-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QWTSDTg30F71V0fqEO/YImA8D7wv5IRiiOFj4V6sK3HMp3P2FwNbf03iJcemPsRe Lq26jYvrw4XjIxh/NHZhTg== 0000910647-04-000338.txt : 20040928 0000910647-04-000338.hdr.sgml : 20040928 20040928150036 ACCESSION NUMBER: 0000910647-04-000338 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040928 DATE AS OF CHANGE: 20040928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASB FINANCIAL CORP /OH CENTRAL INDEX KEY: 0000944304 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 311429488 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25906 FILM NUMBER: 041049643 BUSINESS ADDRESS: STREET 1: 503 CHILLICOTHE ST CITY: PORTSMOUTH STATE: OH ZIP: 45662 BUSINESS PHONE: 6143543177 MAIL ADDRESS: STREET 1: 503 CHILLICTHE ST CITY: PORTSMOUTH STATE: OH ZIP: 45662 10KSB 1 asb10ksb.txt BODY OF FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Fiscal Year Ended June 30, 2004 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______________ to ________________ Commission File Number: 0-25906 ASB FINANCIAL CORP. ---------------------------------------------- (Name of small business issuer in its charter) Ohio 31-1429488 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 503 Chillicothe Street, Portsmouth, Ohio 45662 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (740) 354-3177 -------------- Securities registered pursuant to Section 12(b) of the Exchange Act: None None --------------------- ---------------------- (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Exchange Act: Common Shares, without par value -------------------------------- (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for the fiscal year ended June 30, 2004, were $9.7 million. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average of the bid and asked prices quoted by the Nasdaq National Market, was $26.7 million on September 22, 2004. 1,686,063 of the issuer's common shares were issued and outstanding on September 22, 2004. DOCUMENTS INCORPORATED BY REFERENCE Part II of Form 10-KSB - Portions of the Annual Report to Shareholders for the fiscal year ended June 30, 2004. Part III of Form 10-KSB - Portions of the Proxy Statement for the 2004 Annual Meeting of Shareholders. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] PART I Item 1. Description of Business General ASB Financial Corp. ("ASB"), an Ohio corporation formed in 1995, is a unitary savings and loan holding company which owns all of the outstanding common shares of American Savings Bank, fsb ("American"), a federal savings bank, issued by American upon its conversion from a mutual savings association to a stock savings association in May 1995 (the "Conversion"). American principally engages in the business of originating real estate loans secured by first mortgages on one- to four-family residential real estate located in American's primary market area, which consists of the Cities of Portsmouth and Waverly and contiguous areas of Scioto and Pike County, Ohio. American also makes loans secured by multifamily real estate (over four units) and nonresidential real estate and secured and unsecured consumer loans. In addition, American purchases interests in multifamily real estate and nonresidential real estate loans originated and serviced by other lenders. American also invests in mortgage-backed securities, U.S. Government agency obligations, obligations of state and political subdivisions, and other investments permitted by applicable law. Funds for lending and other investment activities are obtained primarily from savings deposits, which are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit Insurance Corporation (the "FDIC"), and loan principal and mortgage-backed security repayments. American also obtains advances from the Federal Home Loan Bank ("FHLB") of Cincinnati to fund lending activities. American conducts business from its main office in Portsmouth, Ohio and a branch office in Waverly, Ohio. American's primary market area for lending consists of Scioto and Pike County, Ohio, and for deposits consists of Scioto and Pike County and adjacent communities in North Central Kentucky. ASB is subject to regulation, supervision and examination by the Office of Thrift Supervision of the United States Department of the Treasury (the "OTS") and the United States Securities and Exchange Commission ("SEC"). American is subject to regulation, supervision and examination by the OTS and the FDIC. ASB's activities have been limited primarily to holding the common stock of American since the Conversion. Consequently, the following discussion focuses primarily on the business of American. Lending Activities General. American's principal lending activity is the origination of conventional real estate loans, including construction loans, secured by first mortgages on one- to four-family residential real estate located in American's primary market area. American also offers loans, including construction loans, secured by multifamily properties containing five units or more and nonresidential properties. American also purchases interests in multifamily real estate loans and nonresidential real estate loans originated and serviced by other financial institutions. In addition to real estate lending, American originates commercial loans and consumer loans, including automobile loans, loans secured by deposit accounts, home improvement loans and a limited number of unsecured loans. 1 Loan Portfolio Composition. The following table presents certain information regarding the composition of American's loan portfolio at the dates indicated:
At June 30, -------------------------------------------------------------------- 2004 2003 2002 -------------------- -------------------- -------------------- Percent Percent Percent of total of total of total Amount loans Amount loans Amount loans ------ -------- ------ -------- ------ -------- (Dollars in thousands) Real estate loans: One- to four-family $ 76,197 55.8% $ 71,577 60.5% $ 73,300 65.8% Multifamily 5,399 4.0 6,224 5.3 4,717 4.2 Nonresidential and land 18,694 13.7 15,643 13.2 12,436 11.2 Construction 11,124 8.1 5,334 4.5 1,342 1.2 Home equity 3,620 2.6 4,160 3.5 5,093 4.6 -------- ----- -------- ----- -------- ----- Total real estate loans 115,034 84.2 102,938 87.0 96,888 87.0 Commercial 17,075 12.5 11,336 9.6 10,622 9.5 Consumer and other loans: Passbook 545 .4 461 .4 647 .6 Home improvement 1,545 1.1 1,427 1.2 1,220 1.1 Automobile 1,763 1.3 1,585 1.3 1,801 1.6 Other 588 .4 544 .5 234 .2 -------- ----- -------- ----- -------- ----- Total consumer and other loans 4,441 3.3 4,017 3.4 3,902 3.5 -------- ----- -------- ----- -------- ----- Total loans 136,550 100.0% 118,291 100.0% 111,412 100.0% Less: Loans in process 5,536 2,181 1,365 Net deferred loan origination fees and unearned discounts 194 182 177 Allowance for loan losses 999 1,009 855 -------- -------- -------- Total loans - net $129,821 $114,919 $109,015 ======== ======== ========
Loan Maturity. The following table sets forth the contractual maturity of American's total loans at June 30, 2004 before consideration of net items:
Due during the fiscal One- to Consumer year ending June 30, four-family (1)(2) Multifamily (1) Nonresidential (1)(3) and other Total - --------------------- ------------------ --------------- --------------------- --------- ----- (In thousands) 2005 $ 9,236 $ 302 $ 3,944 $1,391 $ 14,873 2006 2,425 349 4,189 1,485 8,448 2007 2,576 370 4,448 1,565 8,959 2008 - 2009 5,639 808 9,741 - 16,188 2010 - 2014 17,450 2,492 13,447 - 33,389 2015 - 2019 23,561 1,078 - - 24,639 2020 and thereafter 24,518 - - - 24,518 ------- ------ ------- ------ -------- Total $85,405 $5,399 $35,769 $4,441 $131,014 ======= ====== ======= ====== ======== - -------------------- Includes construction loans. Includes home equity loans. Includes land development and commercial loans.
2 The following table sets forth the dollar amount of all loans due after June 30, 2005, which have fixed interest rates and which have floating or adjustable interest rates:
Due after June 30, 2005 ----------------------- (In thousands) Fixed rate of interest $ 78,742 Adjustable rate of interest 37,399 -------- $116,141 ========
One- to Four-Family Real Estate Loans. American's principal lending activity is the origination of permanent conventional loans secured by first mortgages on one- to four-family residences, primarily single-family homes, located within American's primary market area. At June 30, 2004, American's one- to four-family residential real estate loan portfolio, including construction loans secured by one- to four-family residences, was approximately $76.2 million, or 55.8% of total loans. OTS regulations limit the amount which American may lend in relationship to the appraised value of the real estate and improvements (the "Loan-to-Value Ratio" or "LTV") at the time of loan origination. In accordance with OTS regulations, American makes loans on one- to four- family residences with LTVs of up to 95%. Private mortgage insurance purchased by the borrower usually covers the principal amount of any loan which exceeds an 85% LTV at the time of origination. American currently offers fixed-rate loans for terms of up to 30 years. Most of the fixed-rate loans in American's portfolio, however, have terms of 15 years or less. American also offers adjustable-rate residential real estate loans ("ARMs") for terms of up to 30 years. The interest rate adjustment periods on the ARMs are either one year or three years. The interest rate adjustments on one-year and three-year ARMs presently originated by American are tied to either the one-year and three-year U.S. Treasury securities rates or the Previously Occupied Homes index published by the Federal Housing Finance Board. The maximum allowable adjustment at each adjustment date is 2% with a maximum adjustment of 6% over the term of the loan. The initial rate on a three-year ARM is typically higher than the initial rate on a one-year ARM to compensate for the reduced interest rate sensitivity. Adjustable-rate loans decrease American's interest rate risk but involve other risks, primarily credit risk. As interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. American also offers home equity loans for current mortgage customers on one- to four-family residences with LTV's of up to 100%. At June 30, 2004, American's home equity loans totaled $3.6 million, or 2.6% of total loans. Multifamily Real Estate Loans. American originates and purchases interests in loans secured by multifamily properties containing over four units. American originates multifamily loans with terms of up to 15 years and a maximum LTV of 75%. Approximately 45% of the multifamily real estate loans held by American are participation interests in loans originated and serviced by other financial institutions and secured by real estate located in Ohio, Kentucky, Florida and North Carolina. See "Loan Originations, Purchases and Sales." Multifamily lending is generally considered to involve a higher degree of risk than one- to four-family residential lending because the borrower typically depends upon income generated by the project to cover operating expenses and debt service. The profitability of a project can be affected by economic conditions, government policies and other factors beyond the control of the borrower. American attempts to reduce the risk associated with multifamily lending by evaluating the creditworthiness of the borrower and the projected income from the project and by obtaining personal guarantees on loans made to corporations and partnerships. American requires that borrowers submit rent rolls and financial statements annually to enable American to monitor the loan. At June 30, 2004, loans secured by multifamily properties totaled approximately $5.4 million, or 4.0% of total loans, of which $2.3 million are participation interests purchased in loans originated by other financial institutions. 3 Nonresidential Real Estate and Land Loans. At June 30, 2004, approximately $18.7 million, or 13.7% of American's total loans, were secured by nonresidential real estate and land. The majority of such loans have adjustable rates and terms of up to 15 years. Among the properties securing nonresidential real estate loans are office buildings, retail properties, warehouses, and a hotel, all of which are located in American's primary market area. Also included in American's nonresidential real estate loan portfolio is $4.3 million of participation interests which have been purchased in loans originated by other financial institutions. American has land loans with principal balances totaling $1.3 million secured by developed land which has been subdivided for single-family home construction in American's market area. American occasionally originates loans for the construction of nonresidential real estate. At June 30, 2004, American had outstanding nonresidential real estate construction loans with an aggregate balance of $5.0 million. Although the loans secured by nonresidential real estate typically have higher interest rates and shorter terms to maturity than one- to four- family residential real estate loans, nonresidential real estate lending is generally considered to involve a higher degree of risk than residential lending due to the relatively larger loan amounts and the effects of general economic conditions on the successful operation of income-producing properties. American has endeavored to reduce such risk by evaluating the credit history and past performance of the borrower, the location of the real estate, the financial condition of the borrower, the quality of the management constructing and operating the property, the quality and characteristics of the income stream generated by the property and appraisals supporting the property's valuation. Construction Loans. American makes loans to individuals for the construction and permanent financing of their primary residences. Construction loans are offered with adjustable and fixed rates for terms of up to 30 years. During the first year, while the residence is being constructed, the borrower is required to pay interest only. Construction loans generally involve greater underwriting and default risks than do loans secured by mortgages on existing properties. Loan funds are advanced upon the security of the project under construction, which is more difficult to value before the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, it is relatively difficult to evaluate accurately the LTV and the total loan funds required to complete a project. In the event a default on a construction loan occurs and foreclosure follows, American would have to take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project. At June 30, 2004, construction loans, in the aggregate, totaled $11.1 million, or 8.1% of American's total loans. Approximately 90% of American's construction loans are secured by property in Scioto County, Ohio. Commercial Loans. At June 30, 2004, approximately $17.1 million, or 12.5%, of American's total loans were commercial loans. The majority of commercial loans are originated to businesses in American's primary market area. Commercial loans may be secured by real estate, inventory, accounts receivable or equity securities, or they may be unsecured. Commercial loans are generally deemed to entail significantly greater risk than real estate lending. The repayment of commercial loans is typically dependant on the income stream and successful operation of a business, which can be affected by economic conditions. Consumer and Other Loans. American makes various types of consumer loans, including loans made to depositors on the security of their deposit accounts, automobile loans, home improvement loans and unsecured personal loans. Consumer loans, other than loans on deposits, are generally made at fixed rates of interest only and for varying terms based on the type of loan. At June 30, 2004, approximately $4.4 million, or 3.3% of American's total loans were consumer and other loans. Home improvement loans include loans insured by the Federal Housing Administration. Home improvement loans typically have a five-year term and a fixed rate of interest. Consumer loans, particularly consumer loans which are unsecured or are secured by rapidly depreciating assets such as automobiles, may entail greater risk than do residential real estate loans. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. The risk of default on consumer loans increases during periods of recession, high unemployment and other adverse economic conditions. Loan Solicitation and Processing. American develops loan originations from a number of sources, including continuing business with depositors, other borrowers and real estate developers, solicitations by American's lending staff and walk-in customers. 4 American's loan personnel take all loan applications for permanent real estate loans. American obtains a credit report, verification of employment and other documentation concerning the creditworthiness of the borrower. An appraisal of the fair market value of the real estate which will be given as security for the loan is prepared by a fee appraiser approved by the Board of Directors. For construction loans, an appraiser also evaluates the building plans, construction specifications and estimates of construction costs, and American evaluates the feasibility of the proposed construction project and the experience and record of the builder. Upon the completion of the appraisal and the receipt of information on the credit history of the borrower, the application for a loan is submitted to American's Executive Committee for review in accordance with American's underwriting guidelines. Any loan for more than $250,000 must be reviewed and approved by the full Board of Directors. If a real estate loan application is approved, either an attorney's opinion or title insurance is obtained on the real estate that will secure the mortgage loan. Most of the loans in American's portfolio have an attorney's opinion. American requires borrowers to carry satisfactory fire and casualty insurance and flood insurance, if applicable, and to name American as an insured mortgagee. Consumer loans are underwritten on the basis of the borrower's credit history and an analysis of the borrower's income and expenses, ability to repay the loan and the value of the collateral, if any. Loan Originations, Purchases and Sales. Currently, American is originating both fixed-rate and ARM loans for its portfolio with no intention of selling such loans in the secondary market. The documentation for most of the loans in American's portfolio does not conform to the secondary market standards of the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA"). In fiscal 2001, American began to originate loans with documentation that conforms to the secondary market standards of the FHLMC and FNMA. To supplement loan demand in its primary market area, American purchases participation interests in multifamily and nonresidential real estate loans originated and serviced by other financial institutions. American does not purchase participation interests through brokers. Whole loans and participation interests purchased by American conform to American's underwriting criteria for loans originated by American. American intends to continue to purchase loans as suitable investment opportunities become available. 5 The following table presents American's loan origination and purchase activity for the periods indicated:
Year ended June 30, ------------------------------- 2004 2003 2002 ---- ---- ---- (In thousands) Loans originated: Adjustable-rate: One- to four-family real estate $ 3,222 $ 1,685 $ 3,075 Multifamily real estate 1,647 1,211 - Nonresidential real estate 1,930 1,480 3,832 Commercial 1,959 2,720 2,459 ------- ------- ------- Total adjustable-rate 8,758 7,096 9,366 Fixed-rate: One- to four-family real estate 27,789 23,346 16,945 Nonresidential real estate 1,764 1,486 136 Commercial 9,801 9,305 5,451 Consumer 3,789 1,588 2,635 ------- ------- ------- Total fixed-rate 43,143 35,725 25,167 Loans purchased - 2,750 2,000 Loans acquired from Waverly Building and Loan Company - - 3,770 ------- ------- ------- Total loans originated, purchased and acquired 51,901 45,571 40,303 Reductions: Principal repayments (36,834) (38,907) (34,588) Increase (decrease) in other items, net (1) (165) (760) (8) ------- ------- ------- Net increase $14,902 $ 5,904 $ 5,707 ======= ======= ======= - -------------------- Consists of loans in process, unearned discounts and deferred loan origination fees and the allowance for loan losses.
6 Federal Lending Limit. OTS regulations impose a lending limit on the aggregate amount that a savings association can lend to any one borrower to an amount equal to 15% of the association's total capital for risk-based capital purposes plus any loan loss reserves not already included in total capital (the "Lending Limit Capital"). A savings association may loan to one borrower an additional amount not to exceed 10% of the association's Lending Limit Capital, if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." In applying this limit, the regulations require that loans to certain related or affiliated borrowers be aggregated. An exception to this limit permits loans of any type to one borrower of up to $500,000. In addition, the OTS may permit exceptions to the lending limit on a case-by-case basis. Based on the 15% limit, American was able to lend approximately $2.5 million to one borrower at June 30, 2004. The largest loan American had outstanding to one borrower at June 30, 2004, was a $2.2 million loan secured by nonresidential real estate. Loan Origination and Other Fees. American realizes loan origination fees and other fee income from its lending activities, including late payment charges, application fees and fees for other miscellaneous services. Loan origination fees and other fees are a volatile source of income, varying with the volume of lending, loan repayments and general economic conditions. All nonrefundable loan origination fees and certain direct loan origination costs are deferred and recognized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 91 as an adjustment to yield over the life of the related loan. Delinquent Loans, Nonperforming Assets and Classified Assets. Delinquent loans are loans for which payment has not been received within 30 days of the payment due date. For loans originated before 2001, loan payments are due on the first day of the month with the portion of the payment applicable to interest to accrue during the current month. Loan payments on loans originated since fiscal 2001 are due the first day of the month, with the portion of the payment applicable to interest having accrued during the preceding month. When a loan payment is 30 days delinquent, a late notice is sent. If payment is not received, a second notice is sent and a telephone call is made to the borrower. A real estate loan is assessed a late penalty of 3% as soon as the loan is more than 30 days delinquent. A consumer loan is assessed a penalty of 5% of the payment due once the loan is more than 15 days delinquent. When a loan secured by real estate becomes delinquent more than 90 days, the Board of Directors reviews the loan and foreclosure proceedings are normally instituted and an appraisal of the collateral is performed unless alternative payment arrangements are agreed upon with the borrower to eliminate the arrearage. If the appraisal indicates that the value of the collateral is less than the book value of the loan, a valuation allowance is established for such loan. When a consumer loan becomes more than 90 days past due, American establishes a specific loss allowance for the amount of the loan. 7 The following table reflects the amount of loans in a delinquent status at the dates indicated:
At June 30, 2004 ----------------------------------------------------------------------------------------------------- Residential real estate Nonresidential real estate (2) Consumer and other Total ----------------------- ------------------------------ --------------------- --------------------- Number Amount % (1) Number Amount % (1) Number Amount % (1) Number Amount % (1) ------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- (Dollars in thousands) Loans delinquent for: 30-59 days 28 $1,843 1.4% 1 $133 .1% 18 $298 .2% 47 $2,274 1.7% 60-89 days 6 275 .2 - - - 14 73 - 20 348 .2 90 days and over 17 841 .6 1 115 .1 11 91 .1 29 1,047 .8 -- ------ --- - ---- -- -- ---- -- -- ------ --- Total delinquent loans 51 $2,959 2.2% 2 $248 .2% 43 $462 .3% 96 $3,669 2.7% == ====== === = ==== == == ==== == == ====== === At June 30, 2003 ----------------------------------------------------------------------------------------------------- Residential real estate Nonresidential real estate (2) Consumer and other Total ----------------------- ------------------------------ --------------------- --------------------- Number Amount % (1) Number Amount % (1) Number Amount % (1) Number Amount % (1) ------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- (Dollars in thousands) Loans delinquent for: 30-59 days 29 $1,946 1.7% - $ - - 15 $259 .2% 44 $2,205 1.9% 60-89 days 7 252 .2 - - - 12 85 .1 19 337 .3 90 days and over 17 742 .6 3 245 .2 18 231 .2 38 1,218 1.0 -- ------ --- - ---- -- -- ---- -- -- ------ --- Total delinquent loans 53 $2,940 2.5% 3 $245 .2% 45 $575 .5% 101 $3,760 3.2% == ====== === = ==== == == ==== == == ====== === At June 30, 2002 ----------------------------------------------------------------------------------------------------- Residential real estate Nonresidential real estate (2) Consumer and other Total ----------------------- ------------------------------ --------------------- --------------------- Number Amount % (1) Number Amount % (1) Number Amount % (1) Number Amount % (1) ------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- (Dollars in thousands) Loans delinquent for: 30-59 days 16 $ 976 .9% - $ - -% 11 $137 .1% 27 $1,113 1.0% 60-89 days 14 778 .7 - - - 10 168 .1 24 946 .9 90 days and over 14 517 .4 2 445 .4 15 190 .2 31 1,152 1.0 -- ------ --- - ---- -- -- ---- -- -- ------ --- Total delinquent loans 44 $2,271 2.0% 2 $445 .4% 36 $495 .4% 82 $3,211 2.9% == ====== === = ==== == == ==== == == ====== === Percentages correlate to total loans before net items. Includes land loans.
