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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 March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File 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 May 14, 2004, the latest practicable date, 4,605,538 shares of the
registrant's common stock, no par value, were issued and outstanding.
Page 1 of 21
Winton Financial Corporation
INDEX
Page
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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 20
SIGNATURES 21
2
ITEM 1 FINANCIAL STATEMENTS
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
MARCH 31, SEPTEMBER 30,
2004 2003
(Unaudited)
ASSETS
Cash and due from banks $ 2,073 $ 1,848
Interest-bearing deposits in other financial institutions 8,918 7,648
------------ ------------
Cash and cash equivalents 10,991 9,496
Investment securities available for sale - at market 15,273 21,466
Mortgage-backed securities available for sale - at market 3,845 2,103
Mortgage-backed securities held to maturity - at amortized cost,
approximate market value of $3,398 and $4,204 at
March 31, 2004 and September 30, 2003, respectively 3,451 4,269
Loans receivable - net 489,193 481,364
Loans held for sale - at lower of cost or market 5,891 6,116
Office premises and equipment - at depreciated cost 6,711 6,131
Real estate acquired through foreclosure 1,247 846
Federal Home Loan Bank stock - at cost 8,320 8,156
Accrued interest receivable 2,544 2,571
Prepaid expenses and other assets 905 786
Intangible assets - net of amortization 66 97
Prepaid federal income taxes 527 501
------------ ------------
Total assets $ 548,964 $ 543,902
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 365,342 $ 354,296
Advances from the Federal Home Loan Bank 128,589 136,612
Other borrowed money 3,000 2,000
Accounts payable on mortgage loans serviced for others 429 401
Advance payments by borrowers for taxes and insurance 2,360 2,433
Other liabilities 1,733 2,459
Deferred federal income taxes 1,773 1,479
------------ ------------
Total liabilities 503,226 499,680
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;
4,718,568 and 4,592,884 shares issued at March 31, 2004 and
September 30, 2003, respectively - -
Additional paid-in capital 12,317 11,285
Retained earnings 34,561 33,213
Treasury stock - 117,630 and 40,300 shares at March 31, 2004 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 394 253
------------ ------------
Total shareholders' equity 45,738 44,222
------------ ------------
Total liabilities and shareholders' equity $ 548,964 $ 543,902
============ ============
3
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
SIX MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
(Unaudited)
Interest income
Loans $ 14,964 $ 15,594 $ 7,434 $ 7,628
Mortgage-backed securities 144 134 72 75
Investment securities 316 192 157 109
Interest-bearing deposits and other 176 237 89 121
---------- ---------- ---------- ----------
Total interest income 15,600 16,157 7,752 7,933
Interest expense
Deposits 4,300 5,004 2,095 2,371
Borrowings 3,391 3,492 1,663 1,742
---------- ---------- ---------- ----------
Total interest expense 7,691 8,496 3,758 4,113
---------- ---------- ---------- ----------
Net interest income 7,909 7,661 3,994 3,820
Provision for losses on loans 150 305 75 150
---------- ---------- ---------- ----------
Net interest income after provision
for losses on loans 7,759 7,356 3,919 3,670
Other income
Mortgage banking income 1,028 1,740 547 797
Gain on sale of office premises - 243 - -
Gain on sale of investment securities designated
as available for sale 252 97 252 -
Gain on sale of real estate acquired through foreclosure 2 25 - 2
Other operating 408 358 221 183
---------- ---------- ---------- ----------
Total other income 1,690 2,463 1,020 982
General, administrative and other expense
Employee compensation and benefits 3,208 2,759 1,438 1,396
Occupancy and equipment 852 601 424 329
Data processing 263 224 143 111
Franchise taxes 261 208 127 108
Amortization of intangible assets 31 31 15 16
Advertising 209 124 97 64
Other operating 1,152 1,004 538 467
---------- ---------- ---------- ----------
Total general, administrative and other expense 5,976 4,951 2,782 2,491
---------- ---------- ---------- ----------
Earnings before income taxes 3,473 4,868 2,157 2,161
Federal income taxes
Current 882 1,673 475 674
Deferred 221 (54) 222 40
---------- ---------- ---------- ----------
Total federal income taxes 1,103 1,619 697 714
---------- ---------- ---------- ----------
