borrowers for taxes and insurance 1,119 958
Proceeds from issuance of shares under stock option plans 89 37
Dividends paid on common stock (506) (458)
Purchase of treasury stock (1,005) -
-------- --------
Net cash provided by financing activities 12,068 9,108
-------- --------
Net increase in cash and cash equivalents 5,166 10,195
Cash and cash equivalents at beginning of period 9,496 11,965
-------- --------
Cash and cash equivalents at end of period $ 14,662 $ 22,160
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 636 $ -
======== ========
Interest on deposits and borrowings $ 3,968 $ 4,406
======== ========
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 119 $ (78)
======== ========
Recognition of mortgage servicing rights in accordance with
SFAS No. 140 $ 76 $ 89
======== ========
7
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three-month periods ended December 31, 2003 and 2002
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-Q and, therefore,
do not include information or footnotes necessary for a complete
presentation of financial position, results of operations, and cash
flows in conformity with accounting principles generally accepted in
the United States of America. Accordingly, these financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto of Winton Financial Corporation ("Winton
Financial" or the "Corporation") included in the Annual Report on Form
10-K for the year ended September 30, 2003. However, all adjustments
(consisting of only normal recurring accruals) which, in the opinion of
management, are necessary for a fair presentation of the consolidated
financial statements have been included. The results of operations for
the three-month period ended December 31, 2003, is not necessarily
indicative of the results which may be expected for the entire fiscal
year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Winton Financial and its wholly-owned subsidiary, The Winton Savings
and Loan Co. ("Winton Savings" or the "Company"). All significant
intercompany items have been eliminated.
3 Earnings Per Share
Basic earnings per common share is computed based upon the
weighted-average number of common shares outstanding during the period.
Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under the Corporation's
stock option plan. The computations are as follows:
FOR THE THREE MONTHS ENDED
DECEMBER 31,
2003 2002
Weighted-average common shares
outstanding (basic) 4,503,394 4,467,978
Dilutive effect of assumed exercise
of stock options 152,973 131,314
--------- ---------
Weighted-average common shares
outstanding (diluted) 4,656,367 4,599,292
========= =========
Options to purchase 125,500 and 140,500 shares of common stock, with a
respective weighted-average exercise price of $13.25 and $13.21, were
outstanding at December 31, 2003 and 2002, respectively, but were
excluded from the computation of common share equivalents for those
respective periods because their exercise prices were greater than the
average market price of the common shares.
8
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended December 31, 2003 and 2002
4. Stock Option Plans
Shareholders of the Corporation have approved stock option plans that
provide for the issuance of up to 1,498,165 common shares to be granted
at the discretion of the Board of Directors. Under the 1988 Stock
Option Plan, 649,680 common shares were reserved for issuance to
directors, officers, and key employees of the Corporation and Winton
Savings. At December 31, 2003, 274,630 options under the 1988 Plan were
subject to exercise at the discretion of the grantees through fiscal
2008. The 1999 Stock Option Plan reserved 401,530 common shares for
issuance to directors, officers, and key employees of the Corporation
and Winton Savings. At December 31, 2003, 386,000 options under the
1999 Plan were subject to exercise at the discretion of the grantees
through fiscal 2010, while 2,500 options were ungranted. The 2003 Stock
Option Plan reserved 446,955 common shares for issuance to directors,
officers and key employees of the Corporation and Winton Savings. At
December 31, 2003, there were 347,485 shares ungranted under the 2003
Stock Option Plan. For the three months ended December 31, 2003, awards
of 105,500 options were granted from the 1999 and 2003 Stock Option
Plans.
The Corporation accounts for its stock option plans in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," which contains
a fair value-based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date
based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period.
Alternatively, SFAS No. 123 permits entities to continue to account for
stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities that continue to account for stock options
using APB Opinion No. 25 are required to make pro forma disclosures of
net earnings and earnings per share, as if the fair value-based method
of accounting defined in SFAS No. 123 had been applied.
The Corporation applies APB Opinion No. 25 and related Interpretations
in accounting for its stock option plans. Accordingly, no compensation
cost has been recognized for the plans. Had compensation cost for the
Corporation's stock option plan been determined based on the fair value
at the grant dates for awards under the plans consistent with the
accounting method utilized in SFAS No. 123, the Corporation's net
earnings and earnings per share would have been reported at the
pro-forma amounts indicated below.