8 Nonperforming assets include nonaccrual loans, accruing loans which are delinquent 90 days or more, restructured loans, real estate acquired by foreclosure or by deed-in-lieu thereof and repossessed assets. Loans are placed on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed insufficient to warrant further accrual. The following table sets forth information with respect to the accrual and nonaccrual status of American's loans and other nonperforming assets at the dates indicated:
At June 30, ---------------------------- 2004 2003 2002 ---- ---- ---- (Dollars in thousands) Nonaccrual loans $ 767 $ 828 $ 871 Accruing loans delinquent 90 days or more 280 390 281 ------ ------ ------ Total nonperforming loans 1,047 1,218 1,152 ------ ------ ------ Total nonperforming assets $1,047 $1,218 $1,152 ====== ====== ====== Allowance for loan losses $ 999 $1,009 $ 855 ====== ====== ====== Nonperforming assets as a percent of total assets .63% .80% .78% Allowance for loan losses as a percent of nonperforming assets 95.42% 82.84% 74.22%
For the year ended June 30, 2004, gross interest income which American would have recorded had nonaccrual loans been current in accordance with their original terms was $66,000, and American recorded $13,600 in interest on nonaccrual loans during such period. When American acquires a property as a result of foreclosure proceedings or by deed-in-lieu of foreclosure ("REO"), it records the property at its estimated fair value, less estimated selling expenses, at the date of acquisition, and any write-down resulting therefrom is charged to the allowance for loan losses. Interest accrual, if any, ceases no later than the date of acquisition of the real estate, and American expenses all costs incurred from such date in maintaining the property. American capitalizes, to the extent of fair value, costs relating to the development and improvement of the property. American classifies its own assets on a regular basis in accordance with federal regulations. Problem assets are classified as "substandard," "doubtful" or "loss." "Substandard" assets have one or more defined weaknesses and are characterized by the distinct possibility that American will sustain some loss if the deficiencies are not corrected. "Doubtful" assets have the same weaknesses as "substandard" assets, with the additional characteristics that (i) the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable and (ii) there is a high possibility of loss. American considers an asset classified "loss" as uncollectible and of such little value that its continuance as an asset of American is not warranted. 9 The aggregate amounts of American's classified assets at the dates indicated were as follows:
At June 30, ------------------------ 2004 2003 2002 ---- ---- ---- (In thousands) Classified assets Substandard $1,164 $1,189 $949 Loss - 29 - ------ ------ ---- Total classified assets $1,164 $1,218 $949 ====== ====== ====
American may establish general loan loss allowances for loans classified as substandard or doubtful. Generally, American charges off the portion of any real estate loan deemed to be uncollectible, whereas it uses a loss classification and corresponding reserve for consumer loans. American analyzes each classified asset on a monthly basis to determine whether a change in its classification is appropriate under the circumstances. This classification analysis focuses on a variety of factors, including the amount of any delinquency and the reasons for the delinquency, the use of any real estate securing the loan, the status of the borrower and the appraised value of any real estate. As such factors change, American changes the classification of the asset accordingly. Federal examiners are authorized to classify an institution's assets. If the institution does not agree with the examiner's classification, it may appeal the determination to the OTS Regional Director. American had no disagreements with the examiners regarding the classification of its assets at the time of its last examination. Allowance for Loan Losses. Senior management, with oversight by the Board of Directors, reviews on a monthly basis the allowance for loan losses as it relates to a number of relevant factors including, but not limited to, trends in the level of delinquent and nonperforming assets and classified assets, current and anticipated economic conditions in American's primary lending area, such as unemployment data and the consumer price index, past loss experience and losses arising from specific problem assets. To a lesser extent, management also considers loan concentrations to single borrowers and changes in the composition of the loan portfolio. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in future adjustments to the allowance, and net earnings could be adversely affected if circumstances differ substantially from the assumptions used in making the final determination. The following table sets forth an analysis of American's allowance for loan losses for the periods indicated:
For the year ended June 30, --------------------------- 2004 2003 2002 ---- ---- ---- (Dollars in thousands) Balance at beginning of period $1,009 $ 855 $713 Charge-offs: Residential real estate loans (1) (42) (8) (42) Nonresidential real estate (2) (66) (75) (29) Consumer loans (13) (12) (17) ------ ------ ---- Total charge-offs (121) (95) (88) Provision for losses on loans 111 249 70 Allowance resulting from acquisition of Waverly Building and Loan Company - - 160 ------ ------ ---- Balance at end of period $ 999 $1,009 $855 ====== ====== ==== Ratio of net charge-offs to average loans outstanding during the period .10% .09% .08% - -------------------- Includes multifamily loans. Includes commercial loans.
10 The following table sets forth the allocation of American's allowance for loan losses by type of loan at the dates indicated:
At June 30, ----------------------------------------------------------------------------- 2004 2003 2002 ----------------------- ----------------------- ----------------------- Percent of Percent of Percent of loans in each loans in each loans in each category to category to category to Amount total loans Amount total loans Amount total loans ------ ------------- ------ ------------- ------ ------------- (Dollars in thousands) Balance at year end applicable to: Real estate loans $109 84.2% $ 83 87.0% $ 43 87.0% Commercial loans 120 12.5 61 9.6 111 9.5 Consumer and other loans 51 3.3 35 3.4 42 3.5 Unallocated 719 - 830 - 659 - ---- ----- ------ ----- ---- ----- Total $999 100.0% $1,009 100.0% $855 100.0% ==== ===== ====== ===== ==== =====
Investment Activities American is permitted to make investments in certain commercial paper, corporate debt securities rated in one of the four highest rating categories by one or more nationally recognized statistical rating organizations, and mutual funds, as well as other investments permitted by federal regulations. The following table sets forth the composition of ASB's investments, other than mortgage-backed securities, at the dates indicated:
At June 30, -------------------------------------------------------------------- 2004 2003 2002 -------------------- -------------------- -------------------- Carrying Percent Carrying Percent Carrying Percent value of total value of total value of total -------- -------- -------- -------- -------- -------- (Dollars in thousands) Investments designated as held to maturity: Interest-bearing deposits in other financial institutions (1) $ 5,485 30.5% $ 4,851 27.2% $ 6,376 23.4% Investments designated as available for sale: U.S. Government agency obligations 10,675 59.4 12,022 67.3 19,576 71.9 Municipal obligations 862 4.8 208 1.2 40 .1 Corporate equity securities - - - - 302 1.1 FHLMC stock 950 5.3 775 4.3 948 3.5 ------- ----- ------- ----- ------- ----- Total investments designated as available for sale 12,487 69.5 13,005 72.8 20,866 76.6 ------- ----- ------- ----- ------- ----- Total investments $17,972 100.0% $17,856 100.0% $27,242 100.0% ======= ===== ======= ===== ======= ===== Includes certificates of deposit in other financial institutions.
11 The following table sets forth information regarding the maturities, book value and weighted average yields of ASB's investment securities, other than mortgage-backed securities, at June 30, 2004:
Maturing in Maturing in Maturing in 1-5 years 5-10 Years 10-20 Years Total --------------------- --------------------- --------------------- -------------------- Weighted Weighted Weighted Amortized average Amortized average Amortized average Amortized Market Cost yield cost yield cost yield cost value --------- -------- --------- -------- --------- -------- --------- ------ (Dollars in thousands) Investments designated as available for sale: U.S. Government agency obligations $5,247 3.68% $3,467 5.64% $2,149 5.46% $10,863 $10,675 Municipal obligations 565 2.95 40 4.40% 276 5.50 881 862 FHLMC stock - - - - - - 15 950 ------ ---- ------ ---- ------ ---- ------- ------- Total $5,812 3.61% $3,507 5.63% $2,425 5.46% $11,759 $12,487 ====== ==== ====== ==== ====== ==== ======= =======
American has been an active purchaser of mortgage-backed securities. At June 30, 2004, mortgage-backed securities totaled $11.8 million or 7.1% of total assets. All of the mortgage-backed securities in American's portfolio are government-guaranteed securities, including participations or pass-through securities issued by the Government National Mortgage Association ("GNMA"), the FHLMC or the FNMA, and collateralized mortgage obligations ("CMOs"). American generally purchases mortgage-backed securities at or near par in order to avoid prepayment risk. The following table sets forth details of American's investment in mortgage-backed securities, of which all are designated as available for sale, at the dates indicated.
At June 30, 2004 At June 30, 2003 ------------------------------------------------ ------------------------------------------------ Gross Gross Gross Gross Amortized unrealized unrealized Estimated Amortized unrealized unrealized Estimated cost gains losses fair value cost gains losses fair value --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- (In thousands) Available for sale: FHLMC participation certificates $ 2,031 $10 $ 32 $ 2,009 $ 3,593 $ 45 $ 2 $ 3,636 FNMA participation certificates 7,910 13 154 7,769 6,468 63 12 6,519 GNMA participation certificates 1,931 23 20 1,934 1,817 69 - 1,886 Collateralized mortgage obligations 55 1 - 56 89 - - 89 ------- --- ---- ------- ------- ---- --- ------- Total mortgage-backed securities $11,927 $47 $206 $11,768 $11,967 $177 $14 $12,130 ======= === ==== ======= ======= ==== === ======= At June 30, 2002 ------------------------------------------------ Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value --------- ---------- ---------- ---------- (In thousands) Available for sale: FHLMC participation certificates $1,441 $ 35 $- $1,476 FNMA participation certificates 2,373 15 3 2,385 GNMA participation certificates 2,355 97 - 2,452 Collateralized mortgage obligations 780 - 2 778 ------ ---- -- ------ Total mortgage-backed securities $6,949 $147 $5 $7,091 ====== ==== == ======
12 Deposits and Borrowings Deposits. American's primary source of funds for use in lending and other investment activities is deposits. In addition to deposits, American derives funds from interest payments and principal repayments on loans and mortgage-backed securities and income on interest-earning assets. Loan payments are a relatively stable source of funds, while deposit inflows and outflows fluctuate more in response to changes in general interest rates and money market conditions. American attracts deposits principally from within its primary market area through the offering of a broad selection of deposit instruments, including negotiable order of withdrawal ("NOW") accounts, Super NOW accounts, demand deposit accounts, money market deposit accounts, money market checking accounts, passbook savings accounts, term certificate accounts and individual retirement accounts ("IRAs"). American's management periodically establishes the interest rates paid, maturity terms, service fees and withdrawal penalties for the various types of accounts based on American's liquidity requirements, growth goals and interest rates paid by competitors. American does not use brokers to attract deposits, and the amount of deposits from outside American's primary market area is not significant. The following table sets forth the dollar amount of deposits in the various types of accounts offered by American at the dates indicated:
At June 30, ------------------------------------------------------------------- 2004 2003 2002 -------------------- -------------------- ------------------- Percent Percent Percent of total of total of total Amount deposits Amount deposits Amount deposits ------ -------- ------ -------- ------ -------- (Dollars in thousands) Transaction accounts: Passbook accounts $ 11,828 8.7% $ 10,963 8.4% $ 10,919 8.6% Demand, NOW and Super NOW accounts 7,706 5.6 8,463 6.5 8,297 6.5 Money market deposit accounts 32,543 23.8 30,319 23.1 21,920 17.3 -------- ----- -------- ----- -------- ----- Total transaction accounts 52,077 38.1 49,745 38.0 41,136 32.4 Certificates of deposit: 0.00 - 1.99% 21,950 16.0 6,332 4.8 - - 2.00 - 2.99% 39,100 28.6 30,521 23.3 18,612 14.7 3.00 - 3.99% 16,411 12.0 32,368 24.8 23,574 18.6 4.00 - 4.99% 6,655 4.9 10,157 7.8 20,196 15.9 5.00 - 5.99% 112 .1 1,198 .9 15,071 11.9 6.00 - 6.99% 256 .2 279 .2 6,835 5.4 7.00 - 7.99% 200 .1 180 .2 1,373 1.1 8.00 - 8.99% - - - - 75 - -------- ----- -------- ----- -------- ----- Total certificates of deposit 84,684 61.9 81,035 62.0 85,736 67.6 -------- ----- -------- ----- -------- ----- Total deposits $136,761 100.0% $130,780 100.0% $126,872 100.0% ======== ===== ======== ===== ======== =====
13 The following table presents the amount of American's certificates of deposit of $100,000 or more by the time remaining until maturity at June 30, 2004:
At June 30, 2004 ---------------- (In thousands) Certificates of deposit with balances of $100,000 or more maturing in quarter ending (1): September 30, 2004 $ 2,299 December 31, 2004 951 March 31, 2005 298 June 30, 2005 908 After June 30, 2005 9,451 ------- Total certificates of deposit with balances of $100,000 or more $13,907 ======= - -------------------- Account balances over $100,000 are not insured by the FDIC.