NET EARNINGS $ 2,370 $ 3,249 $ 1,460 $ 1,447
========== ========== ========== ==========
EARNINGS PER SHARE
Basic $ 0.52 $ 0.72 $ 0.32 $ 0.32
========== ========== ========== ==========
Diluted $ 0.51 $ 0.70 $ 0.31 $ 0.31
========== ========== ========== ==========
Dividends per share $ 0.2250 $ 0.2050 $ 0.1125 $ 0.1025
========== ========== ========== ==========
4
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
SIX MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
(Unaudited)
Net earnings $ 2,370 $ 3,249 $ 1,460 $ 1,447
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during
the period, net of taxes (benefits) of $158, $(13),
$97 and $(6) for the respective periods 307 (26) 188 (12)
Reclassification adjustment for realized gains included
in earnings, net of taxes of $86, $33 and $86, for the
respective periods (166) (64) (166) -
---------- ---------- ---------- ----------
Comprehensive income $ 2,511 $ 3,159 $ 1,482 $ 1,435
========== ========== ========== ==========
Accumulated comprehensive income $ 394 $ 250 $ 394 $ 250
========== ========== ========== ==========
5
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31,
(In thousands)
2004 2003
(Unaudited)
Cash flows from operating activities:
Net earnings for the period $ 2,370 $ 3,249
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 44 11
Amortization of deferred loan origination fees (138) (94)
Depreciation and amortization 342 198
Amortization of intangible assets 31 31
Provision for losses on loans 150 305
Gain on sale of mortgage loans (979) (1,670)
Loans originated for sale in the secondary market (64,247) (111,537)
Proceeds from sale of loans in the secondary market 65,451 134,475
Gain on sale of office premises - (243)
Gain on sale of investments designated as available for sale (252) (97)
Gain on sale of real estate acquired through foreclosure (2) (25)
Federal Home Loan Bank stock dividends (164) (167)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 27 201
Prepaid expenses and other assets (119) (76)
Accounts payable on mortgage loans serviced for others 28 (128)
Other liabilities (726) 673
Federal income taxes
Current (26) (85)
Deferred 221 (54)
------------ ------------
Net cash provided by operating activities 2,011 24,967
Cash flows from investing activities:
Principal repayments on mortgage-backed securities 1,070 721
Purchase of mortgage-backed securities designated as available for sale (2,001) (2,000)
Proceeds from maturity/calls of investment securities designated
as available for sale 5,000 6,315
Proceeds from sale of securities designated as available for sale 8,689 3,622
Purchase of investment securities designated as available for sale (7,067) (12,299)
Loan principal repayments 77,326 106,521
Loan disbursements (85,772) (115,268)
Proceeds from sale of loan participations 125 -
Proceeds from sale of real estate acquired through foreclosure 72 771
Proceeds from sale of office premises and equipment - 366
Purchase of office premises and equipment (913) (1,138)
Additions to real estate acquired through foreclosure - (160)
------------ ------------
Net cash used in investing activities (3,471) (12,549)
------------ ------------
Net cash provided by (used in) operating and investing
activities (balance carried forward) (1,460) 12,418
------------ ------------
6
WINTON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended March 31,
(In thousands)
2004 2003
(Unaudited)
Net cash provided by (used in) operating and investing
activities (balance brought forward) $ (1,460) $ 12,418
Cash flows from financing activities:
Net increase in deposit accounts 11,046 1,808
Repayments of Federal Home Loan Bank advances (61,923) (14,253)
Proceeds from Federal Home Loan Bank advances and other borrowings 54,900 15,000
Advances by borrowers for taxes and insurance (73) 46
Proceeds from exercise of stock options 1,032 258
Dividends paid on common stock (1,022) (919)
Purchase of treasury stock (1,005) -
------------ ------------
Net cash provided by financing activities 2,955 1,940
------------ ------------
Net increase in cash and cash equivalents 1,495 14,358
Cash and cash equivalents at beginning of period 9,496 11,965
------------ ------------
Cash and cash equivalents at end of period $ 10,991 $ 26,323
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 635 $ 1,695
============ ============
Interest on deposits and borrowings $ 7,771 $ 8,468
============ ============
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 141 $ (90)
============ ============
Recognition of mortgage servicing rights in accordance with
