10-Q 1 l09017ae10vq.txt WINTON FINANCIAL CORPORATION 10-Q 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 June 30, 2004 ------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________ Commission File 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 August 12, 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

2 ITEM 1 FINANCIAL STATEMENTS WINTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except share data)

3 WINTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data)

4 WINTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)

5 WINTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended June 30, (In thousands)

6 WINTON FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the nine months ended June 30, (In thousands)

7 WINTON FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the nine- and three-month periods ended June 30, 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 nine- and three-month periods ended June 30, 2004, are 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:

Options to purchase 155,500 shares of common stock with a weighted-average exercise price of $13.03 were outstanding at June 30, 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 nine- and three-month periods ended June 30, 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 June 30, 2004, 174,846 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 June 30, 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 June 30, 2004, 99,470 options under the 2003 Plan were subject to exercise at the discretion of grantees through fiscal 2013, while 347,485 remained ungranted. For the nine months ended June 30, 2004, awards of 105,000 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, and 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.

9 WINTON FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the six- and three-month periods ended June 30, 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 June 30, 2004 and September 30, 2003 and 2002, and changes during the periods ended on those dates is presented below:

The following information applies to options outstanding at June 30, 2004: Number outstanding 144,846 Exercise price $6.75 Number outstanding 502,000 Range of exercise prices $8.75-$13.25 Weighted-average exercise price $10.10 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 nine- and three-month periods ended June 30, 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 June 30, 2004, and the results of operations for the three-month and nine-month periods ended June 30, 2004 compared to the same periods 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 June 30, 2004 The Corporation had total assets of $553.7 million at June 30, 2004, an increase of $9.8 million, or 1.8%, over the September 30, 2003 total. The increase in assets was comprised of a $2.4 million increase in mortgage-backed securities, an increase in loans receivable, including loans held for sale of $17.5 million and an increase in office premises and equipment of $727,000. These increases were partially offset by a $6.7 million decline in investments available for sale and a $6.1 million decline in cash and interest bearing deposits. The growth in assets was funded primarily by an increase in deposits of $13.0 million, undistributed earnings of $2.0 million and proceeds from the exercise of stock options of $1.1 million, which were partially offset by a decrease in advances from the FHLB and other borrowings of $3.5 million and an acquisition of 77,330 shares of treasury stock for a total purchase price of $1.0 million. Investment securities totaled $14.8 million at June 30, 2004, a decrease of $6.7 million, or 31.0%, from September 30, 2003 levels. The decrease in investment securities resulted from sales, maturities and calls of $17.9 million, which were partially offset by purchases totaling $11.4 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 $8.8 million at June 30, 2004, an increase of $2.4 million, or 37.7%, over September 30, 2003. The growth during 2004 was due primarily to purchases of mortgage-backed securities totaling $4.0 million, which were partially offset by principal repayments of $1.5 million during the period. The mortgage-backed securities purchased during the period consisted of adjustable rate mortgages guaranteed by GNMA, FNMA and FHLMC. Loans receivable totaled $505.0 million at June 30, 2004, an increase of $17.5 million, or 3.6%, compared to the September 30, 2003 total. Loan originations of $228.2 million exceeded principal repayments of $117.4 million and net loan sales of $92.6 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 June 30, 2004 (continued) The Company's allowance for loan losses totaled $2.4 million at June 30, 2004, an increase of $116,000, or 5.1%, over the total at September 30, 2003. At June 30, 2004, the allowance represented approximately .46% of the total loan portfolio and 54.6% of total nonperforming loans. Nonperforming loans totaled $4.4 million and $3.8 million at June 30, 2004 and September 30, 2003, respectively. At June 30, 2004, nonperforming loans were comprised of $983,000 of loans secured by one- to four-family residential real estate, $2.3 million of loans