The following table sets forth American's deposit account balance activity for the periods indicated:
Year ended June 30, ---------------------------------- 2004 2003 2002 ---- ---- ---- (Dollars in thousands) Beginning balance $130,780 $126,872 $120,725 Deposits 763,898 769,775 543,956 Deposits acquired from Waverly Building and Loan Company - - 4,723 Withdrawals (759,501) (768,129) (547,474) Interest credited 1,584 2,262 4,942 -------- -------- -------- Ending balance $136,761 $130,780 $126,872 ======== ======== ======== Net increase $ 5,981 $ 3,908 $ 6,147 ======== ======== ======== Percent increase 4.57% 3.08% 5.09% ======== ======== ========
Borrowings. American's other sources of funds include advances from the FHLB and other borrowings. American is a member of the FHLB of Cincinnati and must maintain an investment in the capital stock of the FHLB of Cincinnati in an amount equal to the greater of 1% of the aggregate outstanding principal amount of American's residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, and 5% of its outstanding advances from the FHLB of Cincinnati. American complied with this requirement at June 30, 2004 with an investment in stock of the FHLB of Cincinnati of $1.1 million. FHLB advances are secured by collateral in one or more of the following categories: fully-disbursed, whole first mortgage loans on improved residential property or securities representing a whole interest in such loans; securities issued, insured or guaranteed by the U.S. Government or an agency thereof; deposits in any FHLB; or other real estate related collateral acceptable to the FHLB, if such collateral has a readily ascertainable value and the FHLB can perfect its security interest in the collateral. At June 30, 2004, American had $10.9 million outstanding in advances from the FHLB. 14 The following table sets forth certain information as to American's FHLB advances at the dates indicated:
At June 30, --------------------------- 2004 2003 2002 ---- ---- ---- (Dollars in thousands) FHLB advances $10,899 $4,188 $4,223 Weighted average interest rate 3.12% 1.33% 1.95%
The following table sets forth the maximum balance and average balance of FHLB advances during the periods indicated:
Year ended June 30, ------------------------------ 2004 2003 2002 ---- ---- ---- (Dollars in thousands) FHLB advances: Maximum balance $10,963 $7,409 $6,560 Average balance $ 8,459 $4,354 $5,039 Weighted average interest rate 2.23% 1.63% 2.36%
Competition American competes for deposits with other savings banks, savings associations, commercial banks and credit unions and with the issuers of commercial paper and other securities, such as shares in money market mutual funds. The primary factors in competing for deposits are interest rates and convenience of office location. In making loans, American competes with other savings banks, savings associations, commercial banks, consumer finance companies, credit unions, mortgage companies, leasing companies and other lenders. American competes for loan originations primarily through the interest rates and loan fees it charges and through the efficiency and quality of services provided. Competition is intense and is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors which are not readily predictable. Subsidiary Activities American has two wholly-owned subsidiaries. A.S.L. Services, Inc. ("ASL"), owns stock in American's data processing service provider. At June 30, 2004, the stock held by ASL had a book value of $114,000. ASL also has an $18,000 investment in the Money Concepts Financial Planning Center, bringing the total assets of ASL to approximately $132,000 at June 30, 2004. Additionally, American owns ASB Community Development Corp. ("ASB Development"), which participates in a federal tax program designed to promote lending in new markets, which in turn provides federal income tax credits to American. At June 30, 2004, ASB Development's assets consisted primarily of deposits in American of $123,000 and loans of $1.9 million. Personnel As of June 30, 2004, American had 31 full-time employees and 11 part- time employees. American believes that relations with its employees are excellent. American offers health, disability and life benefits and retirement plan benefits. None of the employees of American is represented by a collective bargaining unit. 15 REGULATION General As a savings and loan holding company, ASB is subject to regulation, examination and oversight by the OTS and must submit periodic reports to the OTS concerning its activities and financial condition. In addition, as an Ohio corporation, ASB is subject to provisions of the Ohio Revised Code applicable to corporations generally. As a federal savings association, American is subject to regulatory oversight by the OTS and, because American's deposits are insured by the FDIC, American is also subject to examination and regulation by the FDIC. American must file periodic reports with the OTS concerning its activities and financial condition. Examinations are conducted periodically by the OTS and the FDIC to determine whether American is in compliance with various regulatory requirements and is operating in a safe and sound manner. Office of Thrift Supervision General. The OTS is responsible for the regulation and supervision of all federally-chartered savings associations and all other savings associations the deposits of which are insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The OTS issues regulations governing the operation of savings associations, regularly examines such associations and imposes assessments on savings associations based on their asset size to cover the costs of general supervision and examination. The OTS also may initiate enforcement actions against savings associations and certain persons affiliated with them for violations of laws or regulations or for engaging in unsafe or unsound practices. Under certain circumstances, the OTS may appoint a conservator or receiver for a savings association. Savings associations are subject to regulatory oversight under various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending and truth-in-savings disclosures, equal credit opportunity, fair credit reporting and community reinvestment. Community reinvestment regulations evaluate how well and to what extent an institution lends and invests in its designated service area, with particular emphasis on low- to moderate-income communities and borrowers in that area. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of an association to open a new branch or engage in a merger. Regulatory Capital Requirements. American is required by OTS regulations to meet certain minimum capital requirements. All savings associations must have tangible capital of 1.5% of adjusted total assets, core capital of 4% of adjusted total assets, except for associations with the highest examination rating and acceptable levels of risk, and risk- based capital equal to 8% of risk-weighted assets. Assets and certain off- balance sheet items are weighted at percentage levels ranging from 0% to 100% depending on their relative risk. American exceeded these requirements with tangible capital of 9.3%, core capital of 9.3% and risk-based capital of 16.6% at June 30, 2004. The OTS has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled savings associations. At each successively lower defined capital category, an association is subject to more restrictive and more numerous mandatory and discretionary regulatory actions or limits, and the OTS has less flexibility in determining how to resolve the problems of the institution. In addition, the OTS generally can downgrade an association's capital category, notwithstanding its capital level, if, after notice and opportunity for hearing, the association is deemed to be engaging in an unsafe or unsound practice because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. An undercapitalized association will be subject to increased monitoring and asset growth restrictions and will be required to obtain prior approval for acquisitions, branching and engaging in new lines of business. Critically undercapitalized institutions must be placed in conservatorship or receivership within 90 days of reaching that capitalization level, except under limited circumstances. American's capital at June 30, 2004, met the standards for the highest category, a "well-capitalized" institution. Federal law prohibits a savings association from making a capital distribution to anyone or paying management fees to any person having control of the association if, after such distribution or payment, the association would be undercapitalized. In addition, each company controlling an undercapitalized association must guarantee that the association will comply with its capital plan until the association has been adequately capitalized 16 on an average during each of four preceding calendar quarters and must provide adequate assurances of performance. Qualified Thrift Lender Test. If a savings association fails to meet one of the two tests in order to be a qualified thrift lender ("QTL"), the association and its holding company become subject to certain operating and regulatory restrictions. The first test requires a savings association to maintain a specified level of investments in assets that are designated as qualifying thrift investments ("QTIs"). Generally, QTIs are assets related to domestic residential real estate and manufactured housing, although they also include credit card, student and small business loans and stock issued by any FHLB, the FHLMC or the FNMA. Under the first test, at least 65% of an institution's "portfolio assets" (total assets less goodwill and other intangibles, property used to conduct business and 20% of liquid assets) must consist of QTI on a monthly average basis in nine out of every 12 months. The second test permits a savings association to qualify as a QTL if at least 60% of its assets consist of specified types of property, including cash, loans secured by residential real estate or deposits, educational loans and certain governmental obligations. The OTS may grant exceptions to the QTL tests under certain circumstances. At June 30, 2004, American qualified as a QTL. Transactions with Insiders and Affiliates. Loans to executive officers, directors and principal shareholders and their related interests must conform to the lending limit on loans to one borrower, and the total of such loans to executive officers, directors, principal shareholders and their related interests cannot exceed the association's Lending Limit Capital (or 200% of Lending Limit Capital for qualifying institutions with less than $100 million in deposits). Most loans to directors, executive officers and principal shareholders must be approved in advance by a majority of the "disinterested" members of the board of directors of the association, with any "interested" director not participating. All loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or as offered to all employees in a company-wide benefit program, and loans to executive officers are subject to additional limitations. American was in compliance with such restrictions at June 30, 2004. All transactions between savings associations and their affiliates must comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA") and the Federal Reserve Board's Regulation W. An affiliate of a savings association is any company or entity that controls, is controlled by, or is under common control with the savings association. ASB is an affiliate of American. Generally, Sections 23A and 23B of the FRA and Regulation W (i) limit the extent to which a savings association or its subsidiaries may engage in "covered transactions" with any one affiliate up to an amount equal to 10% of such institution's capital stock and surplus, (ii) limit the aggregate of all such transactions with all affiliates up to an amount equal to 20% of such capital stock and surplus, and (iii) require that all such transactions be on terms substantially the same, or at least as favorable to the association, as those provided in transactions with a non-affiliate. The term "covered transaction" includes the making of loans, purchasing of assets, acceptance of securities issued by an affiliate as collateral for an extension of credit to any person, issuance of a guarantee and other similar types of transactions. In addition to the limits in Sections 23A and 23B and Regulation W, a savings association may not make any loan or other extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for a bank holding company and may not purchase or invest in securities of any affiliate except shares of a subsidiary. American was in compliance with these requirements and restrictions at June 30, 2004. Limitations on Capital Distributions. The OTS imposes various restrictions or requirements on the ability of savings associations to make capital distributions. Capital distributions include payments of cash dividends, repurchases and certain other acquisitions by an association of its shares and payments to stockholders of another association in an acquisition of such other association. A subsidiary of a savings and loan holding company must file a notice or an application with the OTS before it can pay a dividend. An application must be submitted to and approved by the OTS (i) if the proposed distribution would cause the savings association's total distributions for the calendar year to exceed net income for that year to date plus the retained net income for the preceding two years; (ii) if the savings association will not be at least adequately capitalized following the capital distribution; or (iii) if the proposed distribution would violate a prohibition contained in any applicable statute, regulation or agreement between the savings association and the OTS or the FDIC, or violate a condition imposed on the savings association in an OTS-approved application or notice. If a savings association subsidiary of a holding company is not required to file an application, it must file a notice with the OTS. Holding Company Regulation. As a unitary savings and loan holding company, ASB generally has no restrictions on its activities. If, however, the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, 17 soundness or stability of its subsidiary savings association, the OTS may impose such restrictions as deemed necessary to address such risk, including limiting (i) payment of dividends by the savings association, (ii) transactions between the savings association and its affiliates, and (iii) any activities of the savings association that might create a serious risk that the liabilities of ASB and its affiliates may be imposed on the savings association. If the savings association subsidiary of a holding company fails to meet the QTL test, then the holding company would become subject to the activities restrictions applicable to multiple holding companies. At June 30, 2004, American met the QTL test. Federal law generally prohibits a savings and loan holding company from controlling any other savings association or savings and loan holding company or from acquiring or retaining more than 5% of the voting shares of a savings association or holding company thereof, which is not a subsidiary, without prior approval of the OTS. Under certain circumstances, a savings and loan holding company is permitted to acquire, with the approval of the OTS, up to 15% of the previously unissued voting shares of an undercapitalized savings association for cash without such savings association being deemed to be controlled by the holding company. Except with the prior approval of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such holding company's stock may also acquire control of any savings institution, other than a subsidiary institution, or any other savings and loan holding company. Federal Regulation of Acquisitions of Control of ASB and American. In addition to the Ohio law limitations on the merger and acquisition of ASB, federal limitations generally require regulatory approval of acquisitions at specified levels. Under pertinent federal law and regulations, no person, directly or indirectly, or acting in concert with others, may acquire control of American or ASB without 60 days' prior notice to the OTS. "Control" is generally defined as having more than 25% ownership or voting power; however, ownership or voting power of more than 10% may be deemed "control" if certain factors are in place. If the acquisition of control is by a company, the acquiror must obtain approval, rather than give notice, of the acquisition. In addition, OTS approval must be obtained for any merger involving either ASB or American. Federal Deposit Insurance Corporation The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and savings and loan associations and safeguards the safety and soundness of the banking and savings and loan industries. The FDIC administers two separate insurance funds, the Bank Insurance Fund ("BIF") for commercial banks and state savings banks and the SAIF for savings associations. American is a member of the SAIF and its deposit accounts are insured by the FDIC up to the prescribed limits. The FDIC has examination authority over all insured depository institutions, including American, and has authority to initiate enforcement actions against insured savings associations if the FDIC does not believe the OTS has taken appropriate action to safeguard safety and soundness and the deposit insurance fund. The FDIC is required to maintain designated levels of reserves in the SAIF and in the BIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. Federal Reserve Requirements FRB regulations currently require that savings associations maintain reserves of 3% of net transaction accounts (primarily NOW accounts) up to $45.4 million (subject to an exemption of up to $6.6 million), and of 10% of net transaction accounts in excess of $45.4 million. At June 30, 2004, American was in compliance with its reserve requirements. Ohio Corporation Law Merger Moratorium Statute. Chapter 1704 of the Ohio Revised Code regulates certain takeover bids affecting public corporations which have significant ties to Ohio. This statute prohibits, with some exceptions, any merger, combination or consolidation and any of certain other sales, leases, distributions, dividends, exchanges, mortgages or transfers between an Ohio corporation and any person who has the right to exercise, alone or with others, 10% or more of the voting power of such corporation (an "Interested Shareholder"), for three years following the date on which such person first becomes an Interested Shareholder. Such a business combination is permitted only if, prior to the time such person first becomes an Interested Shareholder, the Board of Directors of the issuing 18 corporation has approved the purchase of shares which resulted in such person first becoming an Interested Shareholder. After the initial three-year moratorium, such a business combination may not occur unless (1) one of the specified exceptions applies, (2) the holders of at least two-thirds of the voting shares, and of at least a majority of the voting shares not beneficially owned by the Interested Shareholder, approve the business combination at a meeting called for such purpose, or (3) the business combination meets certain statutory criteria designed to ensure that the issuing public corporation's remaining shareholders receive fair consideration for their shares. Control Share Acquisition Statute. Section 1701.831 of the Ohio Revised Code (the "Control Share Acquisition Statute") requires that, with certain exceptions, acquisitions of voting securities which would result in the acquiring shareholder owning 20%, 33-1/3% or 50% of the outstanding voting securities of an Ohio corporation (a "Control Share Acquisition") must be approved in advance by the holders of at least a majority of the outstanding voting shares of such corporation represented at a meeting at which a quorum is present and a majority of the portion of the outstanding voting shares represented at such a meeting excluding the voting shares owned by the acquiring shareholder, by certain other persons who acquire or transfer voting shares after public announcement of the acquisition or by certain officers of the corporation or directors of the corporation who are employees of the corporation. Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act is applicable to all companies with equity securities required to file reports under the Securities Exchange Act of 1934. The Sarbanes-Oxley Act established, among other things: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violations of the securities laws. Many of the provisions were effective immediately while other provisions become effective over a period of time and are subject to rulemaking by the SEC. Because ASB's common stock is registered with the SEC, it is subject to the Sarbanes-Oxley Act, and any future rules or regulations promulgated under such act. TAXATION Federal Taxation ASB and American are each subject to the federal tax laws and regulations which apply to corporations generally. In addition to the regular income tax, ASB and American may be subject to an alternative minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on "alternative minimum taxable income" (which is the sum of a corporation's regular taxable income, with certain adjustments, and tax preference items), less any available exemption. In addition, 75% of the amount by which a corporation's "adjusted current earnings" exceeds its alternative minimum taxable income computed without regard to preference items and prior to reduction by net operating losses, is included in alternative minimum taxable income. Net operating losses can offset no more than 90% of alternative minimum taxable income. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax. Payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. Certain thrift institutions, such as American, are allowed deductions for bad debts under methods more favorable than those granted to other taxpayers. Qualified thrift institutions may compute deductions for bad debts using either the specific charge-off method of Section 166 of the Code or the experience method of Section 593 of the Code. The experience method is also available to small banks. Under the experience method, a thrift institution is generally allowed a deduction for an addition to its bad debt reserve equal to the greater of (i) an amount based on its actual average experience for losses in the current and five preceding taxable years, or (ii) an amount necessary to restore the reserve to its balance as of the close of the base year. Thrift institutions that are treated as small banks are allowed to utilize the experience method applicable to such institutions, while thrift institutions that are treated as large banks are required to use only the specific charge off method. A thrift institution required to change its method of computing reserves for bad debt will treat such change as a change in the method of accounting, initiated by the taxpayer and having been made with the consent of the Secretary of the Treasury. Section 481(a) of the Code requires certain amounts to be recaptured with respect to such change. Generally, the amounts to be recaptured will be determined solely with respect to the "applicable excess 19 reserves" of the taxpayer. The amount of the applicable excess reserves will be taken into account ratably over a six-taxable year period, commencing with the first taxable year beginning after 1995, subject to the residential loan requirement described below. In the case of a thrift institution that is treated as a large bank, the amount of the institution's applicable excess reserves generally is the excess of (i) the balances of its reserve for losses on qualifying real property loans (generally loans secured by improved real estate) and its reserve for losses on nonqualifying loans (all other types of loans) as of the close of its last taxable year beginning before January 1, 1996, over (ii) the balances of such reserves as of the close of its last taxable year beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that is treated as a small bank, like American, the amount of the institution's applicable excess reserves generally is the excess of (i) the balances of its reserve for losses on qualifying real property loans and its reserve for losses on nonqualifying loans as of the close of its last taxable year beginning before January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would have been at the close of its last year beginning before January 1, 1996, had the thrift always used the experience method. The balance of the pre-1988 reserves is subject to the provisions of Section 593(e), which require recapture in the case of certain excessive distributions to shareholders. The pre-1988 reserves may not be utilized for payment of cash dividends or other distributions to a shareholder (including distributions in dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). Distribution of a cash dividend by a thrift institution to a shareholder is treated as made: first, out of the institution's post-1951 accumulated earnings and profits; second, out of the pre-1988 reserves; and third, out of such other accounts as may be proper. To the extent a distribution by American to ASB is deemed paid out of its pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and the gross income of American for tax purposes would be increased by the amount which, when reduced by the income tax, if any, attributable to the inclusion of such amount in its gross income, equals the amount deemed paid out of the pre-1988 reserves. As of June 30, 2004, the pre-1988 reserves of American for tax purposes totaled approximately $1.9 million. American believes it had approximately $1.6 million of accumulated earnings and profits for tax purposes as of June 30, 2004, which would be available for dividend distributions, provided regulatory restrictions applicable to the payment of dividends are met. No representation can be made as to whether American will have current or accumulated earnings and profits in subsequent years. The tax returns of American have been audited or closed without audit through fiscal year 1999. In the opinion of management, any examination of open returns would not result in a deficiency which could have a material adverse effect on the financial condition of American. Ohio Taxation ASB is subject to the Ohio corporation franchise tax, which, as applied to ASB, is a tax measured by both net earnings and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 or (ii) 0.4% of taxable net worth. In computing its tax under the net worth method, ASB may exclude 100% of its investment in the capital stock of American, as reflected on the balance sheet of ASB in computing its taxable net worth as long as it owns at least 25% of the issued and outstanding capital stock of American. The calculation of the exclusion from net worth is based on the ratio of the excludable investment (net of any appreciation or goodwill included in such investment) to total assets multiplied by the net value of the stock. As a holding company, ASB may be entitled to various other deductions in computing taxable net worth that are not generally available to operating companies. ASB may elect to be a "qualifying holding company" and as such be exempt from the net worth tax. A corporation franchise tax based solely on net earnings would still apply. To be exempt, ASB must satisfy all of the requirements of the applicable statute, including making related member adjustments that could affect the taxable net worth of American. ASB made such an election for fiscal 2004. American is a "financial institution" for State of Ohio tax purposes. As such, it is subject to the Ohio corporate franchise tax on "financial institutions," which is imposed annually at a rate of 1.3% of the taxable book net worth. As a "financial institution," American is not subject to any tax based upon net income or net profits imposed by the State of Ohio. CRITICAL ACCOUNTING POLICIES We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the allowance for loan losses to be a critical accounting policy. 