SFAS No. 140 $ 240 $ 190
============ ============
Transfers from loans to real estate acquired through foreclosure $ 480 $ -
============ ============
7
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six- and three-month periods ended March 31, 2004 and 2003
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 six- and three-month periods ended March 31, 2004, 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 plans. The computations are as follows:
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
Weighted-average common shares
outstanding (basic) 4,536,609 4,477,664 4,570,189 4,487,565
Dilutive effect of assumed exercise
of stock options 111,312 128,682 113,542 128,683
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 4,647,921 4,606,346 4,683,731 4,616,248
========= ========= ========= =========
Options to purchase 155,500 shares of common stock with a
weighted-average exercise price of $13.03 were outstanding at March 31,
2004, but were excluded from the computation of common share
equivalents 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 six- and three-month periods ended March 31, 2004 and 2003
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 March 31, 2004, 179,446 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 March 31, 2004, 372,530 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 March 31,
2004, there were 347,485 shares ungranted under the 2003 Stock Option
Plan. For the three months ended March 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.
SIX MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
Net earnings (In thousands) As reported $ 2,370 $ 3,249 $ 1,460 $ 1,447
Stock-based compensation, net of tax (166) - - -
--------- --------- --------- ---------
Pro-forma $ 2,204 $ 3,249 $ 1,460 $ 1,447
========= ========= ========= =========
Earnings per share
Basic As reported $ 0.52 $ 0.72 $ 0.32 $ 0.32
Stock-based compensation, net of tax (0.04) - - -
--------- --------- --------- ---------
Pro-forma $ 0.48 $ 0.72 $ 0.32 $ 0.32
========= ========= ========= =========
Diluted As reported $ 0.51 $ 0.70 $ 0.31 $ 0.31
Stock-based compensation, net of tax (0.04) - - -
--------- --------- --------- ---------
Pro-forma $ 0.47 $ 0.70 $ 0.31 $ 0.31
========= ========= ========= =========
9
WINTON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six- and three-month periods ended March 31, 2004 and 2003
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
March 31, 2004 and September 30, 2003 and 2002, and changes during the
periods ended on those dates is presented below:
SIX MONTHS ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
2004 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 (125,684) 6.05 (127,830) 5.41 (27,040) 5.00
Forfeited (2,500) 8.75 - - (2,000) 10.06
-------- ----------- -------- --------- ------- ---------
Outstanding at end of period 651,446 $ 10.08 674,130 $ 8.86 801,960 $ 8.33
======== =========== ======== ========= ======= =========
Options exercisable at period-end 651,446 674,130 $ 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 March 31, 2004:
Number outstanding 149,446
Exercise price $ 6.75
Number outstanding 502,000
Range of exercise prices $8.75 - $13.25
Weighted-average exercise price $ 10.08
Weighted-average remaining contractual life 4.6 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 six- and three-month periods ended March 31, 2004 and 2003
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 March 31, 2004, and the results of
operations for the three-month and six-month periods ended March 31, 2004
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 March 31,
2004
The Corporation had total assets of $549.0 million at March 31, 2004, an
increase of $5.1 million, or 0.9%, over the September 30, 2003 total. The
increase in assets was comprised of a $1.5 million increase in cash and
interest-bearing deposits, an increase in mortgage-backed securities of
$924,000, an increase in loans receivable, including loans held for sale of $7.6
million and an increase in office premises and equipment of $580,000. These
increases were partially offset by a $6.2 million decline in investments
available for sale. The growth in assets was funded primarily by an increase in
deposits of $11.0 million, undistributed earnings of $1.3 million and proceeds
from the exercise of stock options of $1.0 million, which were partially offset
by a decrease in advances from the FHLB and other borrowings of $7.0 million and
an acquisition of treasury stock totaling $1.0 million.