For the three months ended
December 31,
2003 2002
Net earnings (in thousands) As reported $910 $1,802
Stock-based compensation, net of tax 166 -
---- ------
Pro-forma $744 $1,802
==== ======
Earnings per share
Basic As reported $.20 $ .40
Stock-based compensation, net of tax (.04) -
---- ------
Pro-forma $.16 $ .40
==== ======
Diluted As reported $.20 $ .39
Stock-based compensation, net of tax (.04) -
---- ------
Pro-forma $.16 $ .39
==== ======
9
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended December 31, 2003 and 2002
4. Stock Option Plans (continued)
The fair value of each option grant was estimated through a third-party
stock valuation firm. The following assumptions were used for grants in
fiscal 2004: dividend yield of 3.41%, expected volatility of 18.7%
risk-free interest rate of 4.15% and an expected life of ten years.
A summary of the status of the Corporation's stock option plans as of
December 31, 2003 and September 30, 2003 and 2002, and changes during
the periods ended on those dates is presented below:
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
2003 2003 2002
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of period 674,130 $ 8.86 801,960 $8.33 831,000 $ 8.23
Granted 105,500 13.00 - - - -
Exercised (11,000) 5.00 (127,830) 5.41 (27,040) 5.00
Forfeited (2,500) 8.75 - - (2,000) 10.06
------- ------- ------- ----- ------- -------
Outstanding at end of period 766,130 $ 9.48 674,130 $8.86 801,960 $ 8.33
======= ======= ======= ===== ======= =======
Options exercisable at period-end 766,130 $ 9.48 674,130 $8.86 801,960 $ 8.33
======= ======= ======= ===== ======= =======
Weighted-average fair value of
options granted during the period $ 2.38 $ - $ -
======= ===== =======
The following information applies to options outstanding at December 31,
2003:
Number outstanding 244,630
Range of exercise prices $ 5.00 - $6.75
Number outstanding 521,500
Range of exercise prices $8.75 - $13.25
Weighted-average exercise price $ 9.48
Weighted-average remaining contractual life 4.8 years
5. Critical Accounting Policies
Allowance for Loan Losses: It is the Company's policy to provide
valuation allowances for estimated losses on loans based upon past loss
experience, trends in the level of delinquent and specific problem
loans, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and current
economic conditions in the Company's primary market areas. When the
collection of a loan becomes doubtful, or otherwise troubled, the
Company records a loan loss provision equal to the difference between
the fair value of the property securing the loan and the loan's
carrying value. Major loans and major lending areas are reviewed
periodically to determine potential problems at an early date. The
allowance for loan losses is increased by charges to earnings and
decreased by charge-offs (net of recoveries).
10
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three-month periods ended December 31, 2003 and 2002
5. Critical Accounting Policies (continued)
The Company accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." This Statement
requires that impaired loans be measured based upon the present value
of expected future cash flows discounted at the loan's effective
interest rate or, as an alternative, at the loans' observable market
price or fair value of the collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the
loan agreement. In applying the provisions of SFAS No. 114, the Company
considers its investment in one-to-four family residential loans and
consumer installment loans to be homogeneous and therefore excluded
from separate identification for evaluation of impairment. With respect
to the Company's investment in commercial and other loans, and its
evaluation of impairment thereof, such loans are collateral dependent
and as a result are carried as a practical expedient at the lower of
cost or fair value.
It is the Company's policy to charge off unsecured credits that are
more than ninety days delinquent. Similarly, collateral dependent loans
which are more than ninety days delinquent are considered to constitute
more than a minimum delay in repayment and are evaluated for impairment
under SFAS No. 114 at that time.
Mortgage Servicing Rights: Mortgage servicing rights are accounted for
pursuant to the provisions of SFAS No. 140. "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities,"
which requires that the Company recognize as separate assets, rights to
service mortgage loans for others, regardless of how those servicing
rights are acquired. An institution that acquires mortgage servicing
rights through either the purchase or origination of mortgage loans and
sells those loans with servicing rights retained must allocate some of
the cost of the loans to the mortgage servicing rights.
SFAS No. 140 requires that capitalized mortgage servicing rights and
capitalized excess servicing receivables be assessed for impairment.