20 The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of the most critical for American Savings Bank. Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlining collateral, the financial strength of the borrower, results of internal loans reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change. The analysis has two components, specific and general allocations. Specific allocations are made for loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The general allocation is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general reserve. Actual loan losses may be significantly more than the reserves we have established which could have a material negative effect on our financial results. Item 2. Description of Property. At June 30, 2004, American owned the property at 503 Chillicothe Street, Portsmouth, Ohio, on which its main office is located and the properties at 907 Chillicothe Street, Portsmouth, Ohio and 951 West Emmitt Ave., Waverly, Ohio where American operated branch offices. At June 30, 2004, the net book value of these properties, including the buildings was $1.6 million, and American's office premises and equipment had a total net book value of approximately $260,000. For additional information regarding American's office premises and equipment see Notes A and E of Notes to Consolidated Financial Statements. Item 3. Legal Proceedings. Neither ASB nor American is presently involved in any legal proceedings of a material nature. From time to time, American is a party to legal proceedings incidental to its business to enforce its security interest in collateral pledged to secure loans made by American. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. PART II Item 5. Market for Common Equity and Related Stockholder Matters. The information contained in the ASB Financial Corp. Annual Report to Shareholders for the fiscal year ended June 30, 2004 (the "Annual Report"), under the caption "Market Price of ASB's Common Shares and Related Shareholder Matters" is incorporated herein by reference. Item 6. Management's Discussion and Analysis or Plan of Operation. The information contained in the Annual Report under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" is incorporated herein by reference. Item 7. Financial Statements. The Consolidated Financial Statements contained in the Annual Report and the opinion of Grant Thornton LLP, dated August 12, 2004, are incorporated herein by reference. 21 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable. Item 8A. Controls and Procedures. ASB's Chief Executive Officer and Chief Financial Officer have evaluated ASB's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that ASB's disclosure controls and procedures are effective. There were no changes in ASB's internal controls, which materially affected or are reasonably likely to materially affect, ASB's internal controls over financial reporting. Item 8B. Other Information. Not applicable. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. The information contained in the definitive Proxy Statement for the 2004 Annual Meeting of Shareholders of ASB Financial Corp. (the "Proxy Statement") under the captions "Election of Directors and Board Information," "Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. ASB has adopted a code of ethics applicable to all officers, directors, and employees that complies with SEC requirements. A copy of ASB's code of ethics may be obtained without charge upon written request to the Secretary of ASB Financial Corp. at 503 Chillicothe Street, Portsmouth, Ohio 45662. Item 10. Executive Compensation. The information contained in the Proxy Statement under the caption "Compensation of Executive Officers and Directors" and "Stock Option Plan" is incorporated herein by reference. Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information contained in the Proxy Statement under the caption "Ownership of ASB Shares" is incorporated herein by reference. ASB maintains the ASB Financial Corp. 1995 Stock Option and Incentive Plan (the "Plan") under which it may issue equity securities to its directors, officers and employees. The Plan was approved by ASB's shareholders at the 1995 Annual Meeting of Shareholders. 22 The following table shows, as of June 30, 2004, the number of common shares issuable upon exercise of outstanding stock options, the weighted average exercise price of those stock options, and the number of common shares remaining for future issuance under the Plan, excluding shares issuable upon exercise of outstanding stock options. Equity Compensation Plan Information -------------------------
- ------------------------------------------------------------------------------------------------------------ (a) (b) (c) - ------------------------------------------------------------------------------------------------------------ Number of securities remaining available for Number of securities future issuance under to be issued upon Weighted-average equity compensation plans exercise of exercise price of (excluding securities Plan Category outstanding options outstanding options reflected in column (a)) - ------------------------------------------------------------------------------------------------------------ Equity compensation plans approved by security holders 78,128 $10.15 - - ------------------------------------------------------------------------------------------------------------ Equity compensation plans not approved by security holders N/A N/A N/A - ------------------------------------------------------------------------------------------------------------ Total 78,128 $10.15 - - ------------------------------------------------------------------------------------------------------------
Item 12. Certain Relationships and Related Transactions Not applicable. Item 13. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Incorporation (incorporated by reference) 3.2 Code of Regulations (incorporated by reference) 10.1 ASB Financial Corp. 1995 Stock Option and Incentive Plan (incorporated by reference) 10.2 American Savings Bank, f.s.b. Management Recognition Plan and Trust Agreement (incorporated by reference) 10.3 Deferred Compensation Plan of American Savings Bank, f.s.b. 13 Annual Report (the following parts of which are incorporated herein by reference: "Market Price of ASB Common Shares and Related Shareholder Matters;" "Management's Discussion and Analysis of Financial Condition and Results of Operations;" and Consolidated Financial Statements.) 20 Proxy Statement 21 Subsidiaries of ASB Financial Corp. (incorporated by reference) 23 Consent of Independent Registered Public Accounting Firm 23 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K. On April 28, 2004, ASB filed a Form 8-K to report the issuance of a press release regarding its earnings for the quarter ended March 31, 2004. Item 14. Principal Accountant Fees and Services. The information contained in the Proxy Statement under the caption "Audit and Non-Audit Fees" is incorporated by reference. 24 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ASB FINANCIAL CORP. By /s/Robert M. Smith -------------------------------- Robert M. Smith President Date: September 27, 2004 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/Gerald R. Jenkins By /s/Larry F. Meredith -------------------------- ------------------------------ Gerald R. Jenkins Larry F. Meredith Director Director Date: September 27, 2004 Date: September 27, 2004 By /s/William J. Burke By /s/Louis M. Schoettle -------------------------- ------------------------------ William J. Burke Louis M. Schoettle Director Director Date: September 27, 2004 Date: September 27, 2004 By /s/Christopher H. Lute By /s/Michael L. Gampp -------------------------- -------------------------------- Christopher H. Lute Michael L. Gampp Director Chief Financial Officer (Principal Financial Officer and Date: September 27, 2004 Principal Accounting Officer) Date: September 27, 2004 By /s/Robert M. Smith ----------------------------- Robert M. Smith President and Director (Principal Executive Officer) Date: September 27, 2004 25 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Articles of Incorporation of ASB Financial Corp. Incorporated by reference to the Form 10-KSB for fiscal year ended June 30, 1995 filed with the SEC on September 28, 1995 (SEC File No. 000-25906) (the "1995 Form 10-KSB") with the Securities and Exchange Commission (the "SEC"), Exhibit 3.3 3.4 Code of Regulations of ASB Financial Corp. Incorporated by reference to the 1995 Form 10-KSB, Exhibit 3.5 10.1 ASB Financial Corp. 1995 Stock Option and Incentive Plan Incorporated by reference to the Form 10-KSB for the fiscal year ended June 30, 1996 filed with the SEC on EDGAR on September 30, 1996 (SEC File No. 000-25906) (the "1996 Form 10-KSB") Exhibit 10.1 10.2 American Savings Bank, f.s.b. Management Recognition Incorporated by reference to the 1996 Plan and Trust Agreement Form 10-KSB, Exhibit 10.2 10.3 Deferred Compensation Plan of American Savings Bank f.s.b. Included herewith 13 2004 Annual Report to Shareholders Included herewith 20 Proxy Statement for 2004 Annual Meeting Incorporated by reference to the Proxy Statement for the 2004 Annual Meeting of Shareholders filed with the SEC on September 24, 2004 21 Subsidiaries of ASB Financial Corp. Incorporated by reference to the 1995 Form 10-KSB, Exhibit 21 23 Consent of Independent Registered Public Accounting Firm Included herewith 31.1 Certification of Chief Executive Officer Pursuant to Included herewith Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Included herewith Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer Pursuant to Included herewith Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to Included herewith Section 906 of the Sarbanes-Oxley Act of 2002
26 EX-10 2 asb-103.txt EXHIBIT 10.3 Exhibit 10.3 DEFERRED COMPENSATION PLAN OF AMERICAN SAVINGS BANK, f.s.b. PORTSMOUTH, OHIO This Agreement made this 23rd day of July, 1998, by and between ASB and its directors. Whereas, American Savings Bank, fsb, (ASB), formerly American Savings Association, established a deferred compensation benefit plan for its directors December 28, 1981 which plan was amended April 14, 1995 and Whereas, ASB desires to further amend and restate its plan, Now, Therefore, the parties agree as follows: 1. Compensation. ASB shall pay each director a monthly salary the amount of which will be determined by its board of directors. 2. Each director may elect, each year, to defer any part or all of his fee. No change may be made during the calendar year in which the election is made. A director who begins to serve as such during a calendar year may elect to defer his compensation, or any part thereof, within thirty (30) days after compensation begins. 3. ASB shall contribute to a Trust that portion of each director's salary elected by him to be deferred. Deferrals shall be contributed to a "Rabbi Trust" periodically and will be invested in securities, including those of ASB Financial, bonds, certificates of deposit, mutual funds and other investment vehicles, as determined from time to time by ASB's Board of Directors. 4. The term of each director shall be determined by the shareholders of ASB at its annual meeting in accordance with its regulations. 5. (a) Payment upon retirement, disability, or death during his term: If a director retires, is totally disabled or dies during his service with ASB, the benefits to which he is entitle shall be paid to him, his beneficiary or beneficiaries, or to his or his beneficiary's estate. The day that a participant ceases to be a director of ASB shall be considered his retirement date and distribution of his benefits will begin thirty (30) days thereafter. (b) At his option or election, upon retirement, a director may be paid in a lump sum or in equal monthly payments over a period of either five (5) or ten (10) years provided the election is made at least six months before retirement. If the election is not timely made, the benefits shall be paid to him in a lump sum unless otherwise mutually agreed upon. (c) Method of Payment. Payment of his benefit shall be paid to a director in cash or in kind or partly in each at his option. Once a method of payment has been chosen it may be changed only with the consent of ASB. (d) Should a director die before retirement, his date of death shall be considered his retirement date and his benefit shall be paid to his beneficiary in equal monthly installments over a period of ten (10) years. Should there be more than one beneficiary, the benefit shall be divided equally between or among them. Should any beneficiary die before receiving his share, it shall be paid to his estate in a lump sum. (e) Should a director die after retirement but before receiving all his benefits, the benefits shall be paid to his beneficiary in the same manner and method as were chosen by him. If any beneficiary should die before receiving all his share, the remainder shall be paid to his estate. (f) Should a director retire because of disability considered by ASB, in its sole discretion, to prevent him from performing his duties satisfactorily, the date of disability shall be considered his retirement date and he shall be paid accordingly. 6. Benefits nonforfeitable. Benefits of deferred compensation are nonforfeitable and shall be paid to the director or to his beneficiary whether his service terminates voluntarily or involuntarily. 7. Other retirement plans. Nothing herein shall effect a director's right to participate in any other retirement plan offered by ASB. 8. Termination of Status. ASB reserves the right to terminate a director's services at any time. Participation in the plan may be terminated by mutual consent. Neither termination of service nor non- participation shall affect a director's right to his benefits. 9. Administration. The plan shall be administered by ASB in its sole discretion and while acting in good faith it shall not be liable for any action arising out of such administration. 10. Amendment: This plan may be amended in writing by mutual consent. 11. Notice. Any notice required hereunder may be given in writing by personal delivery or by mail to the parties addresses on file with ASB. 12. Non-Waiver. No delay or failure by either party to exercise any right hereunder shall constitute a waiver of that or any other right. 13. Counterparts. This agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same instrument. 14. As used herein unless the context requires otherwise, words in the singular may be construed to be in the plural and words in any gender may be construed to be in any other gender. 15. Governing Laws. This Agreement shall be construed in accordance with and governed by the laws of the State of Ohio. 16. Binding Effect. The provisions of this Agreement shall be binding upon and inure to the benefit of each of the parties and their respective successors and assigns. In Witness Whereof, the parties have signed this agreement. Witness: AMERICAN SAVINGS BANK, fsb Corporate Seal By /s/ Robert M. Smith Attest ------------------------------------ Robert M. Smith, Its President /s/ M. Kathryn Scott - ----------------------------------- , Secretary DIRECTORS /s/ Bonnie R. Dingess /s/ Gerald R. Jenkins - ----------------------------------- ------------------------------------ Gerald Jenkins /s/ Angie Morrison /s/ Robert M. Smith - ----------------------------------- ------------------------------------ Robert M. Smith /s/ Louis M. Schoettle ------------------------------------ Louis M. Schoettle /s/ Victor Morgan ------------------------------------ Victor Morgan /s/ William Burke ------------------------------------ William Burke /s/ Lee O. Fitch ------------------------------------ Lee O. Fitch EX-13 3 asb-x13.txt EXHIBIT 13 Exhibit 13 ASB FINANCIAL CORP. 2004 ANNUAL REPORT TO SHAREHOLDERS Dear Fellow Shareholder: It is with a great deal of pleasure that we present our Annual Report to Shareholders, which reflects another year of solid earnings and growth for ASB Financial Corp. Net earnings for the fiscal year ended June 30, 2004, totaled $2.0 million, or diluted earnings per share of $1.18, a decrease of $51,000, or 2.5% from the $2.1 million, or $1.30 per diluted share in net earnings recorded for the fiscal year ended June 30, 2003. Earnings per share decreased by 9.2% due to the decrease in net earnings and an increase in the number of equivalent shares outstanding. In addition to a sound earnings performance, we are please to report that, for the fifth consecutive year, the Company has increased its quarterly dividend by $.01 per share to $.15, reflecting a 7.1% increase in the annual dividends paid to shareholders. Total assets grew to $166.4 million at June 30, 2004, an increase of $13.6 million, or 8.9%, over June 30, 2003. The loan portfolio grew during fiscal 2004 by $14.1 million or 13.0% and deposit growth totaled $6.0 million, or 5.2%, during the year. A substantial amount of our growth has come from the Pike County market, where we continue to see substantial and continuing growth in residential and commercial lending. Your Corporation will continue to focus on the strategic objectives of continuing asset growth, maintaining a community focus, and providing personalized service for our valued customers. Upcoming projects such as Internet Banking and Check Imaging will provide more personalized service and the potential for growth in the future. The Board and management of your Corporation are pleased that the rise in the price of our stock from $16.94 on June 30, 2003, to $22.94 on June 30th of this year, an increase of $5.95 or 35.1%. This increase is a reflection of our strong earnings performance, low efficiency ratio and aggressive dividend strategy. These factors have served us well, as ASB Financial's stock price has out-performed most of our peers during the past fiscal year. The Board of Directors and management team remain committed to the communities we serve and to achieving growth and increasing returns to our shareholders in the years ahead. Very truly yours, ASB FINANCIAL CORP. /s/ Robert M. Smith Robert M. Smith President BUSINESS OF ASB FINANCIAL CORP. ============================================================================ ASB Financial Corp. ("ASB" or the "Corporation"), a unitary savings and loan holding company incorporated under the laws of the State of Ohio, owns all of the issued and outstanding common shares of American Savings Bank, fsb ("American" or the "Savings Bank"), a federal savings bank. Other than investing excess funds, ASB's activities have been primarily limited to holding the common shares of American. Serving the southeastern Ohio market area since 1892, American conducts business from its main office at 503 Chillicothe Street in Portsmouth, Ohio and a branch office at 118 North Market Street in Waverly, Ohio. The principal business of American is the origination of loans secured by one- to four-family residential real estate located in American's primary market area, which consists of the contiguous areas of Scioto County and Pike County, Ohio. American also originates loans secured by multifamily residences (over four units) and nonresidential real estate and purchases interests in loans originated by other lenders secured by multifamily real estate and nonresidential real estate located outside of American's primary market area. In addition to real estate lending, American invests in mortgage-backed securities, U.S. Government and agency obligations and other investments. Funds for lending and other investment activities are obtained primarily from deposits, which are insured up to applicable limits by the Federal Deposit Insurance Corporation (the "FDIC"), and from borrowings from the Federal Home Loan Bank (the "FHLB") of Cincinnati. ASB is subject to regulation, supervision and examination by the Office of Thrift Supervision of the United States Department of the Treasury (the "OTS"). American is subject to regulation, supervision and examination by the OTS and the FDIC. American is also a member of the FHLB of Cincinnati. ASB's office is located at 503 Chillicothe Street, Portsmouth, Ohio 45662. The telephone number is (740) 354-3177. 2 MARKET PRICE OF ASB'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS ============================================================================= There were 1,661,063 common shares of ASB outstanding on September 1, 2004, held of record by approximately 476 shareholders. Price information for ASB's common shares is quoted on the Nasdaq National Market ("Nasdaq") under the symbol "ASBP." The table below sets forth the high and low closing prices for the common shares of ASB, as quoted by Nasdaq, together with dividends declared per share, for each quarter of the fiscal years ended June 30, 2004 and 2003.
Cash dividends Quarter ended High close Low close declared Fiscal 2004 September 30, 2003 $24.96 $17.27 $0.14 December 31, 2003 $27.50 $22.56 $0.14 March 31, 2004 $27.75 $23.11 $0.14 June 30, 2004 $29.24 $22.00 $0.15 Fiscal 2003 September 30, 2002 $11.59 $10.70 $0.13 December 31, 2002 $14.90 $10.70 $0.13 March 31, 2003 $17.50 $14.25 $0.13 June 30, 2003 $17.25 $14.05 $1.14
The income of ASB on an unconsolidated basis consists of interest and dividends on investment and mortgage-backed and related securities and dividends which may periodically be paid on the common shares of American held by ASB. In addition to certain federal income tax considerations, OTS regulations impose limitations on the payment of dividends and other capital distributions by savings associations. 3 SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA ============================================================================= The following tables set forth certain information concerning the consolidated financial condition, earnings and other data regarding ASB at the dates and for the periods indicated.