Investment securities totaled $15.3 million at March 31, 2004, a decrease of
$6.2 million, or 28.9%, from September 30, 2003 levels. The decrease in
investment securities resulted from sales, maturities and calls of $13.7
million, which were partially offset by purchases totaling $7.1 million. During
the period, $8.2 million of municipal bonds with maturities ranging from 2009 to
2018 were sold to shorten the average life of the investment portfolio.
Purchases during the period were comprised of municipal securities and
short-term U.S. Treasury and government agency securities.
Mortgage-backed securities totaled $7.3 million at March 31, 2004, an increase
of $924,000, or 14.5%, 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 $1.1 million during the
period. The mortgage-backed securities purchases during the period consisted of
adjustable rate mortgages guaranteed by FNMA and FHLMC.
Loans receivable totaled $495.1 million at March 31, 2004, an increase of $7.6
million, or 1.6%, compared to the September 30, 2003 total. Loan originations of
$150.0 million exceeded principal repayments of $77.3 million and loan sales of
$64.5 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 March 31,
2004 (continued)
The Company's allowance for loan losses totaled $2.4 million at March 31, 2004,
an increase of $116,000, or 5.1%, over the total at September 30, 2003. At March
31, 2004, the allowance represented approximately 0.47% of the total loan
portfolio and 58.1% of total nonperforming loans. Nonperforming loans totaled
$4.1 million and $3.8 million at March 31, 2004 and September 30, 2003,
respectively. At March 31, 2004, nonperforming loans were comprised of $769,000
of loans secured by one- to four-family residential real estate, $3.1 million of
loans secured by nonresidential real estate, $238,000 in multi-family loans and
$11,000 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 March 31, 2004 and September
30, 2003, the ratio of total nonperforming loans to total loans amounted to
0.80% and 0.75%, respectively. Management believes all nonperforming loans are
adequately collateralized and that there are no unreserved losses on such
nonperforming loans at March 31, 2004. Although management believes that its
allowance for loan losses at March 31, 2004 is adequate based on the available
facts and circumstances, there can be no assurance that additions to such
allowance will not be necessary in future periods, which could adversely affect
Winton Financial's results of operations.
Office premises and equipment increased by $580,000, or 9.5%, since September
30, 2003. The increase is due to expansion of the branch network system and the
mortgage operations center coupled with technology upgrades to the computer
system.
Deposits totaled $365.3 million at March 31, 2004, an increase of $11.0 million,
or 3.1%, over September 30, 2003 levels. Deposits increased during the six
months ended March 31, 2004, 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 $131.6
million at March 31, 2004, a decrease of $7.0 million, or 5.1%, from September
30, 2003 levels. During the six months ended March 31, 2004, the Company repaid
$61.9 million in advances from the FHLB and obtained new borrowings totaling
$54.9 million. New FHLB borrowings during period consisted of $11.0 million in
fixed rate advances with terms from 48 to 84 months, and $6.0 million of
callable advances and daily cash management advances used for liquidity.
Shareholders' equity totaled $45.7 million at March 31, 2004, an increase of
$1.5 million, or 3.4%, from September 30, 2003. The increase resulted from net
earnings of $2.4 million, proceeds from exercise of options of $1.0 million and
an increase in unrealized gains on available for sale securities of $141,000,
all of which exceeded the purchase of treasury stock of $1.0 million and
dividends paid totaling $1.0 million.
The Company is required to meet minimum capital standards promulgated by the
Office of Thrift Supervision (the "OTS"). At March 31, 2004, the Company's
regulatory capital exceeded such minimum capital requirements.
Comparison of Operating Results for the Three-Month Periods ended March 31, 2004
and 2003
General
The Corporation recorded net earnings for the three months ended March 31, 2004,
totaling $1.5 million, an increase of $13,000, or 0.9%, from the $1.4 million in
net earnings recorded for the same period in 2003. The increase in net earnings
was comprised of a $174,000 increase in net interest income, a $75,000 decrease
in the provision for losses on loans, a $38,000 increase in other income and a
reduction in federal income tax expense of $17,000, all of which were partially
offset by a $291,000 increase in general, administrative and other expenses.