secured by nonresidential real estate, $929,000 in multi-family loans and $149,000 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 June 30, 2004 and September 30, 2003, the ratio of total nonperforming loans to total loans amounted to 0.86% and 0.75%, respectively. Management believes all nonperforming loans are adequately collateralized and that there are no unreserved losses on such nonperforming loans at June 30, 2004. Although management believes that its allowance for loan losses at June 30, 2004 is adequate based on the available facts and circumstances, there can be no assurance that additions to such allowance will not be necessary in future periods, which could adversely affect Winton Financial's results of operations. Office premises and equipment increased by $727,000, or 11.9%, 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 $367.3 million at June 30, 2004, an increase of $13.0 million, or 3.7%, over September 30, 2003 levels. Deposits increased during the nine months ended June 30, 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 $135.1 million at June 30, 2004, a decrease of $3.5 million, or 2.5%, from September 30, 2003 levels. During the nine months ended June 30, 2004, the Company repaid $71.9 million in advances from the FHLB and obtained new borrowings totaling $68.4 million. Shareholders' equity totaled $45.9 million at June 30, 2004, an increase of $1.7 million, or 3.9%, from September 30, 2003. The increase resulted from net earnings of $3.6 million, proceeds from exercise of options of $1.1 million which exceeded the purchase of treasury stock of $1.0 million, dividends paid totaling $1.5 million and a decrease in unrealized gains on investment securities designated as available for sale of $383,000. The Company is required to meet minimum capital standards promulgated by the Office of Thrift Supervision (the "OTS"). At June 30, 2004, the Company's regulatory capital exceeded such minimum capital requirements. Comparison of Operating Results for the Three-Month Periods ended June 30, 2004 and 2003 General The Corporation recorded net earnings for the three months ended June 30, 2004, totaling $1.2 million, a decrease of $257,000, or 17.5%, from the $1.5 million in net earnings recorded for the same period in 2003. The decrease in net earnings was a result of a $538,000, or 44.0%, decline in other operating income and a $98,000, or 3.7%, increase in general administrative and other expense, which were partially offset by a $179,000, or 4.7%, increase in net interest income, a $75,000, or 50.0%, decline in the provisions for losses on loans and a $125,000, or 17.4%, decline in provision for federal income taxes. 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 June 30, 2004 and 2003 (continued) Net Interest Income Interest income on loans and mortgage-backed securities totaled $7.4 million for the three months ended June 30, 2004, a decrease of $107,000, or 1.4%, compared to the same quarter in 2003. The decrease resulted primarily from a reduction in the weighted-average yield of 83 basis points, to 5.78% for the three months ended June 30, 2004, which was partially offset by an increase in the average balance outstanding of $52.9 million, or 11.6%, quarter to quarter. Interest income on investment securities and interest-bearing deposits decreased by $18,000, or 7.6%, for the three months ended June 30, 2004, compared to the same quarter in 2003, and was comprised of a decrease of $16.3 million, or 35.2%, in the average balance outstanding quarter to quarter which was partially offset by an 88 basis point increase in weighted-average yield to 2.93%. The yield increase in the 2004 quarter was due to a shift in balances from lower yielding interest-bearing deposits to higher yield investment securities quarter over quarter. Interest expense on deposits decreased by $206,000, or 9.0%, for the three months ended June 30, 2004, compared to the same period in 2003. The decrease was primarily attributable to a 44 basis point decrease in the weighted-average cost of deposits, which was partially offset by a $29.0 million, or 8.5%, increase in the average balance of deposits outstanding quarter to quarter. The weighted-average cost of deposits amounted to 2.26% and 2.70% for the three months ended June 30, 2004 and 2003, respectively. Interest expense on borrowings decreased by $98,000, or 5.7%, during the three months ended June 30, 2004, compared to the same quarter in 2003, due primarily to a 60 basis point decrease in the weighted-average cost of borrowings, to 4.81% for the three months ended June 30, 2004, which was partially offset by a $7.6 million, or 6.0% 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 $179,000, or 4.7%, to $4.0 million for the three months ended June 30, 2004, compared to the same quarter in 2003. The interest rate spread decreased by 3 basis points, to 2.73% for the three months ended June 30, 2004, and the net interest margin decreased 7 basis points to 2.94% for the three months ended June 30, 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 June 30, 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 June 30, 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.