Selected consolidated financial At June 30, condition data: 2004 2003 2002 2001 2000 (In thousands) Total amount of: Assets $166,371 $152,755 $148,272 $140,987 $131,898 Cash and cash equivalents 7,385 7,610 7,704 4,649 5,069 Certificates of deposit in other financial institutions 178 173 100 - - Investment securities available for sale - at market 12,487 13,005 20,866 20,772 19,127 Mortgage-backed securities available for sale - at market 11,768 12,130 7,091 8,716 8,616 Loans receivable - net 129,821 114,919 109,015 103,308 94,744 Deposits 136,761 130,780 126,872 120,725 110,007 Advances from the FHLB 10,899 4,188 4,223 4,257 7,790 Shareholders' equity, restricted 17,424 16,359 15,454 14,503 12,581 - --------------------
Selected consolidated operating Year ended June 30, data: 2004 2003 2002 2001 2000 (In thousands, except per share data) Interest income $8,954 $9,576 $9,543 $10,262 $9,257 Interest expense 3,051 3,888 5,050 6,379 5,427 ------ ------ ------ ------- ------ Net interest income 5,903 5,688 4,493 3,883 3,830 Provision for losses on loans 111 249 70 1 1 ------ ------ ------ ------- ------ Net interest income after provision for losses on loans 5,792 5,439 4,423 3,882 3,829 Other income 705 745 486 495 354 General, administrative and other expense 3,743 3,277 3,077 2,783 2,673 ------ ------ ------ ------- ------ Earnings before income taxes and extraordinary item 2,754 2,907 1,832 1,594 1,510 Federal income taxes 744 846 548 460 426 ------ ------ ------ ------- ------ Earnings before extraordinary item 2,010 2,061 1,284 1,134 1,084 Extraordinary item - negative goodwill arising from Waverly acquisition - net of tax - - 229 - - ------ ------ ------ ------- ------ Net earnings $2,010 $2,061 $1,513 $ 1,134 $1,084 ====== ====== ====== ======= ====== Earnings per share Basic $ 1.22 $ 1.32 $ 1.00 $ .75 $ .70 ====== ====== ====== ======= ====== Diluted $ 1.18 $ 1.30 $ .97 $ .73 $ .70 ====== ====== ====== ======= ======
4
Year ended June 30, Selected financial ratios: 2004 2003 2002 2001 2000 Return on average assets 1.26% 1.36% 1.06% .83% .86% Average interest rate spread during year 3.68 3.50 2.84 2.46 2.74 Net interest margin 3.84 3.81 3.23 2.94 3.15 Return on average equity 12.99 12.61 11.48 8.22 8.21 Equity to total assets at end of year 10.47 10.71 10.42 10.29 9.54 Average interest-earning assets to average interest-bearing liabilities 108.11 112.16 110.90 109.93 109.25 Net interest income to general, administrative and other expense 157.71 173.57 146.02 139.53 143.28 General, administrative and other expense to average total assets 2.35 2.16 2.16 2.05 2.13 Nonperforming assets to total assets .60 .80 .48 .44 .21 Loan loss allowance to nonperforming loans 99.90 82.77 120.93 115.37 257.30 Dividend payout ratio 46.72 115.91 49.00 60.00 201.43
5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ============================================================================= GENERAL - ----------------------------------------------------------------------------- ASB was incorporated for the purpose of owning the outstanding common shares of American. As a result, the discussion and analysis that follows focuses primarily on the financial condition and results of operations of American. The following discussion and analysis of the consolidated financial condition and results of operations of ASB and American should be read in conjunction with, and with reference to, the Consolidated Financial Statements and the Notes thereto presented in this Annual Report. Forward-Looking Statements are Subject to Change Certain statements contained in this report that are not historical facts are forward looking statements that are subject to certain risks and uncertainties. When used herein, the terms "anticipates," "plans," "expects," "believes," and similar expressions as they relate to ASB or its management are intended to identify such forward looking statements. ASB's actual results, performance or achievements may materially differ from those expressed or implied in the forward-looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. Critical Accounting Policies The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to use judgments in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The following critical accounting policy is based upon judgments and assumptions by management that includes inherent risks and uncertainties. The allowance for loan loss is an accounting estimate of probable but unconfirmed asset impairment that has occurred in the Corporation's loan portfolio as of the date of the consolidated financial statements before losses have been confirmed resulting in a subsequent charge-off or write- down. It is the Corporation's policy to provide valuation allowances for estimated losses on loans based upon past loss experience, adjusted for changes in trends and conditions of certain items, including: * Local market areas and national economic developments; * Levels of and trends in delinquencies and impaired loans; * Levels of and trends in recoveries of prior charge-offs; * Adverse situations that may affect specific borrowers' ability to repay; * Effects of any changes in lending policies and procedures; * Credit concentrations; * Volume and terms of loans; and * Current collateral values, where appropriate. When the collection of a loan becomes doubtful, or otherwise troubled, the Corporation 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). 6 The Corporation accounts for its allowance for losses on loans in accordance with Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies," and SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." Both Statements require the Corporation to evaluate the collectibility of both contractual interest and principal loan payments. SFAS No. 5 requires the accrual of a loss when it is probable that a loan has been impaired and the amount of the loss can be reasonably estimated. SFAS No. 114 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 as impaired under SFAS No. 114 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 Corporation considers its investment in one- to four-family residential loans and consumer loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. These homogeneous loan groups are evaluated for impairment in accordance with SFAS No. 5. With respect to the Corporation's investment in nonresidential real estate and other loans, and its evaluation of impairment thereof, management believes such loans are adequately collateralized and as a result impaired loans are carried as a practical expedient at the lower of cost or fair value. It is the Corporation's policy to charge off unsecured credits that are more than ninety days delinquent. Similarly, once a collateral dependent loan becomes more than ninety days delinquent, it is considered to constitute more than a minimum delay in repayment and is evaluated for impairment under SFAS No. 114 at that time. CHANGES IN FINANCIAL CONDITION FROM JUNE 30, 2003 TO JUNE 30, 2004 - ----------------------------------------------------------------------------- ASB's total assets amounted to $166.4 million at June 30, 2004, an increase of $13.6 million, or 8.9%, over 2003 levels. The increase in assets was comprised primarily of a $14.9 million increase in loans, partially offset by decreases of $362,000 in mortgage-backed securities, and $518,000 in investment securities. The increase in assets was funded by increased deposits of $6.0 million, increases in advances from the Federal Home Loan Bank of $6.7 million and growth of $1.1 million in shareholders' equity. Cash and interest-bearing deposits totaled $7.4 million at June 30, 2004, a decrease of $225,000, or 3.0%, from 2003 levels. Investment securities totaled $12.5 million at June 30, 2004, a decrease of $518,000, or 4.0%, compared to the balance at June 30, 2003. Mortgage-backed securities totaled $11.8 million at June 30, 2004, a decrease of $362,000, or 3.0%, year to year. During fiscal 2004, purchases of investment and mortgage- backed securities totaling $15.8 million were offset by maturities, sales, premium amortization and principal repayments of securities totaling $16.2 million, and a decrease in the market value of investment and mortgage- backed securities totaling $449,000. Loans receivable increased by $14.9 million, or 13.0%, to a total of $129.8 million at June 30, 2004, compared to $114.9 million at June 30, 2003. Loan disbursements of $51.9 million exceeded principal repayments of $36.8 million during fiscal 2004. The volume of loan disbursements in fiscal 2004 exceeded that of fiscal 2003 by $9.1 million, or 21.2%. Growth in loans secured by residential real estate, including construction loans, totaled $6.5 million, or 5.5%, growth in loans secured by nonresidential real estate totaled $3.1 million, or 19.5%, and the consumer loan portfolio increased by $6.2 million, or 40.1%, year to year. The increase in consumer loans was due primarily to developing the markets served. At June 30, 2004, American's allowance for loan losses was $1.0 million, representing .73% of total loans and 99.9% of nonperforming loans. At June 30, 2003, American's allowance for loan losses was also $1.0 million, representing .85% of total loans and 82.8% of nonperforming loans. Nonperforming loans totaled $1.0 7 million and $1.2 million at June 30, 2004 and 2003, respectively. At June 30, 2004, nonperforming loans were comprised of $843,000 of loans secured by one- to four-family residential real estate and $157,000 of commercial loans. The allowance for loan loss is determined as outlined in the aforementioned "Critical Accounting Policy." To the best of management's knowledge, all known losses as of June 30, 2004, have been recorded. Deposits increased by $6.0 million, or 4.6%, to a total of $136.8 million at June 30, 2004. The increase in deposits consisted primarily of increases of $3.6 million in certificates of deposit, $2.2 million in money market deposit accounts, and $858,000 in passbook accounts, which were partially offset by a $757,000 decrease in NOW accounts. Growth in deposits was generally used to fund new loan originations. Shareholders' equity totaled $17.4 million at June 30, 2004, an increase of $1.1 million, or 6.5%, over June 30, 2003 levels. The increase resulted primarily from net earnings of $2.0 million, proceeds from stock option exercises of $78,000 and the effects of $351,000 of amortization related to stock benefit plans, which were partially offset by dividends declared of $944,000, a $296,000 decrease in unrealized gains on available for sale securities and treasury stock purchases of $134,000. During fiscal 2004, the Corporation paid quarterly dividends totaling $.57 per share. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 - ----------------------------------------------------------------------------- General. Net earnings were $2.0 million for the fiscal year ended June 30, 2004, a decrease of $51,000, or 2.5%, from fiscal 2003. The decline in earnings resulted primarily from a $466,000 increase in general and administrative expense, which was partially offset by a $215,000 increase in net interest income, a $138,000 decrease in provision for losses on loans and a $102,000 decrease in the provision for federal income taxes. Net Interest Income. Total interest income was $9.0 million for the fiscal year ended June 30, 2004, a decrease of $622,000, or 6.5%, from fiscal 2003. Interest income on loans totaled $8.1 million in fiscal 2004, a decrease of $129,000, or 1.6%. This decrease was due primarily to a 74 basis point decrease in the average yield, to 6.52% for the fiscal year ended June 30, 2004, which was partially offset by a $10.8 million, or 9.5%, increase in the weighted-average balance of loans outstanding. Interest income on mortgage-backed securities decreased by $184,000, or 47.9%, as a result of a 218 basis point decrease in the average yield, which was partially offset by a $1.7 million, or 17.5%, increase in the weighted-average balance outstanding year to year. Interest income on investment securities and interest-bearing deposits decreased by $309,000, or 32.2%, due primarily to an $8.0 million, or 30.8%, decrease in the weighted average balance outstanding year to year and an 8 basis point decrease in the average yield, to 3.63% for fiscal 2004. Interest expense totaled $3.1 million for the fiscal year ended June 30, 2004, a decrease of $837,000, or 21.5%, from the $3.9 million total recorded in fiscal 2003. Interest expense on deposits decreased by $955,000, or 25.0%, due primarily to an 83 basis point decrease in the weighted-average cost of deposits, to 2.14% for fiscal 2004, which was partially offset by a $5.1 million, or 4.0%, increase in the weighted- average balance outstanding year to year. Interest expense on borrowings increased by $118,000, or 166.2%, due primarily to a $4.1 million, or 94.3%, increase in the weighted-average balance outstanding year to year and a 60 basis point increase in the average cost of borrowings, to 2.23% in fiscal 2004. Decreases in the average yields on interest-earning assets and the average 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 $215,000, or 3.8%, to a total of $5.9 million for the fiscal year ended June 30, 2004, compared to $5.7 million in fiscal 2003. The interest rate spread increased by 18 basis points to 3.68% in fiscal 2004 from 3.50% in 8 fiscal 2003, and the net interest margin increased by 3 basis points to 3.84% in fiscal 2004 from 3.81% in fiscal 2003. Provision for Losses on Loans. American 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 American, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to American's market area, and other factors related to the collectibility of American's loan portfolio. As a result of such analysis, management recorded an $111,000 provision for losses on loans during the fiscal year ended June 30, 2004, a decrease of $138,000, or 55.4%, from fiscal 2003. The decrease in the provision in fiscal 2004 is based upon management's analysis of the loan portfolio including nonperforming assets, as outlined in the "Critical Accounting Policies" There can be no assurance that the loan loss allowance will be adequate to absorb losses on known nonperforming assets or that the allowance will be adequate to cover losses on nonperforming assets in the future. Other Income. Other income totaled $705,000 for the fiscal year ended June 30, 2004, a decrease of $40,000, or 5.4%, from the $745,000 recorded in fiscal 2003. The decrease resulted from an $116,000 decrease in gain on sale of investment securities, which was partially offset by a $58,000 gain on sale of office premises and an increase of $18,000, or 3.1%, in other operating income. The increase in other operating income was comprised primarily of increases in fees on loans and deposits transactions. General, Administrative and Other Expense. General, administrative and other expense totaled $3.7 million for the fiscal year ended June 30, 2004, an increase of $466,000, or 14.2%, over the total recorded in fiscal 2003. The increase resulted primarily from increases of $292,000, or 16.9%, in employee compensation and benefits, $22,000, or 5.4%, in data processing costs, $75,000, or 9.2%, in other operating expense, and $40,000, or 31.0%, in franchise taxes. The increase in employee compensation and benefits was due primarily to normal merit increases and bonuses as well as increased costs related to employee health insurance premiums. The increase in data processing was due primarily to system upgrades, as well as increased costs related to American's growth in loans and deposits year to year. The increase in franchise taxes was due primarily to growth in ASB's equity year to year. The increase in other operating expense was due primarily to increased expense associated with the debit card program and pro-rata increases in operating costs due to the Corporation's overall growth year to year. Federal Income Taxes. The provision for federal income taxes totaled $744,000 for the fiscal year ended June 30, 2004, a decrease of $102,000, or 12.1% from the $846,000 recorded in fiscal 2003. The decrease was due primarily to the $153,000, or 5.3%, decrease in pre-tax earnings and $100,000 of New Markets tax credits. ASB's effective tax rates were 27.0% and 29.1% for the fiscal years ended June 30, 2004 and 2003, respectively. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2003 AND 2002 - ----------------------------------------------------------------------------- General. Net earnings amounted to $2.1 million for the fiscal year ended June 30, 2003, an increase of $548,000, or 36.2%, over fiscal 2002. The increase in earnings resulted primarily from a $1.2 million increase in net interest income and a $259,000 increase in other income, which were partially offset by increases of $179,000 in the provision for losses on loans, $200,000 in general, administrative and other expense, and $298,000 in the provision for federal income taxes and the nonrecurring after-tax effects of the negative goodwill resulting from the Waverly acquisition totaling $229,000. The level of income and expense for 2003 includes the effects of the acquisition of Waverly, which was acquired in June 2002 in a transaction accounted for using the purchase method of accounting. 9 Net Interest Income. Total interest income was $9.6 million for the fiscal year ended June 30, 2003, an increase of $33,000, or .3%, over fiscal 2002. Interest income on loans totaled $8.2 million in fiscal 2003, an increase of $330,000, or 4.2%. This increase was due primarily to a $7.4 million, or 7.0%, increase in the weighted-average balance of loans outstanding, which was partially offset by a 19 basis point decrease in the average yield, to 7.26% for the fiscal year ended June 30, 2003. Interest income on mortgage- backed securities decreased by $29,000, or 7.0%, as a result of a 204 basis point decrease in the average yield, which was partially offset by a $2.9 million, or 41.5%, increase in the weighted-average balance outstanding year to year. Interest income on investment securities and interest-bearing deposits decreased by $268,000, or 21.8%, due primarily to a 103 basis point decrease in the average yield, to 3.71% for fiscal 2003. Interest expense totaled $3.9 million for the fiscal year ended June 30, 2003, a decrease of $1.2 million, or 23.0%, from the $5.1 million total recorded in fiscal 2002. Interest expense on deposits decreased by $1.1 million, or 22.6%, due primarily to a 113 basis point decrease in the weighted-average cost of deposits, to 2.97% for fiscal 2003, which was partially offset by an $8.4 million, or 7.0%, increase in the weighted- average balance outstanding year to year. Interest expense on borrowings decreased by $48,000, or 40.3%, due primarily to a 73 basis point decrease in the average cost of borrowings, to 1.63% in fiscal 2003 and a $685,000, or 13.6%, decrease in the weighted-average balance outstanding year to year. Decreases in the average yields on interest-earning assets and the average 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 $1.2 million, or 26.6%, to a total of $5.7 million for the fiscal year ended June 30, 2003, compared to $4.5 million in fiscal 2002. The interest rate spread increased by 66 basis points to 3.50% in fiscal 2003 from 2.84% in fiscal 2002, and the net interest margin increased by 58 basis points to 3.81% in fiscal 2003 from 3.23% in fiscal 2002. Provision for Losses on Loans. As stated previously, American 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 American, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to American's market area, and other factors related to the collectibility of American's loan portfolio. As a result of such analysis, management recorded a $249,000 provision for losses on loans during the fiscal year ended June 30, 2003, an increase of $179,000, or 255.7%, over fiscal 2002. There can be no assurance that the loan loss allowance will be adequate to absorb losses on known nonperforming assets or that the allowance will be adequate to cover losses on nonperforming assets in the future. Other Income. Other income totaled $745,000 for the fiscal year ended June 30, 2003, an increase of $259,000, or 53.3%, over the $486,000 recorded in fiscal 2002. The increase resulted from increase of $125,000 in gain on sale of investment securities year to year and $134,000, or 29.5%, in other operating income. The increase in other operating income was comprised primarily of increases in fees on loans and deposits transactions. General, Administrative and Other Expense. General, administrative and other expense totaled $3.3 million for the fiscal year ended June 30, 2003, an increase of $200,000, or 6.5%, over the total recorded in fiscal 2002. The increase resulted primarily from increases of $149,000, or 9.5%, in employee compensation and benefits, $15,000, or 3.8%, in data processing costs, $10,000, or 1.2%, in other operating expense, and $18,000, or 16.2%, in franchise taxes. The increase in employee compensation and benefits was due primarily to the addition of five employees at the Waverly office and normal merit increases, which were partially offset by a $45,000 decline in expense related to stock benefit plans and an increase in deferred loan costs associated with the increase in lending volume year to year. The increase in data processing was due primarily to system upgrades, as well as increased costs related to American's growth in loans and deposits. The increase in franchise taxes was due primarily to growth in ASB's equity year to year. The increase in other operating expense was due primarily to increased expense associated with the debit card program and pro-rata increases in operating costs due to the Corporation's overall growth year to year. 10 Federal Income Taxes. The provision for federal income taxes totaled $846,000 for the fiscal year ended June 30, 2003, an increase of $298,000, or 54.4%, over the $548,000 recorded in fiscal 2002. The increase was due primarily to the $1.1 million, or 58.7%, increase in pre-tax earnings, which was partially offset by a $100,000 New Markets tax credits. ASB's effective tax rates were 29.1% and 29.9% for the fiscal years ended June 30, 2003 and 2002, respectively. AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA - ----------------------------------------------------------------------------- The following table sets forth certain information relating to ASB's average balance sheet and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average monthly balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented. Average balances are derived from average monthly balances, which include nonaccruing loans in the loan portfolio, net of the allowance for loan losses.
Year ended June 30, 2004 2003 2002 Average Interest Average Interest Average Interest outstanding earned/ Yield/ outstanding earned/ Yield/ outstanding earned/ Yield/ balance paid rate balance paid rate balance paid rate (Dollars in thousands) Interest-earning assets: Loans receivable $124,219 $8,102 6.52% $113,396 $8,231 7.26% $106,024 $7,901 7.45% Mortgage-backed securities 11,548 200 1.73 9,828 384 3.91 6,947 413 5.95 Investment securities and other interest-earning assets 17,948 652 3.63 25,929 961 3.71 25,930 1,229 4.74 -------- ------ ------ -------- ------ ------ -------- ------ ------ Total interest-earning assets 153,715 8,954 5.83 149,153 9,576 6.42 138,901 9,543 6.87 Non-interest-earning assets 5,786 2,219 3,728 -------- -------- -------- Total assets $159,501 $151,372 $142,629 ======== ======== ======== Interest-bearing liabilities: Deposits $133,731 2,862 2.14 $128,626 3,817 2.97 $120,212 4,931 4.10 Borrowings 8,459 189 2.23 4,354 71 1.63 5,039 119 2.36 -------- ------ ------ -------- ------ ------ -------- ------ ------ Total interest-bearing liabilities 142,190 3,051 2.15 132,980 3,888 2.92 125,251 5,050 4.03 ------ ------ ------ ------ ------ ------ Non-interest-bearing liabilities 1,837 2,051 4,199 -------- -------- -------- Total liabilities 144,027 135,031 129,450 Shareholders' equity 15,474 16,341 13,179 -------- -------- -------- Total liabilities and shareholders' equity $159,501 $151,372 $142,629 ======== ======== ======== Net interest income $5,903 $5,688 $4,493 ====== ====== ====== Interest rate spread 3.68% 3.50% 2.84% ====== ====== ====== Net interest margin (net interest income as a percent of average interest-earning assets) 3.84% 3.81% 3.23% ====== ====== ====== Average interest-earning assets to average interest- bearing liabilities 108.11% 112.16% 110.90% ====== ====== ======
11 The table below describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected ASB's interest income and expense during the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume) and (iii) total changes in rate and volume. The combined effects of changes in both volume and rate, which cannot be separately identified, have been allocated proportionately to the change due to volume and the change due to rate.
Year ended June 30, 2004 vs. 2003 2003 vs. 2002 Increase Increase (decrease) (decrease) due to due to Volume Rate Total Volume Rate Total (In thousands) Interest-earning assets: Loans receivable $ 790 $ (919) $(129) $579 $ (249) $ 330 Mortgage-backed securities 67 (251) (184) 181 (210) (29) Investment securities and interest - bearing assets (295) (14) (309) - (268) (268) ----- ------- ----- ---- ------- ------- Total interest-earning assets 562 (1,184) (622) 760 (727) 33 ----- ------- ----- ---- ------- ------- Interest-bearing liabilities: Deposits 154 (1,109) (955) 378 (1,492) (1,114) Borrowings 67 51 118 (16) (32) (48) ----- ------- ----- ---- ------- ------- Total interest-bearing liabilities 221 (1,058) (837) 362 (1,524) (1,162) ----- ------- ----- ---- ------- ------- Increase in net interest income $ 341 $ (126) $ 215 $398 $ 797 $ 1,195 ===== ======= ===== ==== ======= =======
ASSET AND LIABILITY MANAGEMENT - --------------------------------------------------------------------------- American, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. As a part of its effort to monitor its interest rate risk, American reviews the reports of the OTS which set forth the application of the "net portfolio value" ("NPV") methodology used by the OTS. Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning and other assets and outgoing cash flows on interest-bearing liabilities. The methodology attempts to quantify interest rate risk as the change in the NPV which would result from theoretical changes in market interest rates. The following table presents, at June 30, 2004 and 2003, an analysis of the interest rate risk of American, as measured by changes in NPV for instantaneous and sustained parallel shifts of 100 basis point movements in market interest rates. Decreases of greater than 100 basis points are not presented at June 30, 2004 and 2003, due to the low interest rate environment at those dates. 12
At June 30, 2004 At June 30, 2003 NPV as a % of NPV as a % of Changes in interest rate Board limit PV of Assets Change PV of Assets Change (basis points) % changes Ratio in NPV Ratio in NPV +300 (6)% $13,980 $(7,835) 9.26% (256)bp +200 (6) 16,746 (5,069) 10.45 (137) +100 (6) 19,464 (2,351) 11.42 (40) - - 21,815 - 11.82 - -100 6 22,672 857 11.60 (22)
The model reflects that American's NPV is more sensitive to an increase in interest rates than a decrease in interest rates. This occurs principally because, as rates rise, the market values of the Savings Bank's investments, adjustable-rate mortgage loans, fixed-rate loans and mortgage-backed securities decline due to the rate increases. The values of the Savings Bank's deposits and borrowings change in approximately the same proportion in rising or falling rate scenarios. If interest rates rise from current levels, American's net interest income could be negatively affected. Moreover, rising interest rates could negatively affect American's earnings due to diminished loan demand. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they do not all reprice simultaneously and they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind such changes. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the assets. Further, in the event of a change in interest rates, expected rates of prepayment on loans and early withdrawal from certificates could deviate significantly from those assumed in calculating the table. LIQUIDITY AND CAPITAL RESOURCES - ----------------------------------------------------------------------------- Liquidity refers to the ability of an institution to generate sufficient cash to fund current loan demand, meet deposit withdrawals and pay operating expenses. Liquidity is influenced by financial market conditions, fluctuations in interest rates, general economic conditions and regulatory requirements. ASB's liquidity, primarily represented by cash and cash equivalents and investment securities available for sale, is a result of the operating, investing and financing activities of American. These activities are summarized below on a consolidated basis for the years ended June 30, 2004, 2003, and 2002:
Year ended June 30, 2004 2003 2002 (In thousands) Net cash from operating activities $ 2,918 $ 2,229 $1,932 Net cash from investing activities (14,856) (4,828) 647 Net cash from financing activities 11,713 2,505 476 -------- ------- ------ Net change in cash and cash equivalents (225) (94) 3,055 Cash and cash equivalents at the beginning of the year 7,610 7,704 4,649 -------- ------- ------ Cash and cash equivalents at the end of the year $ 7,385 $ 7,610 $7,704 ======== ======= ======
13 The following table sets forth information regarding the Bank's obligations and commitments to make future payments under contract as of June 30, 2004, at market rates:
Payments due by period Less than More than 1 year 1 - 3 years 3 -5 years 5 years Total (in thousands) Contractual obligations: Advances from the Federal Home Loan Bank $ - $ 1,000 $ 5,651 $4,248 $ 10,899 Certificates of deposit 14,127 57,958 12,599 - 84,684 ------- ------- ------- ------ -------- 14,127 58,958 18,250 4,248 95,583 Amount of commitments expiration per period Commitments to originate loans: Home equity lines of credit 797 1,171 2,549 1,283 5,800 Commercial lines of credit 2,800 - - - 2,800 Commercial letters of credit 399 - - - 399 Non-residential real estate and land loans 6,600 - - - 6,600 ------- ------- ------- ------ -------- Total contractual obligations $24,723 $60,129 $20,799 $5,531 $111,182 ======= ======= ======= ====== ========
It is management's belief that there are no known trends, known demands, commitments or events that are likely to result in a material change in the Corporation's liquidity position. American is required by OTS regulations to maintain specified minimum amounts of capital. The following table sets forth the amount and percentage level of American's regulatory capital at June 30, 2004, and the minimum requirement amounts. Tangible and core capital are reflected as a percentage of adjusted total assets. Risk-based (or total) capital, which consists of core and supplementary capital, is reflected as a percentage of risk-weighted assets. At June 30, 2004, American met the definition of a "well capitalized" institution under OTS regulations.