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 March 31, 2004
and 2003 (continued)
Net Interest Income
Interest income on loans and mortgage-backed securities totaled $7.5 million for
the three months ended March 31, 2004, a decrease of $197,000, or 2.6%, compared
to the same quarter in 2003. The decrease resulted primarily from a reduction in
the weighted-average yield of 78 basis points, to 5.98% for the three months
ended March 31, 2004, which was partially offset by an increase in the average
balance outstanding of $46.2 million, or 10.1%, quarter to quarter.
Interest income on investment securities and interest-bearing deposits increased
by $16,000, or 6.9%, for the three months ended March 31, 2004, compared to the
same quarter in 2003, comprised of an increase of 55 basis points in the
weighted-average yield, to 2.54% for the 2004 quarter which was partially offset
by a decrease of $7.4 million, or 16.1%, in the average balance outstanding
quarter to quarter. The yield increase in the 2004 quarter was due to a shift in
balances from lower yielding interest-bearing deposits to longer term higher
yield investment securities quarter over quarter.
Interest expense on deposits decreased by $276,000, or 11.6%, for the three
months ended March 31, 2004, compared to the same period in 2003. The decrease
was primarily attributable to a 53 basis point decrease in the weighted-average
cost of deposits, which was partially offset by a $29.4 million, or 8.8%,
increase in the average balance of deposits outstanding quarter to quarter. The
weighted-average cost of deposits amounted to 2.31% and 2.84% for the three
months ended March 31, 2004 and 2003, respectively.
Interest expense on borrowings decreased by $79,000, or 4.5%, during the three
months ended March 31, 2004, compared to the same quarter in 2003, due primarily
to a 57 basis point decrease in the weighted-average cost of borrowings, to
4.75% for the three months ended March 31, 2004, which was partially offset by a
$8.9 million, or 6.8% 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 $174,000, or 4.6%, to $4.0 million for the
three months ended March 31, 2004, compared to the same quarter in 2003. The
interest rate spread decreased by 3 basis points, to 2.75% for the three months
ended March 31, 2004, and the net interest margin decreased 9 basis points to
2.95% for the three months ended March 31, 2004.
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 March
31, 2004, compared to a provision of $150,000 recorded in the 2003 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 March 31, 2004
and 2003 (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.
MARCH 31, SEPTEMBER 30,
2004 2003
(Dollars in thousands)
Loans delinquent
30 to 89 days $ 5,962 $4,999
90 or more days 4,096 3,759
-------- ------
Total delinquent loans $ 10,058 $8,758
======== ======
Loans accounted for on nonaccrual basis $ 2,311 $3,195
Loans greater than 90 days delinquent and still accruing 1,785 564
-------- ------
Total nonperforming loans 4,096 3,759
Real estate acquired through foreclosure 1,247 846
-------- ------
Total nonperforming assets $ 5,343 $4,605
======== ======
Allowance for loan losses $ 2,381 $2,265
======== ======
Allowance for loan losses to total loans 0.48% 0.45%
Allowance for loan losses to nonperforming loans 58.13% 60.26%
Allowance for loan losses to nonperforming assets 44.56% 49.19%
Nonperforming loans to total loans 0.80% 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 $1.0 million for the three months ended March 31, 2004, an
increase of $38,000, or 3.9%, compared to the 2003 period, due primarily to a
$252,000, increase in gains on sale of investments which were partially offset
by a $250,000, or 31.4%, decline in mortgage banking 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 $38,000, or 20.8%, increase in other operating income quarter
to quarter was primarily attributable in 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 March 31, 2004
and 2003 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $2.8 million for the three
months ended March 31, 2004, an increase of $291,000, or 11.7%, compared to the
same period in 2003. The increase was due to increases in employee compensation
and benefits of $42,000, or 3.0%, occupancy and equipment expense of $95,000, or
28.9%, data processing expense of $32,000, or 28.8%, franchise tax expense of
$19,000, or 17.6%, advertising expense of $33,000, or 51.6%, and other operating
expenses of $71,000, or 15.2%. Employee compensation and benefits increased
primarily due to a reduction in deferred salary cost resulting from the decline
in loan production and an increase in health insurance costs quarter to quarter.