Impairment is measured based on fair value. The mortgage servicing
rights recorded by the Company, calculated in accordance with the
provisions of SFAS No. 140, were segregated into pools for valuation
purposes, using as pooling criteria the loan term and coupon rate. Once
pooled, each grouping of loans was evaluated on a discounted earnings
basis to determine the present value of future earnings that a
purchaser could expect to realize from each portfolio. Earnings were
projected from a variety of sources including loan servicing fees,
interest earned on float, net interest earned on escrows, miscellaneous
income, and costs to service the loans. The present value of future
earnings is the "economic" value of the pool, i.e., the net realizable
present value to an acquiror of the acquired servicing.
11
WINTON FINANCIAL CORPORATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
In the following pages, management presents an analysis of the financial
condition of Winton Financial as of December 31, 2003, and the results of
operations for the three-month period ended December 31, 2003 compared to the
same period in the prior year. In addition to this historical information, the
following discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, Winton Financial's operations and Winton
Financial's actual results could differ significantly from those discussed in
the forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein, but also include changes in
the economy and interest rates in the nation and in Winton Financial's general
market area. Without limiting the foregoing, the following statements in this
discussion and analysis are forward-looking and are, therefore, subject to such
risks and uncertainties:
1. Management's analysis of the interest rate risk of Winton Savings;
2. Management's discussion of the liquidity of Winton Savings' assets and the
regulatory capital of Winton Savings;
3. Management's determination of the amount and adequacy of the allowance for
loan losses; and
4. Management's opinion as to the effects of recent accounting pronouncements.
Discussion of Financial Condition Changes from September 30, 2003 to December
31, 2003
The Corporation had total assets of $556.6 million at December 31, 2003, an
increase of $12.7 million, or 2.3%, over the September 30, 2003 total. The
increase in assets was comprised of a $5.2 million increase in cash and
interest-bearing deposits, a $2.7 million increase in investment securities, an
increase in mortgage-backed securities of $1.3 million, an increase in loans
receivable, including loans held for sale of $3.8 million and an increase in
office premises and equipment of $196,000. The growth in assets was funded
primarily by an increase in deposits of $7.0 million, an increase in advances
from the FHLB and other borrowings of $5.4 million, undistributed earnings of
$404,000 and proceeds from the exercise of stock options of $89,000, which were
partially offset by an acquisition of treasury stock totaling $1.0 million.
Investment securities totaled $24.2 million at December 31, 2003, an increase of
$2.7 million, or 12.8%, over September 30, 2003 levels. The increase in
investment securities resulted from purchases of $5.1 million, which were
partially offset by sales, maturities and calls totaling $2.5 million. Purchases
during the period were comprised of municipal securities and short-term U.S.
Treasury and government agency securities.
Mortgage-backed securities totaled $7.7 million at December 31, 2003, an
increase of $1.3 million, or 21.2%, over September 30, 2003. The growth during
2004 was due primarily to purchases of mortgage-backed securities totaling $2.0
million, which were partially offset by principal repayments of $625,000 during
the period. The mortgage-backed purchases during the first quarter of fiscal
2004 consisted of adjustable rate mortgages guaranteed by FNMA and FHLMC.
Loans receivable totaled $491.3 million at December 31, 2003, an increase of
$3.8 million, or 0.8%, compared to the September 30, 2003 total. Loan
originations of $74.0 million exceeded principal repayments of $42.6 million and
loan sales of $27.7 million during the period.
12
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from September 30, 2003 to December
31, 2003 (continued)
The Company's allowance for loan losses totaled $2.3 million at December 31,
2003, an increase of $60,000, or 2.7%, over the total at September 30, 2003. At
December 31, 2003, the allowance represented approximately .46% of the total
loan portfolio and 67.3% of total nonperforming loans. Nonperforming loans
totaled $3.5 million and $3.8 million at December 31, 2003 and September 30,
2003, respectively. At December 31, 2003, nonperforming loans were comprised of
$839,000 of loans secured by one- to four-family residential real estate, $2.6
million of loans secured by nonresidential real estate, $15,000 in commercial
loans and $18,000 in consumer loans. Nonperforming nonresidential loans
consisted primarily of a $2.2 million loan collateralized by an office building
and lot with a loan-to-value ratio of approximately 73%. At both December 31,
2003 and September 30, 2003, the ratio of total nonperforming loans to total
loans amounted to .75%. Management believes all nonperforming loans are
adequately collateralized and that there are no unreserved losses on such
nonperforming loans at December 31, 2003. Although management believes that its
allowance for loan losses at December 31, 2003 is adequate based on the
available facts and circumstances, there can be no assurance that additions to
such allowance will not be necessary in future periods, which could adversely
affect Winton Financial's results of operations.