June 30, 2004 Excess of regulatory capital Regulatory Current over current capital requirement requirement Amount Percent Amount Percent Amount Percent (Dollars in thousands) Tangible capital $15,366 9.3% $2,478 1.5% $12,888 7.8% Core capital $15,366 9.3% $6,607 4.0% $ 8,759 5.3% Risk-based capital $16,792 16.6% $8,088 8.0% $ 8,704 8.6%
14 [GRANT THORNTON LETTERHEAD] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors ASB Financial Corp. We have audited the accompanying consolidated statements of financial condition of ASB Financial Corp. as of June 30, 2004 and 2003, and the related consolidated statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 2004. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ASB Financial Corp. as of June 30, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2004, in conformity with accounting principles generally accepted in the United States of America. /s/ Grant Thornton LLP Cincinnati, Ohio August 12, 2004 15 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, 2004 and 2003 (In thousands, except share data)
ASSETS 2004 2003 Cash and due from banks $ 2,078 $ 2,932 Interest-bearing deposits in other financial institutions 5,307 4,678 -------- -------- Cash and cash equivalents 7,385 7,610 Certificates of deposit in other financial institutions 178 173 Investment securities available for sale - at market 12,487 13,005 Mortgage-backed securities available for sale - at market 11,768 12,130 Loans receivable - net of loan loss allowance of $999 and $1,009 at June 30, 2004 and 2003, respectively 129,821 114,919 Office premises and equipment - at depreciated cost 1,814 1,829 Federal Home Loan Bank stock - at cost 1,104 1,061 Accrued interest receivable on loans 336 363 Accrued interest receivable on mortgage-backed securities 50 62 Accrued interest receivable on investments and interest-bearing deposits 130 230 Prepaid expenses and other assets 830 1,050 Prepaid federal income taxes 183 164 Deferred federal income taxes 285 159 -------- -------- Total assets $166,371 $152,755 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $136,761 $130,780 Advances from the Federal Home Loan Bank 10,899 4,188 Advances by borrowers for taxes and insurance 180 177 Accrued interest payable 52 72 Other liabilities 1,055 1,179 -------- -------- Total liabilities 148,947 136,396 Commitments - - Shareholders' equity Preferred stock, 1,000,000 shares authorized, no par value; no shares issued - - Common stock, 4,000,000 shares authorized, no par value; 1,911,180 and 1,905,614 shares issued at June 30, 2004 and 2003, respectively - - Additional paid-in capital 10,165 9,895 Retained earnings, restricted 9,848 8,782 Shares acquired by stock benefit plans (126) (285) Accumulated comprehensive income, unrealized gains on securities designated as available for sale, net of related tax effects 377 673 Less 250,117 and 243,267 shares of treasury stock at June 30, 2004 and 2003, respectively - at cost (2,840) (2,706) -------- -------- Total shareholders' equity 17,424 16,359 -------- -------- Total liabilities and shareholders' equity $166,371 $152,755 ======== ========
The accompanying notes are an integral part of these statements. 16 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF EARNINGS For the years ended June 30, 2004, 2003 and 2002 (In thousands, except per share data)
2004 2003 2002 Interest income Loans $8,102 $8,231 $7,901 Mortgage-backed securities 200 384 413 Investment securities 641 936 1,221 Interest-bearing deposits and other 11 25 8 ------ ------ ------ Total interest income 8,954 9,576 9,543 Interest expense Deposits 2,862 3,817 4,931 Borrowings 189 71 119 ------ ------ ------ Total interest expense 3,051 3,888 5,050 ------ ------ ------ Net interest income 5,903 5,688 4,493 Provision for losses on loans 111 249 70 ------ ------ ------ Net interest income after provision for losses on loans 5,792 5,439 4,423 Other income Gain on sale of office premises 58 - - Gain on sale of investment securities 40 156 31 Other operating 607 589 455 ------ ------ ------ Total other income 705 745 486 General, administrative and other expense Employee compensation and benefits 2,017 1,725 1,576 Occupancy and equipment 235 198 190 Franchise taxes 169 129 111 Data processing 432 410 395 Other operating 890 815 805 ------ ------ ------ Total general, administrative and other expense 3,743 3,277 3,077 ------ ------ ------ Earnings before income taxes and extraordinary item 2,754 2,907 1,832 Federal income taxes Current 694 908 595 Deferred 50 (62) (47) ------ ------ ------ Total federal income taxes 744 846 548 ------ ------ ------ Earnings before extraordinary item 2,010 2,061 1,284 Extraordinary item - negative goodwill arising from Waverly acquisition - net of tax effects of $118 - - 229 ------ ------ ------ NET EARNINGS $2,010 $2,061 $1,513 ====== ====== ====== EARNINGS PER SHARE Basic $ 1.22 $ 1.32 $ 1.00 ====== ====== ====== Diluted $ 1.18 $ 1.30 $ .97 ====== ====== ======
The accompanying notes are an integral part of these statements. 17 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended June 30, 2004, 2003 and 2002 (In thousands)
2004 2003 2002 Net earnings $2,010 $2,061 $1,513 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities during the year, net of taxes (benefits) of $(139), $(38) and $47 in 2004, 2003 and 2002, respectively (270) (74) 91 Reclassification adjustment for realized gains included in earnings, net of taxes of $14, $53 and $11 in 2004, 2003 and 2002, respectively (26) (103) (20) ------ ------ ------ Comprehensive income $1,714 $1,884 $1,584 ====== ====== ====== Accumulated comprehensive income $ 377 $ 673 $ 850 ====== ====== ======
The accompanying notes are an integral part of these statements. 18 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended June 30, 2004, 2003 and 2002 (In thousands, except share data)
Unrealized gains Shares (losses) on Additional acquired securities Common paid-in Retained by stock designated as Treasury stock capital earnings benefit plans available for sale stock Total Balance at July 1, 2001 $ - $ 8,482 $8,393 $(781) $ 779 $(2,370) $14,503 Amortization of expense related to stock benefit plans - 32 - 244 - - 276 Net earnings for the year ended June 30, 2002 - - 1,513 - - - 1,513 Cash dividends of $.49 per share - - (754) - - - (754) Purchase of treasury shares - at cost - - - - - (260) (260) Issuance of shares under stock option plan - 105 - - - - 105 Unrealized gains on securities designated as available for sale, net of related tax effects - - - - 71 - 71 ---- ------- ------ ----- ----- ------- ------- Balance at June 30, 2002 - 8,619 9,152 (537) 850 (2,630) 15,454 Amortization of expense related to stock benefit plans - 60 - 252 - - 312 Net earnings for the year ended June 30, 2003 - - 2,061 - - - 2,061 Cash dividends of $1.53 per share - - (2,431) - - - (2,431) Purchase of treasury shares - at cost - - - - - (76) (76) Issuance of shares under stock option plan - 1,216 - - - - 1,216 Unrealized losses on securities designated as available for sale, net of related tax effects - - - - (177) - (177) ---- ------- ------ ----- ----- ------- ------- Balance at June 30, 2003 - 9,895 8,782 (285) 673 (2,706) 16,359 Amortization of expense related to stock benefit plans - 192 - 159 - - 351 Net earnings for the year ended June 30, 2004 - - 2,010 - - - 2,010 Cash dividends of $.57 per share - - (944) - - - (944) Purchase of treasury shares - at cost - - - - - (134) (134) Issuance of shares under stock option plan - 78 - - - - 78 Unrealized losses on securities designated as available for sale, net of related tax effects - - - - (296) - (296) ---- ------- ------ ----- ----- ------- ------- Balance at June 30, 2004 $ - $10,165 $9,848 $(126) $ 377 $(2,840) $17,424 ==== ======= ====== ===== ===== ======= =======
The accompanying notes are an integral part of these statements. 19 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 2004, 2003 and 2002 (In thousands)
2004 2003 2002 Cash flows from operating activities: Net earnings for the year $ 2,010 $ 2,061 $ 1,513 Adjustments to reconcile net earnings to net cash from operating activities: Amortization of discounts and premiums on loans, investments and mortgage-backed securities - net 233 614 13 Amortization of deferred loan origination fees 27 (62) (62) Amortization of expense related to stock benefit plans 351 312 276 Depreciation and amortization 154 127 128 Provision for losses on loans 111 249 70 Gain on sale of office premises (58) - - Gain on sale of investment securities (40) (156) (31) Federal Home Loan Bank stock dividends (43) (44) (44) Loss on sale of real estate acquired through foreclosure - 4 - Increase (decrease) in cash, net of acquisition of Waverly Building and Loan Company, due to changes in: Accrued interest receivable on loans (28) (92) (35) Accrued interest receivable on mortgage-backed securities 12 (21) 9 Accrued interest receivable on investments and interest-bearing deposits 100 63 6 Prepaid expenses and other assets 220 (290) 142 Accrued interest payable (20) (13) (44) Other liabilities (142) (128) (52) Federal income taxes Current (19) (333) 90 Deferred 50 (62) (47) -------- -------- -------- Net cash provided by operating activities 2,918 2,229 1,932 Cash flows from investing activities: Proceeds from maturity of investment securities 9,710 18,229 23,885 Proceeds from sale of investment securities 559 6,629 31 Purchase of investment securities (10,063) (17,573) (23,914) Purchase of mortgage-backed securities (5,691) (9,963) (3,011) Principal repayments on mortgage-backed securities 5,498 4,896 4,706 Proceeds from sale of mortgage-backed securities 58 - - Purchase of loans - (2,750) (2,000) Loan principal repayments 36,834 38,907 34,588 Loan disbursements (51,901) (42,821) (34,533) Purchase of office premises and equipment (139) (679) (11) Proceeds from sale of office premises 58 - - Proceeds from sale of real estate acquired through foreclosure 226 370 - Increase in certificates of deposit in other financial institutions - net (5) (73) - Net cash received through acquisition of Waverly Building and Loan Company - - 906 -------- -------- -------- Net cash provided by (used in) investing activities (14,856) (4,828) 647 -------- -------- -------- Net cash provided by (used in) operating and investing activities (subtotal carried forward) (11,938) (2,599) 2,579 -------- -------- -------- 20 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the years ended June 30, 2004, 2003 and 2002 (In thousands) 2004 2003 2002 Net cash provided by (used in) operating and investing activities (subtotal brought forward) $(11,938) $ (2,599) $ 2,579 Cash flows from financing activities: Net increase in deposit accounts 5,981 3,816 1,428 Proceeds from Federal Home Loan Bank advances 12,450 2,400 8,300 Repayment of Federal Home Loan Bank advances (5,739) (2,435) (8,334) Advances by borrowers for taxes and insurance 3 15 (9) Proceeds from issuance of shares under stock option plan 78 1,216 105 Purchase of treasury stock (134) (76) (260) Dividends paid on common stock (926) (2,431) (754) -------- -------- -------- Net cash provided by financing activities 11,713 2,505 476 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (225) (94) 3,055 Cash and cash equivalents at beginning of year 7,610 7,704 4,649 -------- -------- -------- Cash and cash equivalents at end of year $ 7,385 $ 7,610 $ 7,704 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Federal income taxes $ 764 $ 688 $ 390 ======== ======== ======== Interest on deposits and borrowings $ 3,071 $ 3,781 $ 5,094 ======== ======== ======== Supplemental disclosure of noncash investing activities: Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ (296) $ (177) $ 71 ======== ======== ======== Transfers from loans to real estate acquired through foreclosure $ 352 $ 374 $ - ======== ======== ======== Loans disbursed upon sale of real estate acquired through foreclosure $ (126) $ - $ - ======== ======== ======== Fair value of assets received in acquisition of the Waverly Building and Loan Company $ - $ - $ 5,646 ======== ======== ======== Dividends payable $ 251 $ 233 $ 199 ======== ======== ========
The accompanying notes are an integral part of these statements. 21 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ASB Financial Corp. (the "Corporation") is a savings and loan holding company whose primary activity is holding the stock of its wholly-owned subsidiary, American Savings Bank, fsb (the "Savings Bank"). The Savings Bank conducts a general banking business in southeastern Ohio which consists of attracting deposits from the general public and primarily applying those funds to the origination of loans for residential, consumer and nonresidential purposes. The Savings Bank's profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Savings Bank can be significantly influenced by a number of factors, such as governmental monetary policy, that are outside of management's control. In late June of fiscal 2002, the Savings Bank acquired substantially all of the assets and liabilities of The Waverly Building and Loan Company ("Waverly"). The acquisition was accounted for using the purchase method of accounting. The business combination with Waverly added approximately $5.6 million in assets and $4.6 million in liabilities to the Corporation at June 30, 2002. Consistent with the purchase method of accounting, Waverly's results of operations were not included in the consolidated financial statements for the fiscal year ended June 30, 2002. The consolidated financial information presented herein has been prepared in accordance with accounting principles generally accepted in the United States of America ("U. S. GAAP") and general accounting practices within the financial services industry. In preparing consolidated financial statements in accordance with U. S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates. The following is a summary of the Corporation's significant accounting policies which have been consistently applied in the preparation of the accompanying consolidated financial statements. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of the Corporation, the Savings Bank, ASB Community Development Corporation and A.S.L. Services, Inc., the Savings Bank's wholly-owned subsidiaries. ASB Community Development Corporation was formed in March 2003 for the purpose of participating in a federal program designed to promote lending in new markets, which in turn provides federal income tax credits to the Savings Bank. All significant intercompany balances and transactions have been eliminated. 22 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investment Securities and Mortgage-Backed Securities ---------------------------------------------------- The Corporation accounts for investment and mortgage-backed securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that investments in debt and equity securities be categorized as held-to-maturity, trading, or available for sale. Securities classified as held-to- maturity are carried at cost only if the Corporation has the positive intent and ability to hold these securities to maturity. Trading securities and securities designated as available for sale are carried at fair value with resulting unrealized gains or losses recorded to operations or shareholders' equity, respectively. At June 30, 2004 and 2003, the Corporation had designated all investment and mortgage-backed securities as available for sale. Realized gains and losses on sales of securities are recognized using the specific identification method. Loans Receivable ---------------- Loans receivable are stated at the principal amount outstanding, adjusted for deferred loan origination fees and the allowance for loan losses. Interest is accrued as earned unless the collectibility of the loan is in doubt. Interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments has returned to normal, in which case the loan is returned to accrual status. If the ultimate collectibility of the loan is in doubt, in whole or in part, all payments received on nonaccrual loans are applied to reduce principal until such doubt is eliminated. Loan Origination Fees --------------------- The Savings Bank accounts for loan origination fees in accordance with SFAS No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Cost of Leases." Pursuant to the provisions of SFAS No. 91, origination fees received from loans, net of direct origination costs, are deferred and amortized to interest income using the level- yield method, giving effect to actual loan prepayments. Additionally, SFAS No. 91 generally limits the definition of loan origination costs to the direct costs of originating a loan, i.e., principally actual personnel costs. Fees received for loan commitments that are expected to be drawn upon, based on the Savings Bank's experience with similar commitments, are deferred and amortized over the life of the loan using the level-yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight- line basis. 23 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Allowance for Loan Losses ------------------------- It is the Savings Bank's policy to provide valuation allowances for estimated losses on loans based on past loss experience, trends in the level of delinquent and problem loans, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current and anticipated economic conditions in the Savings Bank's primary lending area. When the collection of a loan becomes doubtful or otherwise troubled, the Savings Bank records a loan charge-off equal to the difference between the fair value of the property securing the loan and the loan's carrying value. Major loans (including development projects) 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). The Savings Bank accounts for impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which 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 loan's observable market price or fair value of the collateral. The Savings Bank's current procedures for evaluating impaired loans result in carrying such loans at the lower of cost or fair value. 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 Savings Bank 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 Savings Bank's investment in multi- family and nonresidential 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 Savings Bank's policy to charge off unsecured credits that are more than ninety days delinquent. Similarly, once a collateral- dependent loan becomes more than ninety days delinquent, it is considered to constitute more than a minimum delay in repayment and is evaluated for impairment under SFAS No. 114 at that time. The Savings Bank's total impaired loans were as follows at June 30:
2004 2003 (In thousands) Impaired loans with related allowance $234 $384 Impaired loans with no related allowance - - ---- ---- Total impaired loans $234 $384 ==== ====
24 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Allowance for Loan Losses (continued) -------------------------
2004 2003 2002 (In thousands) Allowance on impaired loans Beginning balance $ 46 $ 46 $ 46 Provision - - - ---- ---- ---- Ending balance $ 46 $ 46 $ 46 ==== ==== ==== Average balance of impaired loans $381 $436 $446 Interest income recognized on impaired loans $ 15 $ 20 $ 30
The allowance for impaired loans is not included in the Savings Bank's overall allowance for credit losses. Office Premises and Equipment ----------------------------- Office premises and equipment are carried at cost and include expenditures which extend the useful lives of existing assets. Maintenance, repairs and minor renewals are expensed as incurred. For financial reporting, depreciation and amortization are provided on the straight-line and accelerated methods over the useful lives of the assets, estimated to be forty years for buildings, ten to forty years for building improvements, and five to ten years for furniture and equipment. An accelerated method is used for tax reporting purposes. Real Estate Acquired Through Foreclosure ---------------------------------------- Real estate acquired through foreclosure is carried at the lower of the loan's unpaid principal balance (cost) or fair value, less estimated selling expenses at the date of acquisition. A real estate loss provision is recorded if the property's fair value subsequently declines below the amount determined at the recording date. In determining the lower of cost or fair value at acquisition, costs relating to development and improvement of property are capitalized. Costs relating to holding real estate acquired through foreclosure, net of rental income, are charged against earnings as incurred. Federal Income Taxes -------------------- The Corporation accounts for federal income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes." Pursuant to the provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will result in taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years earnings, offset against taxable temporary differences reversing in future periods, or 25 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Federal Income Taxes (continued) -------------------- utilized to the extent of management's estimate of future taxable income. A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management's estimates of taxes payable on future taxable income. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future. The Corporation's principal temporary differences between pretax financial income and taxable income result from different methods of accounting for deferred loan origination fees and costs, Federal Home Loan Bank stock dividends, the general loan loss allowance, deferred compensation, and percentage of earnings bad debt deductions. Additional temporary differences result from depreciation computed using accelerated methods for tax purposes. Salary Continuation Agreement ----------------------------- The Savings Bank has entered into salary continuation agreements with certain current and former key members of management. These agreements provide for payments of up to fifteen years of compensation under certain circumstances. Recognition of compensation expense related to these salary continuation agreements totaled $36,000 for each of the fiscal years ended June 30, 2004, 2003 and 2002, respectively. Benefit Plans ------------- The Corporation has an Employee Stock Ownership Plan ("ESOP") which provides retirement benefits for substantially all employees who have completed one year of service and have attained the age of 21. The Corporation accounts for the ESOP in accordance with Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee Stock Ownership Plans." SOP 93-6 requires that compensation expense recorded by employers equal the fair value of ESOP shares allocated to participants during a given fiscal year. Expense related to the ESOP totaled approximately $181,000, $165,000 and $190,000 for the fiscal years ended June 30, 2004, 2003 and 2002, respectively. During fiscal 2003, the Corporation initiated a defined contribution 401(k) plan which provides matching contributions to employees' elective salary deferrals. Substantially all employees over the age of 21 are eligible to participate. Expense related to the 401(k) plan totaled approximately $53,000 and $8,000 for the fiscal years ended June 30, 2004 and 2003, respectively. The Corporation has a Management Recognition Plan ("MRP" or the "Plan") which provided for awards of 68,558 shares to members of the board of directors and management. Common shares awarded under the MRP vest ratably over a five year period, commencing with the date of the award in fiscal 1996. Expense recognized under the MRP totaled approximately $62,000, $80,000 and $100,000 for the fiscal years ended June 30, 2004, 2003 and 2002, respectively. As of June 30, 2004, all shares under the Corporation's MRP have been awarded. Management currently anticipates a continuing level of MRP expense for each of the next three fiscal years. 26 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Earnings Per Share ------------------ Basic earnings per share for the fiscal years ended June 30, 2004, 2003 and 2002 is based upon the weighted-average shares outstanding during the year, less 8,128 and 21,979 unallocated ESOP shares during 2003 and 2002, respectively. Diluted earnings per share is computed taking into consideration common shares outstanding and dilutive potential common shares to be issued under the Corporation's stock option plan. The computations were as follows:
2004 2003 2002 Weighted-average common shares outstanding (basic) 1,666,012 1,561,513 1,512,553 Dilutive effect of assumed exercise of stock options 44,369 27,860 53,177 --------- --------- --------- Weighted-average common shares outstanding (diluted) 1,710,381 1,589,373 1,565,730 ========= ========= =========
Stock Option Plan ----------------- During fiscal 1996 the Board of Directors adopted the ASB Financial Corp. Stock Option and Incentive Plan (the "Plan") that provided for the issuance of 225,423 shares, as adjusted, of authorized but unissued shares of common stock at fair value at the date of grant. In fiscal 1996, the Corporation granted 197,521 options which currently have an adjusted exercise price of $7.64. The number of options granted and the exercise price have been adjusted to give effect to returns of capital and special dividend distributions paid by the Corporation. The Plan provides that one-fifth of the options granted become exercisable on each of the first five anniversaries of the date of grant. The Corporation accounts for the Plan 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 the Plan. Accordingly, no compensation cost has been recognized for the Plan. 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 Plan consistent with the accounting method utilized in SFAS No. 123, the Corporation's net earnings and earnings per share would have been reported as the pro forma amounts indicated below: 27 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Stock Option Plan (continued) -----------------
2004 2003 2002 (In thousands, except per share data) Net earnings As reported $2,010 $2,061 $1,513 ====== ====== ====== Pro-forma $1,989 $2,050 $1,511 ====== ====== ====== Earnings per share Basic As reported $ 1.22 $ 1.32 $ 1.00 ====== ====== ====== Pro-forma $ 1.19 $ 1.31 $ 1.00 ====== ====== ====== Diluted As reported $ 1.18 $ 1.30 $ .97 ====== ====== ====== Pro-forma $ 1.16 $ 1.29 $ .97 ====== ====== ======
The fair value of each option grant is estimated on the date of grant using the modified Black-Scholes options-pricing model with the following assumptions used for grants during fiscal 2004 and 2003: dividend yield of 2.3% and 2.9%, respectively; expected volatility of 20.0% for both years; a risk-free interest rate of 4.3% and 3.4%, respectively; and an expected life of ten years for all grants. A summary of the status of the Corporation's Plan as of June 30, 2004, 2003 and 2002, and changes during the periods ending on those dates is presented below:
2004 2003 2002 Weighted- Weighted- Weighted- average average average exercise exercise exercise Shares price Shares price Shares price Outstanding at beginning of year 77,694 $ 8.89 212,915 $ 7.69 226,672 $7.70 Granted 6,000 26.00 9,712 16.50 - - Exercised (5,566) 9.57 (144,933) 7.64 (13,757) 7.64 Forfeited - - - - - - ------ ------ -------- ------ ------- ----- Outstanding at end of year 78,128 $10.15 77,694 $ 8.89 212,915 $7.69 ====== ====== ======== ====== ======= ===== Options exercisable at year-end 59,616 $ 7.87 61,982 $ 7.71 204,915 $7.65 ====== ====== ======== ====== ======= ===== Weighted-average fair value of options granted during the year $11.41 $ 5.28 N/A ====== ====== =====
28 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Stock Option Plan (continued) ----------------- The following information applies to options outstanding at June 30, 2004: Number outstanding 63,616 Range of exercise prices $7.64 - $8.75 Number outstanding 14,512 Range of exercise prices $16.50 - $26.00 Weighted-average exercise price $10.15 Weighted-average remaining contractual life 4.6 years Fair Value of Financial Instruments ----------------------------------- SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments, both assets and liabilities, whether or not recognized in the consolidated statement of financial condition, for which it is practicable to estimate that value. For financial instruments where quoted market prices are not available, fair values are based on estimates using present value and other valuation methods. The methods used are greatly affected by the assumptions applied, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in an exchange for certain financial instruments. The following methods and assumptions were used by the Corporation in estimating its fair value disclosures for financial instruments at June 30, 2004 and 2003: Cash and cash equivalents: The financial statement carrying amounts for cash and cash equivalents are deemed to approximate fair value. Certificates of deposit in other financial institutions: The financial statement carrying amounts for certificates of deposit in other financial institutions are deemed to approximate fair value. Investment and mortgage-backed securities: For investment and mortgage-backed securities, fair value is deemed to equal the quoted market price. Loans receivable: The loan portfolio has been segregated into categories with similar characteristics, such as one- to four- family residential, multi-family residential and nonresidential real estate. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality. For loans on deposit accounts and consumer and other loans, fair values were deemed to equal the historic carrying values. The historical carrying amount of accrued interest on loans is deemed to approximate fair value. 29 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair Value of Financial Instruments (continued) ----------------------------------- Federal Home Loan Bank stock: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value. Deposits: The fair values of NOW accounts, passbook accounts, money market demand accounts and advances by borrowers are deemed to approximate the amount payable on demand. Fair values for fixed-rate certificates of deposit have been estimated using a discounted cash flow calculation using the interest rates currently offered for deposits of similar remaining maturities. Advances from the Federal Home Loan Bank: The fair value of these advances are estimated using the rates currently offered for similar advances with similar remaining maturities. Commitments to extend credit: For fixed-rate and adjustable- rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At June 30, 2004 and 2003, the difference between the fair value and notional amount of loan commitments was not material. Based on the foregoing methods and assumptions, the carrying value and fair value of the Corporation's financial instruments at June 30 were as follows:
2004 2003 Carrying Fair Carrying Fair value value value value (In thousands) Financial assets Cash and cash equivalents and certificates of deposit $ 7,563 $ 7,563 $ 7,783 $ 7,783 Investment securities 12,487 12,487 13,005 13,005 Mortgage-backed securities 11,768 11,768 12,130 12,130 Loans receivable 129,887 133,360 114,974 117,421 Federal Home Loan Bank stock 1,104 1,104 1,061 1,061 -------- -------- -------- -------- $162,809 $166,282 $148,953 $151,400 ======== ======== ======== ======== Financial liabilities Deposits $136,761 $135,711 $130,780 $131,630 Escrow deposits 180 180 177 177 Federal Home Loan Bank advances 10,899 11,031 4,188 4,184 -------- -------- -------- -------- $147,840 $146,922 $135,145 $135,991 ======== ======== ======== ========
30 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Cash and Cash Equivalents ------------------------- For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest-bearing deposits due from other financial institutions with original maturities of less than ninety days. Advertising ----------- Advertising costs are expensed when incurred. The Corporation's advertising expense totaled $111,000, $73,000 and $48,000 for the fiscal years ended June 30, 2004, 2003 and 2002, respectively. Effects of Recent Accounting Pronouncements ------------------------------------------- In March 2004, the Emerging Issues Task Force ("EITF") issued EITF 03-01 "The Meaning of Other-than-Temporary Impairment and its Application to Certain Investments." EITF 03-01 requires that unrealized losses on investment securities that are deemed other- than-temporary be recorded as an adjustment to operations. The Statement applies both to securities designated as held to maturity and those designated as available for sale. EITF 03-01 provides that unrealized losses may be viewed as other-than-temporary as a result not only due to deterioration of the credit quality of the issuer, but due to changes in the interest rate environment as well. An investor must be able to demonstrate the positive ability and intent to hold such securities until a forecasted recovery takes place or until maturity of the security. EITF 03-01 requires separate disclosure related to unrealized losses for securities that have been in an unrealized loss position for a period of less than twelve months and for those that have been in an unrealized loss position for a period greater than twelve months, for financial statements issued for years ending after December 15, 2003. The loss recognition provisions of other-than-temporary losses under EITF 03-01 are effective September 30, 2004. It is management's belief that, given the Corporation's liquidity position, and assuming no credit quality concerns, EITF 03-01 will have no material effect on the Corporation's financial statements. In March 2004, the Financial Accounting Standards Board (the "FASB") issued a proposed Statement, "Share-Based Payment," that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The proposed Statement would eliminate the ability to account for share-based compensation transactions, including stock option grants, using APB Opinion No. 25, "Accounting for Stock Issued to Employees," and generally would require instead that such transactions be accounted for using a fair-value-based method. Issuance of the final standards and adoption by the Corporation would be expected to result in recognition of compensation expense for the effect of stock option grants in future periods. Reclassifications ----------------- Certain prior year amounts have been reclassified to conform to the 2004 consolidated financial statement presentation. 31 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of investment securities at June 30, 2004 and 2003 are summarized as follows:
2004 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Available for sale: U.S. Government agency obligations $10,863 $ 4 $192 $10,675 Municipal obligations 881 - 19 862 FHLMC stock 15 935 - 950 ------- ---- ---- ------- $11,759 $939 $211 $12,487 ======= ==== ==== ======= 2003 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Available for sale: U.S. Government agency obligations $11,932 $ 90 $ - $12,022 Municipal obligations 203 5 - 208 FHLMC stock 15 760 - 775 ------- ---- ---- ------- $12,150 $855 $ - $13,005 ======= ==== ==== =======
32 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued) The amortized cost and estimated fair value of U.S. Government agency and municipal obligations by contractual term to maturity at June 30 are shown below:
2004 2003 Estimated Estimated Amortized fair Amortized fair cost value cost value (In thousands) Due in three years or less $ 2,896 $ 2,866 $ 250 $ 252 Due after three years through five years 2,916 2,909 3,723 4,291 Due after five years 5,932 5,762 8,162 7,687 ------- ------- ------- ------- $11,744 $11,537 $12,135 $12,230 ======= ======= ======= =======
At June 30, 2004 and 2003, the Corporation had pledged investment securities totaling $5.5 million and $6.3 million, respectively, to secure public and other deposits. The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of mortgage-backed securities at June 30, 2004 and 2003 are summarized as follows:
2004 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Available for sale: Federal Home Loan Mortgage Corporation participation certificates $ 2,031 $ 10 $ 32 $ 2,009 Government National Mortgage Association participation certificates 1,931 23 20 1,934 Federal National Mortgage Association participation certificates 7,910 13 154 7,769 Collateralized mortgage obligations 55 1 - 56 ------- ---- ---- ------- Total mortgage-backed securities $11,927 $ 47 $206 $11,768 ======= ==== ==== ======= 2003 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Available for sale: Federal Home Loan Mortgage Corporation participation certificates $ 3,593 $ 45 $ 2 $ 3,636 Government National Mortgage Association participation certificates 1,817 69 - 1,886 Federal National Mortgage Association participation certificates 6,468 63 12 6,519 Collateralized mortgage obligations 89 - - 89 ------- ---- ---- ------- Total mortgage-backed securities $11,967 $177 $ 14 $12,130 ======= ==== ==== =======
33 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued) The amortized cost of mortgage-backed securities, by contractual terms to maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties.