The increase in occupancy and equipment expense resulted from the aforementioned
expansion of the branch network and mortgage operation center plus technology
upgrades to computer systems. The increase in franchise tax and data processing
was due to the Corporation's growth quarter to quarter. Increases in
communication and telephone expense 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 $697,000 for the three months
ended March 31, 2004, a decrease of $17,000 or 2.4%, compared to the same period
in 2003. The decrease was due to a reduction in earnings before taxes of $4,000,
or 0.2%, coupled with the increase in non-taxable municipal bond interest income
quarter to quarter. The effective tax rates were 32.3% and 33.0% for the
three-month periods ended March 31, 2004 and 2003, respectively.
Comparison of Operating Results for the Six-Month Periods ended March 31, 2004
and 2003
General
The Corporation recorded net earnings for the six months ended March 31, 2004,
totaling $2.4 million, a decrease of $879,000, or 27.1%, from the $3.2 million
in net earnings recorded for the same period in 2003. The decrease in net
earnings was comprised of a $773,000 decrease in other income and a $1.0 million
increase in general, administrative and other expense, which were partially
offset by a $516,000 reduction in federal income taxes, a $155,000 decline in
the provision for losses on loans and a $248,000 increase in net interest
income.
Net Interest Income
Interest income on loans and mortgage-backed securities totaled $15.1 million
for the six months ended March 31, 2004, a decrease of $620,000, or 3.9%,
compared to the same period in 2003. The decrease resulted primarily from a
reduction in the weighted-average yield of 78 basis points, to 6.04% for the six
months ended March 31, 2004, which was partially offset by an increase in the
average balance outstanding of $39.0 million, or 8.5%, period to period.
Interest income on investment securities and interest-bearing deposits increased
by $63,000, or 14.7%, for the six months ended March 31, 2004, compared to the
same period in 2003, comprised of an increase of 40 basis points in the
weighted-average yield, to 2.54% for the 2004 quarter partially offset by a
decrease of $1.4 million, or 3.5%, in the average balance outstanding period to
period. The yield increase in the 2004 six month period was due to a shift to
longer term investment securities during 2004.
16
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six-Month Periods ended March 31, 2004
and 2003 (continued)
Net Interest Income (continued)
Interest expense on deposits decreased by $704,000, or 14.1%, for the six months
ended March 31, 2004, compared to the same period in 2003. The decrease was
primarily attributable to a 60 basis point decrease in the weighted-average cost
of deposits, which was partially offset by a $25.3 million, or 7.5%, increase in
the average balance of deposits outstanding period to period. The
weighted-average cost of deposits amounted to 2.39% and 2.99% for the six months
ended March 31, 2004 and 2003, respectively.
Interest expense on borrowings decreased by $101,000, or 2.9%, during the six
months ended March 31, 2004, compared to the same quarter in 2003, due primarily
to a 62 basis point decrease in the weighted-average cost of borrowings, to
4.84% for the six months ended March 31, 2004, which was partially offset by a
$12.4 million, or 9.7% increase in average balance of FHLB advances and other
borrowings outstanding period to period. 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 $248,000, or 3.2%, to $7.9 million for the six
months ended March 31, 2004, compared to the same period in 2003. The interest
rate spread decreased by 6 basis points, to 2.72% for the six months ended March
31, 2004, and the net interest margin decreased 12 basis points to 2.94 for the
six months ended March 31, 2004.
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 $150,000 provision for losses on loans for the six months ended March
31, 2004, compared to a provision of $305,000 recorded in the 2003 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.