Office premises and equipment increased by $196,000, or 3.2%, since September
30, 2003. The increase is due to the opening of a new branch office, relocation
of another branch office and the expansion of the mortgage operations center,
coupled with technology upgrades to the computer system.
Deposits totaled $361.3 million at December 31, 2003, an increase of $7.0
million, or 2.0%, over September 30, 2003 levels. Deposits increased during the
three months ended December 31, 2003, due primarily to the opening of a new
branch and management's continuing efforts to grow the portfolio through
marketing and pricing strategies. Advances from the FHLB and other borrowings
totaled $144.0 million at December 31, 2003, an increase of $5.4 million, or
3.9%, from September 30, 2003 levels. During the three months ended December 31,
2003, the Company borrowed $22.9 million from the FHLB, which was comprised of
advances with an average term of 5.0 years and a weighted-average interest rate
of 3.88%, offset by $17.5 million of such advances being repaid during the
period.
Shareholders' equity totaled $43.8 million at December 31, 2003, a decrease of
$393,000, or 0.9%, from September 30, 2003. The decrease resulted from the
purchase of $1.0 million of treasury stock and dividends paid totaling $506,000
which together exceeded net earnings of $910,000, proceeds from exercise of
options of $89,000 and an increase in unrealized gains available for sale
securities of $119,000.
The Company is required to meet minimum capital standards promulgated by the
Office of Thrift Supervision (the "OTS"). At December 31, 2003, the Company's
regulatory capital exceeded such minimum capital requirements.
Comparison of Operating Results for the Three-Month Periods ended December 31,
2003 and 2002
General
The Corporation recorded net earnings for the three months ended December 31,
2003, totaling $910,000, a decrease of $892,000, or 49.5%, from the $1.8 million
in net earnings recorded for the same period in 2002. The decrease in net
earnings was comprised of a $811,000 decrease in other income and a $734,000
increase in general, administrative and other expense, which were partially
offset by a $499,000 reduction in federal income taxes, an $80,000 decline in
the provision for losses on loans and a $74,000 increase in net interest income.
13
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods ended December 31,
2003 and 2002 (continued)
Net Interest Income
Interest income on loans and mortgage-backed securities totaled $7.6 million for
the three months ended December 31, 2003, a decrease of $423,000, or 5.3%,
compared to the same quarter in 2002. The decrease resulted primarily from a
reduction in the weighted-average yield of 77 basis points, to 6.11% for the
three months ended December 31, 2003, which was partially offset by an increase
in the average balance outstanding of $31.3 million, or 6.7%, quarter to
quarter.
Interest income on investment securities and interest-bearing deposits increased
by $47,000, or 23.6%, for the three months ended December 31, 2003, compared to
the same quarter in 2002, comprised of an increase of 2 basis points in the
weighted-average yield, to 2.45% for the 2003 quarter and an increase of $7.5
million, or 22.8%, in the average balance outstanding quarter to quarter.
Interest expense on deposits decreased by $428,000, or 16.3%, for the three
months ended December 31, 2003, compared to the same period in 2002. The
decrease was primarily attributable to a 66 basis point decrease in the
weighted-average cost of deposits, which was partially offset by a $21.6
million, or 6.4%, increase in the average balance of deposits outstanding
quarter to quarter. The weighted-average cost of deposits amounted to 2.47% and
3.13% for the three months ended December 31, 2003 and 2002, respectively.
Interest expense on borrowings decreased by $22,000, or 1.3%, during the three
months ended December 31, 2003, compared to the same quarter in 2002, due
primarily to a 67 basis point decrease in the weighted-average cost of
borrowings, to 4.89% for the three months ended December 31, 2003, which was
partially offset by a $15.6 million, or 12.4% increase in average balance of
FHLB advances and other borrowings outstanding quarter to quarter. The decreases
in yields on interest-earning assets and costs of interest-bearing liabilities
were due primarily to the overall decrease in interest rates in the economy.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $74,000, or 1.9%, to $3.9 million for the three
months ended December 31, 2003, compared to the same quarter in 2002. The
interest rate spread decreased by 10 basis points, to 2.69% for the three months
ended December 31, 2003, and the net interest margin decreased 17 basis points
to 2.91% for the three months ended December 31, 2003.