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 $685,000 for the three months ended June 30, 2004, a decrease of $538,000, or 44.0%, compared to the 2003 period, due primarily to a $771,000, or 75.6%, decline in mortgage banking income and a $39,000 decline in a non-recurring gain on sale of office premises. These decreases were partially offset by a $196,000 gain on investment securities designated as available for sale, a $70,000 net change quarter to quarter in gain on sale of real estate acquired through foreclosure and a $6,000 increase in other operating income. 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. 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 June 30, 2004 and 2003 (continued) General, Administrative and Other Expense General, administrative and other expense totaled $2.8 million for the three months ended June 30, 2004, an increase of $98,000, or 3.7%, compared to the same period in 2003. The increase was due to increases in occupancy and equipment expense of $93,000, or 26.9%, data processing expense of $18,000, or 16.1%, franchise tax expense of $20,000, or 18.5%, and advertising expense of $25,000, or 34.7%, which were partially offset by a decrease in other operating expense of 45,000, or 8.2%, and employee compensation and benefits of $13,000, or 0.9%. The increase in occupancy and equipment expense resulted from 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. Federal Income Taxes The provision for federal income taxes amounted to $594,000 for the three months ended June 30, 2004, a decrease of $125,000, or 17.4%, compared to the same period in 2003. The decrease was due to a reduction in earnings before taxes of $382,000, or 17.5%. The effective tax rates were 32.9% and 32.9% for the three-month periods ended June 30, 2004 and 2003, respectively. Comparison of Operating Results for the Nine-Month Periods ended June 30, 2004 and 2003 General The Corporation recorded net earnings for the nine months ended June 30, 2004, totaling $3.6 million, a decrease of $1.1 million, or 24.1%, from the $4.7 million in net earnings recorded for the same period in 2003. The decrease in net earnings was comprised of a $1.3 million decrease in other income and a $1.1 million increase in general, administrative and other expense, which were partially offset by a $641,000 reduction in federal income taxes, a $230,000 decline in the provision for losses on loans and a $427,000 increase in net interest income. Net Interest Income Interest income on loans and mortgage-backed securities totaled $22.5 million for the nine months ended June 30, 2004, a decrease of $727,000, or 3.1%, compared to the same period in 2003. The decrease resulted primarily from a reduction in the weighted-average yield of 77 basis points, to 5.97% for the nine months ended June 30, 2004, which was partially offset by an increase in the average balance outstanding of $43.4 million, or 9.4%, period to period. Interest income on investment securities and interest-bearing deposits increased by $45,000, or 6.7%, for the nine months ended June 30, 2004, compared to the same period in 2003, was comprised of an increase of 49 basis points in the weighted-average yield, to 2.65% for the 2004 period partially offset by a decrease of $5.3 million, or 12.8%, in the average balance outstanding period to period. The yield increase in the 2004 nine 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 Nine-Month Periods ended June 30, 2004 and 2003 (continued) Net Interest Income (continued) Interest expense on deposits decreased by $910,000, or 12.5%, for the nine months ended June 30, 2004, compared to the same period in 2003. The decrease was primarily attributable to a 55 basis point decrease in the weighted-average cost of deposits, which was partially offset by a $26.2 million, or 7.2%, increase in the average balance of deposits outstanding period to period. The weighted-average cost of deposits amounted to 2.34% and 2.89% for the nine months ended June 30, 2004 and 2003, respectively. Interest expense on borrowings decreased by $199,000, or 3.8%, during the nine months ended June 30, 2004, compared to the same quarter in 2003, due primarily to a 64 basis point decrease in the weighted-average cost of borrowings, to 4.81% for the nine months ended June 30, 2004, which was partially offset by a $11.2 million, or 8.8% 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 $427,000, or 3.7%, to $11.9 million for the nine months ended June 30, 2004, compared to the same period in 2003. The interest rate spread decreased by 6 basis points, to 2.72% for the nine months ended June 30, 2004, and the net interest margin decreased 11 basis points to 2.94 for the nine months ended June 30, 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 $225,000 provision for losses on loans for the nine months ended June 30, 2004, compared to a provision of $455,000 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 $2.4 million for the nine months ended June 30, 2004, a decrease of $1.3 million, or 35.6%, compared to the 2003 period, due primarily to a $1.5 million, or 53.7%, decrease in mortgage banking income and the absence of $282,000 in non-recurring gains on the sale of office premises. These decreases were partially offset by a $351,000, or 361.9%, increase in gain on sale of investment securities, a $56,000, or 10.3%, gain in other operating income period to period and a net increase of $47,000 in gain on sale of real estate acquired through foreclosure. 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 Nine-Month Periods ended June 30, 2004 and 2003 (continued) General, Administrative and Other Expense General, administrative and other expense totaled $8.8 million for the nine months ended June 30, 2004, an increase of $1.1 million, or 14.7%, compared to the same period in 2003. The increase was due to increases in employee compensation and benefits of $436,000, or 10.3%, occupancy and equipment expense of $344,000, or 36.3%, advertising expenses of $110,000, or 56.1%, franchise tax expense of $73,000, or 23.1%, other operating expense of $103,000, or 6.6% and data processing expense of $57,000, or 17.0%. 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 $1.7 million for the nine months ended June 30, 2004, a decrease of $641,000, or 27.4%, compared to the same period in 2003. The decrease was due to a reduction in earnings before taxes of $1.8 million, or 25.2%, coupled with an increase in non-taxable municipal bond interest income for the nine months ended June 30, 2004. The effective tax rates were 32.2% and 33.1% for the nine-month periods ended June 30, 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 June 30, 2004, the Company had $130.6 million of outstanding FHLB advances, with the ability to borrow an additional $71.0 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 June 30, 2004, the Company had $9.7 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 June 30, 2004.

Winton Financial believes that the Company's liquidity posture at June 30, 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 was 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. During the quarter ended June 30, 2004, 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 April 19, 2004, a Form 8-K was filed to report earnings for the quarter ended March 31, 2004 and to announce the intention to repurchase up to 230,000 shares, or 5%, of common stock. 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: August 16, 2004 By: /s/ Robert L. Bollin ------------------------- --------------------------- Robert L. Bollin President Date: August 16, 2004 By: /s/ Jill M. Burke ------------------------- --------------------------- Jill M. Burke Chief Financial Officer 21

WINTON FINANCIAL CORP 10-Q