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 $1.7 million for the six months ended March 31, 2004, a
decrease of $773,.000, or 31.4%, compared to the 2003 period, due primarily to a
$712,000, or 40.9%, decrease in mortgage banking income, the absence of $243,000
in non-recurring gains on the sale of office premises and a $23,000 net decrease
in gain on sale of real estate acquired through foreclosure. These decreases
were partially offset by a $155,000, or 159.8%, increase in gain on sale of
investment securities and a $50,000, or 14.0%, gain in other operating income
period to period. The decrease in mortgage banking income was due primarily to
the decrease in the volume of loan sales period to period as interest rates
increased from forty year historic lows. The increase in other operating income
was primarily attributable to increases in service charge fees on checking
accounts and fee income from loan payoff and loan subordination charges.
17
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six-Month Periods ended March 31, 2004
and 2003 (continued)
General, Administrative and Other Expense
General, administrative and other expense totaled $6.0 million for the six
months ended March 31, 2004, an increase of $1.0 million, or 20.7%, compared to
the same period in 2003. The increase was due to increases in employee
compensation and benefits of $449,000, or 16.3%, occupancy and equipment expense
of $251,000, or 41.8%, other operating expense of $148,000, or 14.7%,
advertising expenses of $85,000, or 68.5%, franchise tax expense of $53,000, or
25.5%, and data processing expense of $39,000, or 17.4%. 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 period to period and a $123,000 one-time supplemental retirement payment.
The increase in occupancy and equipment expense resulted from the aforementioned
expansion of the branch network and mortgage operation center plus technology
upgrades to computer systems. The increase in franchise tax and data processing
was due to the Corporation's growth period to period. Increases in real estate
owned expenses, professional fees, communication and telephone expenses and
non-deferred loan expenses primarily contributed to the increase in other
operating expense period to period.
Federal Income Taxes
The provision for federal income taxes amounted to $1.1 million for the six
months ended March 31, 2004, a decrease of $516,000 or 31.9%, compared to the
same period in 2003. The decrease was due to a reduction in earnings before
taxes of $1.4 million, or 28.7%, coupled with an increase in non-taxable
municipal bond interest income for the six months ended March 31, 2004. The
effective tax rates were 31.8% and 33.3% for the six-month periods ended March
31, 2004 and 2003, 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.
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 March 31, 2004, the Company had $128.6 million of outstanding FHLB advances,
with the ability to borrow an additional $54.5 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 March 31, 2004,
the Company had $10.3 million in brokered deposits.
18
WINTON FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
The following table sets forth information regarding the Corporation's
obligations and commitments to make future payments under contract as of March
31, 2004.
PAYMENTS DUE BY PERIOD
LESS MORE
THAN 1-3 3-5 THAN
1 YEAR YEARS YEARS 5 YEARS TOTAL
(In thousands)
Contractual obligations:
Operating lease obligations $ 160 $ 450 $ 248 $ 21 $ 879
Contracts to purchase office premises 80 - - - 80
Advances from the Federal Home Loan
Bank and other borrowings 59,500 30,000 36,000 6,089 131,589
Certificates of deposit 148,796 88,011 9,997 23 246,827
Amount of commitments expiration per period
Loans commitments to originate:
Home equity lines of credit 26,446 - - - 26,446
Commercial lines of credit 6,968 - - - 6,968
One- to four-family and multi-family loans 41,473 - - - 41,473
Non-residential real estate and land loans 7,932 - - - 7,932
Commitments to sell loans in the secondary market (19,374) - - - (19,374)
--------- --------- --------- --------- ---------
Total contractual obligations $ 271,981 $ 118,461 $ 46,245 $ 6,133 $ 442,820
========= ========= ========= ========= =========
Winton Financial believes that the Company's liquidity posture at March 31,
2004, is adequate to meet outstanding loan commitments and other cash
requirements.
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.
19
Winton Financial Corporation
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Securities
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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
(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.
20
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: May 14, 2004 By: /s/Robert L. Bollin
---------------------------
Robert L. Bollin
President
Date: May 14, 2004 By: /s/Jill M. Burke
---------------------------
Jill M. Burke
Chief Financial Officer
21