Provision for Losses on Loans
Winton Savings charges a provision for losses on loans to earnings to bring the
total allowance for loan losses to a level considered appropriate by management
based on historical experience, the volume and type of lending conducted by the
Company, the status of past due principal and interest payments, and general
economic conditions, particularly as such conditions relate to the Company's
loan portfolio and market area. As a result of such analysis, management
recorded a $75,000 provision for losses on loans during the quarter ended
December 31, 2003, compared to a provision of $155,000 recorded in the 2002
period. The provision is based on an internal matrix which evaluates reserves
based upon delinquency levels, risk classification of credits and inherent loss
factors within the portfolio. There can be no assurance that the allowance for
loan losses of the Company will be adequate to cover losses on nonperforming
assets in the future.
14
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods ended December 31,
2003 and 2002 (continued)
Provision for Losses on Loans (continued)
The following table sets forth information regarding the Company's delinquent
loans, nonperforming assets and the allowance for loan losses.
DECEMBER 31, SEPTEMBER 30,
2003 2003
(Dollars in thousands)
Loans delinquent
30 to 89 days $ 8,585 $ 4,999
90 or more days 3,455 3,759
------- -------
Total delinquent loans $12,040 $ 8,758
======= =======
Loans accounted for on nonaccrual basis $ 3,023 $ 3,195
Loans greater than 90 days delinquent and still accruing 432 564
------- -------
Total nonperforming loans 3,455 3,759
Real estate acquired through foreclosure 771 846
------- -------
Total nonperforming assets $ 4,226 $ 4,605
======= =======
Allowance for loan losses $ 2,325 $ 2,265
======= =======
Allowance for loan losses to total loans 0.46% 0.45%
Allowance for loan losses to nonperforming loans 67.29% 60.26%
Allowance for loan losses to nonperforming assets 55.02% 49.19%
Nonperforming loans to total loans 0.75% 0.75%
While management believes that, based on information currently available, the
allowance for loan losses is sufficient to cover losses inherent in the
Company's loan portfolio at this time, no assurance can be given that the level
of the allowance will be sufficient to cover future loan losses or that future
adjustments to the allowance will not be necessary if economic and/or other
conditions differ substantially from the economic and other conditions
considered by management in evaluating the adequacy of the current level of the
allowance.
Other Income
Other income totaled $670,000 for the three months ended December 31, 2003, a
decrease of $811,000, or 54.8%, compared to the 2002 period, due primarily to a
$462,0000, or 49.0%, decrease in mortgage banking income, the absence of
$340,000 in non-recurring gains on the sale of office premises and investment
securities and a $21,000 net decrease in gain on sale of real estate acquired
through foreclosure. These decreases were partially offset by a $12,000, or
6.9%, gain in other operating income quarter to quarter. The decrease in
mortgage banking income was due primarily to the decrease in sales volume
quarter to quarter as interest rates increased from forty year historic lows.
The increase in other operating income was primarily attributable to service
charge fees on checking accounts and fee income from loan payoff and loan
subordination charges.
15
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods ended December 31,
2003 and 2002 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $3.2 million for the three
months ended December 31, 2003, an increase of $734,000, or 29.8%, compared to
the same period in 2002. The increase was due to increases in employee
compensation and benefits of $407,000, or 29.9%, occupancy and equipment expense
of $156,000, or 57.4%, other operating expense of $77,000, or 14.3%, advertising
expenses of $52,000, or 86.7%, franchise tax expense of $34,000, or 34.0%, and
data processing of $7,000, or 6.2%. Employee compensation and benefits increased
primarily due to a reduction in deferred salary cost resulting from the decline
in loan production, an increase in health insurance costs quarter to quarter and
a $123,000 one-time supplemental retirement payment. The increase in occupancy
and equipment expense resulted from the aforementioned opening and relocation of
two branches, the expansion of the branch network and mortgage operation center
plus technology upgrades to computer systems. The increase in advertising
expense is due in large part to the launch of a new advertising campagin and the
opening of a new branch. The increase in franchise tax and data processing was
due to the Corporation's growth quarter to quarter. Increases in real estate
owned expenses and professional fees primarily contributed to the increase in
other operating expense quarter to quarter.
