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
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