June 30, 2004 2003 (In thousands) Due within three years $ 169 $ 14 Due in three to five years 712 532 Due in five to ten years 3,098 1,356 Due in ten to twenty years 1,234 2,296 Due after twenty years 6,714 7,769 ------- ------- $11,927 $11,967 ======= =======
Proceeds from sales of investment securities amounted to $559,000, $6.6 million and $31,000 during the fiscal years ended June 30, 2004, 2003 and 2002, respectively, and resulted in gross realized gains totaling $40,000, $156,000 and $31,000, for those respective periods. The table below indicates the length of time individual securities had been in a continuous unrealized loss position at June 30, 2004:
Less than 12 months 12 months or longer Total Description of Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized securities investments value losses investments value losses investments value losses (Dollars in thousands) Municipal obligations 5 $ 862 $ 19 - $ - $ - 5 $ 862 $ 19 U.S. Government agency obligations 18 10,675 192 - - - 18 10,675 192 Mortgage-backed securities 39 9,778 206 - - - 39 9,778 206 -- ------- ---- -- --- --- -- ------- ---- Total temporarily impaired securities 62 $21,315 $417 - $ - $ - 62 $21,315 $417 == ======= ==== == === === == ======= ====
Management has the intent to hold these securities for the foreseeable future and the decline in the fair value is primarily due to an increase in market interest rates. The fair values are expected to recover as securities approach the securities' respective maturity dates. 34 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE C - LOANS RECEIVABLE The composition of the loan portfolio at June 30 is as follows:
2004 2003 (In thousands) Residential real estate One- to four- family $ 79,817 $ 75,737 Multi-family 5,399 6,224 Construction 11,124 5,334 Nonresidential real estate and land 18,694 15,643 Consumer and other 21,516 15,353 -------- -------- 136,550 118,291 Less: Undisbursed portion of loans in process 5,536 2,181 Deferred loan origination fees 194 182 Allowance for loan losses 999 1,009 -------- -------- $129,821 $114,919 ======== ========
The Savings Bank's lending efforts have historically focused on one- to four-family and multi-family residential real estate loans, which comprised approximately $85.2 million, or 62%, of the total loan portfolio at June 30, 2004, and $82.0 million, or 69%, of the total loan portfolio at June 30, 2003. Generally, such loans have been underwritten on the basis of no more than an 80% loan-to-value ratio, which has historically provided the Savings Bank with adequate collateral coverage in the event of default. Nevertheless, the Savings Bank, as with any lending institution, is subject to the risk that real estate values could deteriorate in its primary lending area of southeastern Ohio, thereby impairing collateral values. However, management believes that residential real estate values in the Savings Bank's primary lending area are presently stable. In the normal course of business, the Savings Bank makes loans to some of its directors, officers and employees. In the opinion of management, such loans are consistent with sound lending practices, are generally on market terms and are within applicable regulatory lending limitations. The aggregate dollar amount of loans outstanding to directors and officers totaled approximately $1.0 million and $911,000 at June 30, 2004 and 2003, respectively. NOTE D - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is summarized as follows for the years ended June 30:
2004 2003 2002 (In thousands) Balance at beginning of year $1,009 $ 855 $713 Allowance resulting from acquisition of The Waverly Building and Loan Company - - 160 Provision for losses on loans 111 249 70 Charge-offs of loans - net of recoveries (121) (95) (88) ------ ------ ---- Balance at end of year $ 999 $1,009 $855 ====== ====== ====
35 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE D - ALLOWANCE FOR LOAN LOSSES (continued) As of June 30, 2004, the Savings Bank's allowance for loan losses was solely general in nature, and is includible as a component of regulatory risk-based capital, subject to certain percentage limitations. Nonperforming loans totaled approximately $1.0 million, $1.2 million and $707,000 at June 30, 2004, 2003 and 2002, respectively. Interest income that would have been recognized had such nonperforming and nonaccrual loans been performing in accordance with contractual terms totaled approximately $66,000, $58,000 and $44,000 for the years ended June 30, 2004, 2003 and 2002, respectively. NOTE E - OFFICE PREMISES AND EQUIPMENT Office premises and equipment at June 30 were comprised of the following:
2004 2003 (In thousands) Land and improvements $ 604 $ 639 Construction in progress 5 348 Office buildings and improvements 1,987 1,648 Furniture, fixtures and equipment 1,000 822 ------ ------ 3,596 3,457 Less accumulated depreciation and amortization 1,782 1,628 ------ ------ $1,814 $1,829 ====== ======
36 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE F - DEPOSITS Deposits consist of the following major classifications at June 30:
Deposit type and weighted- average interest rate 2004 2003 (In thousands) NOW accounts 2004 - 0.21% $ 7,706 2003 - 0.22% $ 8,463 Passbook 2004 - 0.84% 11,828 2003 - 1.10% 10,963 Money market deposit accounts 2004 - 1.47% 32,543 2003 - 1.17% 30,319 -------- -------- Total demand, transaction and passbook deposits 52,077 49,745 Certificates of deposit Original maturities of: Less than 12 months 2004 - 1.27% 2,949 2003 - 1.79% 3,958 12 months to 24 months 2004 - 2.24% 38,570 2003 - 3.07% 47,058 25 months to 36 months 2004 - 3.30% 11,591 2003 - 4.10% 2,754 More than 36 months 2004 - 4.23% 6,353 2003 - 4.50% 4,922 Individual retirement accounts 2004 - 3.14% 17,313 2003 - 3.49% 16,114 Jumbo accounts 2004 - 2.62% 7,908 2003 - 2.94% 6,229 -------- -------- Total certificates of deposit 84,684 81,035 -------- -------- Total deposit accounts $136,761 $130,780 ======== ========
At June 30, 2004 and 2003, the Savings Bank had certificate of deposit accounts with balances greater than $100,000 totaling $13.9 million and $12.8 million, respectively. 37 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE F - DEPOSITS (continued) Interest expense on deposits for the year ended June 30 is summarized as follows:
2004 2003 2002 (In thousands) Passbook $ 146 $ 221 $ 260 NOW and money market deposit accounts 407 482 567 Certificates of deposit 2,309 3,114 4,104 ------ ------ ------ $2,862 $3,817 $4,931 ====== ====== ======
Maturities of outstanding certificates of deposit at June 30 are summarized as follows:
2004 2003 (In thousands) Less than one year $14,127 $13,442 One to three years 57,958 58,677 Over three years 12,599 8,916 ------- ------- $84,684 $81,035 ======= =======
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank, collateralized at June 30, 2004 by pledges of certain residential mortgage loans totaling $13.9 million and the Savings Bank's investment in Federal Home Loan Bank stock, are summarized as follows:
Maturing year ending June 30, Interest rate June 30, 2004 2003 (Dollars in thousands) 1.24% 2004 $ - $1,000 2.35% 2006 1,000 - 1.37% - 3.55% 2008 4,151 2,188 3.94% 2009 1,500 1,000 4.56% 2011 1,500 - 2.86%-5.11% 2014 2,748 - ------- ------ $10,899 $4,188 ======= ====== Weighted-average interest rate 3.12% 1.33% ==== ====
38 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE H - FEDERAL INCOME TAXES Federal income taxes differ from the amounts computed at the statutory corporate tax rate for the years ended June 30 as follows:
2004 2003 2002 (In thousands) Federal income taxes computed at statutory rate $ 936 $ 988 $623 Increase (decrease) in taxes resulting from: Low income housing investment tax credits (78) (78) (78) New Markets tax credits (100) (100) - Nontaxable interest income (8) (3) (3) Other (6) 39 6 ----- ----- ---- Federal income tax provision per consolidated financial statements before extraordinary item $ 744 $ 846 $548 ===== ===== ====
The composition of the Corporation's net deferred tax asset at June 30 was as follows:
2004 2003 (In thousands) Taxes (payable) refundable on temporary differences at estimated corporate tax rate: Deferred tax assets: General loan loss allowance $355 $343 Net operating losses of parent 240 - Deferred compensation 204 529 Stock benefit plans 14 26 Book/tax depreciation 13 4 ---- ---- Total deferred tax assets 826 902 Deferred tax liabilities: Percentage of earnings bad debt deduction - (38) Deferred loan origination costs (74) (101) Federal Home Loan Bank stock dividends (273) (259) Unrealized gains on securities designated as available for sale (194) (345) ---- ---- Total deferred tax liabilities (541) (743) ---- ---- Net deferred tax asset $285 $159 ==== ====
Prior to fiscal 1997, the Savings Bank was allowed a special bad debt deduction, generally limited to 8% of otherwise taxable income, and subject to certain limitations based on aggregate loans and deposit account balances at the end of the year. If the amounts that qualified as deductions for federal income taxes are later used for purposes other than bad debt losses, including distributions in liquidation, such distributions will be subject to federal income taxes at the then current corporate income tax rate. Retained earnings at June 30, 2004 includes approximately $2.1 million for which federal income taxes have not been provided. The amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $700,000 at June 30, 2004. 39 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE I - LOAN COMMITMENTS The Savings Bank is a party to financial instruments with off-balance- sheet risk in the normal course of business to meet the financing needs of its customers, including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statement of financial condition. The contract or notional amounts of the commitments reflect the extent of the Savings Bank's involvement in such financial instruments. The Savings Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Savings Bank uses the same credit policies in making commitments and conditional obligations as those utilized for on-balance-sheet instruments. At June 30, 2004, the Savings Bank had outstanding commitments to originate loans totaling approximately $6.6 million. In addition, the Savings Bank had unused lines of credit for home equity loans and commercial loans totaling $5.8 million and $2.8 million, respectively. Further, the Savings Bank had outstanding commercial letters of credit totaling $399,000. In the opinion of management, all loan commitments equaled or exceeded prevalent market interest rates as of June 30, 2004, and will be funded from normal cash flow from operations. NOTE J - REGULATORY CAPITAL The Savings Bank is subject to minimum regulatory capital standards promulgated by the Office of Thrift Supervision (the "OTS"). Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the Corporation's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Savings Bank must meet specific capital guidelines that involve quantitative measures of the Savings Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Savings Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The minimum capital standards of the OTS generally require the maintenance of regulatory capital sufficient to meet each of three tests, described below as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as shareholders' equity less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) generally equal to 4.0% of adjusted total assets, except for those associations with the highest examination rating and acceptable levels of risk. The risk-based capital requirement provides for the maintenance of core capital plus general loss allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted assets, the Savings Bank multiplies the value of each asset on its statement of financial condition by a defined risk- weighting factor, e.g., one- to four-family residential loans carry a risk-weighting factor of 50%. 40 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE J - REGULATORY CAPITAL (continued) During fiscal 2004, the Savings Bank was notified by the OTS that it was categorized as "well-capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized" the Savings Bank must maintain minimum capital ratios as set forth in the following tables. As of June 30, 2004 and 2003, management believes that the Savings Bank met all capital adequacy requirements to which it was subject.
As of June 30, 2004 To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions ---------------- ---------------------------- ------------------------------ Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tangible capital $15,366 9.3% > or = $2,478 > or = 1.5% > or = $ 8,259 > or = 5.0% Core capital $15,366 9.3% > or = $6,607 > or = 4.0% > or = $ 9,910 > or = 6.0% Risk-based capital $16,792 16.6% > or = $8,088 > or = 8.0% > or = $10,111 > or = 10.0% As of June 30, 2003 To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions ---------------- ---------------------------- ------------------------------ Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tangible capital $12,852 8.5% > or = $2,260 > or = 1.5% > or = $7,535 > or = 5.0% Core capital $12,852 8.5% > or = $6,028 > or = 4.0% > or = $9,042 > or = 6.0% Risk-based capital $14,204 15.3% > or = $7,422 > or = 8.0% > or = $9,278 > or = 10.0%
The Savings Bank's management believes that, under the current regulatory capital regulations, the Savings Bank will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond the control of the Savings Bank, such as increased interest rates or a downturn in the economy in the Savings Bank's market area, could adversely affect future earnings and, consequently, the Savings Bank's ability to meet future minimum regulatory capital requirements. 41 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE K - CONDENSED FINANCIAL STATEMENTS OF ASB FINANCIAL CORP. The following condensed financial statements summarize the financial position of the Corporation as of June 30, 2004 and 2003, and the results of its operations and its cash flows for the fiscal years ended June 30, 2004, 2003 and 2002. ASB FINANCIAL CORP. STATEMENTS OF FINANCIAL CONDITION June 30, 2004 and 2003 (In thousands)
ASSETS 2004 2003 Interest-bearing deposits in American Savings Bank, fsb $ 620 $ 706 Interest-bearing deposits in other financial institutions 874 1,869 Loans receivable 174 164 Loan receivable from ESOP - 98 Investment in American Savings Bank, fsb 15,743 13,526 Prepaid expenses and other 264 229 ------- ------- Total assets $17,675 $16,592 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Dividends payable $ 251 $ 233 Shareholders' equity Common stock and additional paid-in capital 10,165 9,895 Retained earnings 9,848 8,782 Shares acquired by stock benefit plans (126) (285) Treasury shares - at cost (2,840) (2,706) Unrealized gains on securities designated as available for sale, net 377 673 ------- ------- Total shareholders' equity 17,424 16,359 ------- ------- Total liabilities and shareholders' equity $17,675 $16,592 ======= =======
ASB FINANCIAL CORP. STATEMENTS OF EARNINGS Years ended June 30, 2004, 2003 and 2002 (In thousands)
2004 2003 2002 Revenue Interest income $ 22 $ 117 $ 185 Gain on sale of investments - 95 - Equity in earnings of American Savings Bank, fsb 2,162 2,001 1,458 ------ ------ ------ Total revenue 2,184 2,213 1,643 General and administrative expense 169 120 101 ------ ------ ------ Earnings before income taxes 2,015 2,093 1,542 Federal income taxes 5 32 29 ------ ------ ------ NET EARNINGS $2,010 $2,061 $1,513 ====== ====== ======
42 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE K - CONDENSED FINANCIAL STATEMENTS OF ASB FINANCIAL CORP. (continued) ASB FINANCIAL CORP. STATEMENTS OF CASH FLOWS Years ended June 30, 2004, 2003 and 2002 (In thousands)
2004 2003 2002 Cash flows from operating activities: Net earnings for the year $2,010 $2,061 $1,513 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Gain on sale of investments - (95) - Amortization of premiums and discounts on loans and investment securities - net - - (2) (Undistributed earnings of) excess distributions from consolidated subsidiary (2,217) 999 (1,458) Increase (decrease) in cash due to changes in: Prepaid expenses and other assets 2 (134) 50 Deferred federal income taxes - - (1) Other liabilities 18 (97) 13 ------ ------ ------ Net cash provided by (used in) operating activities (187) 2,734 115 Cash flows provided by (used in) investing activities: Proceeds from repayment of loan 98 161 140 Proceeds from return of capital on investment securities - - 21 Proceeds from sale of investment securities - 1,244 - Loan principal repayments 40 942 151 Loan disbursements (50) (768) - ------ ------ ------ Net cash provided by investing activities 88 1,579 312 Cash flows provided by (used in) financing activities: Checks issued in excess of bank balance - (1,625) 592 Proceeds from exercise of stock options 78 1,216 105 Payment of dividends on common stock (926) (2,431) (754) Purchase of treasury shares (134) (76) (260) ------ ------ ------ Net cash used in financing activities (982) (2,916) (317) ------ ------ ------ Net increase (decrease) in cash and cash equivalents (1,081) 1,397 110 Cash and cash equivalents at beginning of year 2,575 1,178 1,068 ------ ------ ------ Cash and cash equivalents at end of year $1,494 $2,575 $1,178 ====== ====== ======
OTS regulations impose limitations on the payment of dividends and other capital distributions by savings associations. Generally, the Savings Bank's payment of dividends is limited, without prior OTS approval, to net earnings for the current calendar year plus the two preceding calendar years, less capital distributions paid over the comparable time period. Insured institutions are required to file an application with the OTS for capital distributions in excess of this limitation. 43 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE L - CONDENSED FINANCIAL STATEMENTS OF ASB COMMUNITY DEVELOPMENT CORP. The following condensed financial statements summarize the financial position of ASB Community Development Corp. as of June 30, 2004 and 2003, and the results of its operations and its cash flows for the fiscal years ended June 30, 2004, 2003 and 2002. ASB COMMUNITY DEVELOPMENT CORP. STATEMENTS OF FINANCIAL CONDITION June 30, 2004 and 2003 (In thousands)
ASSETS 2004 2003 Interest-bearing deposits in American Savings Bank, fsb $ 123 $1,899 Loans receivable 1,928 102 Prepaid expenses and other 9 - ------ ------ Total assets $2,060 $2,001 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Total liabilities $ - $ - Shareholders' equity Common stock and additional paid-in capital 2,000 2,000 Retained earnings 60 1 ------ ------ Total shareholders' equity 2,060 2,001 ------ ------ Total liabilities and shareholders' equity $2,060 $2,001 ====== ======
ASB COMMUNITY DEVELOPMENT CORP. STATEMENTS OF EARNINGS Years ended June 30, 2004 and 2003 (In thousands)
2004 2003 Revenue Interest income $ 59 $ 1 Other income 1 - ---- ---- Total revenue 60 1 General and administrative expenses 1 - ---- ---- Earnings before income taxes 59 1 Federal income taxes - - ---- ---- NET EARNINGS $ 59 $ 1 ==== ====
44 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE L - CONDENSED FINANCIAL STATEMENTS OF ASB COMMUNITY DEVELOPMENT CORP. (continued) ASB COMMUNITY DEVELOPMENT CORP. STATEMENTS OF CASH FLOWS Years ended June 30, 2004 and 2003 (In thousands)
2004 2003 Cash flows from operating activities: Net earnings for the year $ 59 $ 1 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Increase (decrease) in cash due to changes in: Prepaid expenses and other assets (9) - ------ ------ Net cash provided by operating activities 50 1 Cash flows provided by (used in) investing activities: Loan principal repayments 90 - Loan disbursements (1,916) (102) ------ ------ Net cash used in investing activities (1,826) (102) Cash flows provided by (used in) financing activities: Issuance of common stock - 1 Additional capital paid in - 1,999 ------ ------ Net cash provided by financing activities - 2,000 ------ ------ Net increase (decrease) in cash and cash equivalents (1,776) 1,899 Cash and cash equivalents at beginning of year 1,899 - ------ ------ Cash and cash equivalents at end of year $ 123 $1,899 ====== ======
45 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes the Corporation's quarterly results for the fiscal years ended June 30, 2004 and 2003. Certain amounts, as previously reported, have been reclassified to conform to the 2004 presentation.
Three Months Ended September 30, December 31, March 31, June 30, 2004: (In thousands, except per share data) Total interest income $2,194 $2,222 $2,293 $2,245 Total interest expense 740 723 808 780 ------ ------ ------ ------ Net interest income 1,454 1,499 1,485 1,465 Provision for losses on loans 23 28 31 29 Other income 211 170 134 190 General, administrative and other expense 944 981 983 835 ------ ------ ------ ------ Earnings before income taxes 698 660 605 791 Federal income taxes 197 149 155 243 ------ ------ ------ ------ Net earnings $ 501 $ 511 $ 450 $ 548 ====== ====== ====== ====== Earnings per share Basic $ .30 $ .31 $ .27 $ .34 ====== ====== ====== ====== Diluted $ .29 $ .30 $ .26 $ .33 ====== ====== ====== ======
46 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2004, 2003 and 2002 NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (continued)
Three Months Ended September 30, December 31, March 31, June 30, 2003: (In thousands, except per share data) Total interest income $2,474 $2,416 $2,304 $2,382 Total interest expense 1,079 993 919 897 ------ ------ ------ ------ Net interest income 1,395 1,423 1,385 1,485 Provision for losses on loans - 124 45 80 Other income 133 147 179 286 General, administrative and other expense 837 675 841 924 ------ ------ ------ ------ Earnings before income taxes 691 771 678 767 Federal income taxes 203 255 173 215 ------ ------ ------ ------ Net earnings $ 488 $ 516 $ 505 $ 552 ====== ====== ====== ====== Earnings per share Basic $ .32 $ .35 $ .32 $ .33 ====== ====== ====== ====== Diluted $ .31 $ .34 $ .32 $ .33 ====== ====== ====== ======
47 ASB FINANCIAL CORP. DIRECTORS AND OFFICERS ============================================================================= Robert M. Smith Director and President President and Chief Executive Officer American Savings Bank, fsb Gerald R. Jenkins Director Retired President and Chief Executive Officer American Savings Bank, fsb William J. Burke Director Director and Chief Executive Officer OSCO Industries, Inc. Larry F. Meredith Director Retired School Administrator Louis M. Schoettle, M.D. Director Physician Retired Christopher H. Lute Director Director and Chief Executive Officer Lute Supply, Inc. Jack A. Stephenson Vice President Vice President American Savings Bank, fsb Michael L. Gampp Chief Financial Officer Chief Financial Officer and Vice President American Savings Bank, fsb M. Kathryn Fish Secretary Secretary American Savings Bank, fsb Carlisa R. Baker Treasurer Treasurer American Savings Bank, fsb AMERICAN SAVINGS BANK, fsb DIRECTORS AND OFFICERS ============================================================================= Robert M. Smith Director, President and CEO Gerald R. Jenkins Director William J. Burke Director Larry F. Meredith Director Louis M. Schoettle, M.D. Director Christopher Lute Director Jack A. Stephenson Vice President Michael L. Gampp Chief Financial Officer and Vice President Carlisa R. Baker Treasurer M. Kathryn Fish Secretary 48 SHAREHOLDER SERVICES ============================================================================= Illinois Stock Transfer Company serves as transfer agent and dividend distributing agent for ASB's shares. Communications regarding change of address, transfer of shares, lost certificates and dividends should be sent to: Illinois Stock Transfer Company 209 West Jackson Boulevard Suite 903 Chicago, Illinois 60606-6905 (312)427-2953 ANNUAL MEETING ============================================================================= The Annual Meeting of Shareholders of ASB Financial Corp. will be held on October 27, 2004, at 11:00 a.m., local time, at the Shawnee State Park Resort and Conference Center, 4404B State Route 125, West Portsmouth, Ohio 45663. Shareholders are cordially invited to attend. ANNUAL REPORT ON FORM 10-KSB ============================================================================= A copy of ASB's Annual Report on Form 10-KSB, excluding exhibits, as filed with the Securities and Exchange Commission, will be available at no charge to shareholders upon written request to: American Savings Bank, fsb 503 Chillicothe Street Portsmouth, Ohio 45662 Attention: Robert M. Smith, President 49 EX-23 4 asb-23.txt EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our report dated August 12, 2004, accompanying the consolidated financial statements of ASB Financial Corp. which are incorporated within the Annual Report on Form 10-KSB for the year ended June 30, 2004. We hereby consent to the incorporation by reference of said report in the Registration Statement of ASB on Form S-8, File No. 333-16051, effective November 13, 1996. /s/GRANT THORNTON LLP Cincinnati, Ohio September 28, 2004 EX-31 5 asb-311.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION ------------- I, Robert M. Smith, certify that: 1. I have reviewed this Annual Report on Form 10-KSB of ASB Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: September 27, 2004 /s/ Robert M. Smith ------------------------------------ Robert M. Smith President [Chief Executive Officer] 27 EX-31 6 asb-312.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION ------------- I, Michael L. Gampp, certify that: 1. I have reviewed this Annual Report on Form 10-KSB of ASB Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: September 27, 2004 /s/ Michael L. Gampp ------------------------------------ Michael L. Gampp Chief Financial Officer 28 EX-32 7 asb-321.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of ASB Financial Corp. (the "Company") on Form 10-KSB for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert M. Smith, the President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Robert M. Smith - ----------------------------------- Robert M. Smith President [Chief Executive Officer] September 28, 2004 A signed original of this written statement required by Section 906 has been provided to ASB Financial Corp. and will be retained by ASB Financial Corp. and furnished to the Securities and Exchange Commission or its staff upon request. 29 EX-32 8 asb-322.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of ASB Financial Corp. (the "Company") on Form 10-KSB for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael L. Gampp, the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Michael L. Gampp - ----------------------------------- Michael L. Gampp Chief Financial Officer September 28, 2004 A signed original of this written statement required by Section 906 has been provided to ASB Financial Corp. and will be retained by ASB Financial Corp. and furnished to the Securities and Exchange Commission or its staff upon request. 30 -----END PRIVACY-ENHANCED MESSAGE-----