Federal Income Taxes
The provision for federal income taxes amounted to $406,000 for the three months
ended December 31, 2003, a decrease of $499,000 or 55.1%, compared to the same
period in 2002. The decrease was due to a reduction in earnings before taxes of
$1.4 million, or 51.4%, coupled with the increase in non-taxable municipal bond
interest income quarter to quarter. The effective tax rates were 30.9% and 33.4%
for the three-month periods ended December 31, 2003 and 2002, respectively.
Liquidity and Capital Resources
Winton Savings maintains sufficient funds to meet deposit withdrawals, loan
commitments and expenses. Control of the Company's cash flow requires the
anticipation of deposit flows and loan payments. The Company's primary sources
of funds are deposits, borrowings, principal and interest repayments on loans
and proceeds from the sale of mortgage loans.
At December 31, 2003, Winton Savings had $137.9 million of certificates of
deposit maturing within one year. It has been the Company's historic experience
that such certificates of deposit will be renewed at Winton Savings' market
rates of interest. It is management's belief that maturing certificates of
deposit over the next year will similarly be renewed at market rates of interest
without a material adverse effect on results of operations.
In the event that certificates of deposit cannot be renewed at prevailing market
rates, the Company can obtain additional advances from the FHLB of Cincinnati.
At December 31, 2003, the Company had $140.6 million of outstanding FHLB
advances, with the ability to borrow an additional $54.6 million. The Company
has also utilized brokered deposits as a supplement to its local deposits when
such funds are attractively priced in relation to the local market. As of
December 31, 2003, the Company had $9.8 million in brokered deposits.
Winton Financial believes that the Company's liquidity posture at December 31,
2003, is adequate to meet outstanding loan commitments and other cash
requirements.
16
WINTON FINANCIAL CORPORATION
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Corporation's disclosures regarding
market risk since the Corporation's Form 10-K filed with the Securities and
Exchange Commission for the fiscal year ended September 30, 2003.
ITEM 4 CONTROLS AND PROCEDURES
The Corporation's Chief Executive Officer and Chief Financial Officer evaluated
the disclosure controls and procedures (as defined under Rules 13a-14(c) and
15d-14(c) of the Securities Exchange Act of 1934, as amended) as of the end of
the period covered by this quarterly report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures are effective.
There were no significant changes in the Corporation's internal controls or in
other factors that materially affected, or are reasonably likely to materially
affect, these controls.
17
Winton Financial Corporation
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
On January 30, 2004, the Annual Meeting of Shareholders of Winton
Financial Corporation was held. The following matters were voted upon
by the shareholders, as follows:
1) Three directors were nominated for re-election and were
re-elected for terms expiring in 2006, pursuant to the
following votes:
Robert E. Hoeweler For: 3,619,679 Abstain: 111,414
Timothy M. Mooney For: 3,619,662 Abstain: 111,431
J. Clay Stinnett For: 3,619,162 Abstain: 111,931
2) The ratification of the selection of Grant Thornton LLP as the
auditors of Winton Financial for the current fiscal year.
For: 3,712,553 Against: 9,200 Abstain: 9,340
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Employment Agreement between WFC, Winton and Robert L.
Bollin, dated January 1, 2004.
10.2 Employment Agreement between WFC, Winton and Gregory J.
Bollin, dated January 1, 2004.
10.3 Employment Agreement between WFC, Winton and Jill M. Burke,
dated January 1, 2004.
10.4 Severance Agreement between Winton and Gregory P. Niesen,
dated January 1, 2004.
31.1 Written Statement of Chief Executive Officer furnished
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350
31.2 Written Statement of Chief Financial Officer furnished
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350
32.1 Written Statement of Chief Executive Officer furnished
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350
32.2 Written Statement of Chief Financial Officer furnished
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350
18
Winton Financial Corporation
PART II (continued)
ITEM 6. Exhibits and Reports on Form 8-K (continued)
(b) Reports on Form 8-K: On January 22, 2004, a Form 8-K was filed
to report earnings for the quarter ended
December 31, 2003.
On December 22, 2003, a Form 8-K was filed
to report the issuance of a press release
regarding an announcement to employees of
a cost reduction program due to a decline
in loan originations.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 12, 2004 By: /s/Robert L. Bollin
-------------------------------
Robert L. Bollin
President
Date: February 12, 2004 By: /s/Jill M. Burke
-------------------------------
Jill M. Burke
Chief Financial Officer
20