-----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, TfYhXGxQMI24R7v+9FENkv65eBiJEzDpgZfG9M1Us0qa+aPKbszx3LO0dzsm6il+ NHhaMW3nWn/zJsVMxV+alg== 0000950152-96-004999.txt : 19961001 0000950152-96-004999.hdr.sgml : 19961001 ACCESSION NUMBER: 0000950152-96-004999 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 SROS: NONE 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: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-25906 FILM NUMBER: 96636668 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 10KSB40 1 ASB FINANCIAL CORP. 10-KSB 405 1 FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the Fiscal Year Ended June 30, 1996 ------------- OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] 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 Issuer's telephone number: (614) 354-3177 - --------------------------------------------------- -------------- (Address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None ---------------------------------------------- Securities registered pursuant to Section 12(g) of the Exchange Act: Common Shares, without par value ---------------------------------------------- (Title of Class) Check whether the issuer (1) has 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 issuer 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 pursuant to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of issuer'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. [X] The issuer's revenues for the fiscal year ended June 30, 1996, were $8,368,000. Based upon the average bid and asked prices quoted by The Nasdaq Stock Market, the aggregate market value of the voting stock held by non-affiliates of the issuer on September 16, 1996, was $20,715,895. 1,713,960 of the issuer's common shares were issued and outstanding on September 16, 1996. DOCUMENTS INCORPORATED BY REFERENCE Part II of Form 10-KSB - Annual Report to Shareholders for the fiscal year ended June 30, 1996. Part III of Form 10-KSB - Proxy Statement for 1996 Annual Meeting of Shareholders. Transitional Small Business Disclosure Format: Yes No X --- --- 2 PART I ITEM 1. DESCRIPTION OF BUSINESS ASB Financial Corp. ("ASB"), an Ohio corporation, is a unitary savings and loan holding company which owns all of the issued and outstanding common shares of American Savings Bank, fsb ("American"), a federal savings bank chartered under the laws of the United States. On May 10, 1995, ASB acquired all of the common shares issued by American upon its conversion from a mutual savings association to a stock savings association (the "Conversion"). At the time of the Conversion, American was a savings association incorporated in Ohio under the name American Savings Association. GENERAL American is principally engaged 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 City of Portsmouth and contiguous areas of Scioto 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 states 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 Federal Deposit Insurance Corporation (the "FDIC"), and loan principal and mortgage-backed security repayments. American conducts business from its office in Portsmouth, Ohio. American's primary market area for lending consists of Scioto County, Ohio, and for deposits consists of Scioto County and adjacent communities in the North Central Kentucky area. As a savings and loan holding company, ASB is subject to regulation, supervision and examination by the Office of Thrift Supervision of the United States Department of the Treasury (the "OTS"). As a federal savings bank, 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 acquiring such common stock in connection with 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 one- to four-family homes located in American's primary market area. Loans secured by multifamily properties containing five units or more and nonresidential properties, including construction loans, are also offered by American. American also purchases interests in multifamily real estate loans and nonresidential real estate loans originated and serviced by other financial institutions. American does not originate first mortgage loans insured by the Federal Housing Authority or guaranteed by the Veterans Administration. In addition to real estate lending, American originates consumer loans, including automobile loans, loans secured by deposit accounts, home improvement loans and a limited number of unsecured loans. -2- 3 LOAN PORTFOLIO COMPOSITION. The following table presents certain information with respect to the composition of American's loan portfolio at the dates indicated:
At June 30, ---------------------------------------------------------------------------- 1996 1995 1994 --------------------- ---------------------- ----------------------- 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 residential $48,302 68.0% $45,929 71.4% $45,787 74.4% Multifamily 8,265 11.6 8,272 12.9 7,540 12.3 Nonresidential and land 3,401 4.8 4,048 6.3 4,519 7.3 Construction 2,318 3.3 1,064 1.6 825 1.3 ------- ----- ------- ----- ------- ----- Total real estate loans 62,286 87.7 59,313 92.2 58,671 95.3 Consumer and other loans: Passbook 586 .8 617 1.0 626 1.0 Home improvement 1,433 2.0 1,477 2.3 1,097 1.8 Automobile 2,199 3.1 2,323 3.6 794 1.3 Other 4,562 6.4 575 .9 317 .6 ------- ----- ------- ----- ------- ----- Total consumer and other loans 8,780 12.3 4,992 7.8 2,834 4.7 ------- ----- ------- ----- ------- ----- Total loans 71,066 100.0% 64,304 100.0% 61,505 100.0% ===== ===== ===== Less: Loans in process 1,529 1,065 832 Net deferred loan origination fees and unearned discounts 198 194 254 Allowance for loan losses 884 893 1,115 ------- ------- ------- Total loans net $68,455 $62,153 $59,304 ======= ======= =======
LOAN MATURITY. The following table sets forth the contractual maturity of American's total loans at June 30, 1996, before consideration of net items:
Due during the fiscal One- to year ending June 30, four-family (1) Multifamily Nonresidential (2) Consumer Total - -------------------- --------------- ----------- ------------------ -------- ----- (In thousands) 1997 $ 2,665 $ 428 $ 391 $1,276 $ 4,760 1998 2,863 464 427 1,379 5,133 1999 3,065 502 465 1,490 5,522 2000-2001 6,607 1,132 1,059 3,348 12,146 2002-2006 20,614 3,856 1,059 1,287 26,816 2007-2011 14,113 1,883 -- -- 15,996 2012 and thereafter 693 -- -- -- 693 ------- ------ ------ ------ ------- $50,620 $8,265 $3,401 $8,780 $71,066 ======= ====== ====== ====== =======
- ----------------------------- (1) Includes construction loans. (2) Includes land development loans. -3- 4 LOANS SECURED BY ONE- TO FOUR-FAMILY REAL ESTATE. The principal lending activity of American is the origination of permanent conventional loans secured by one- to four-family residences, primarily single-family residences, located within American's primary market area. Each of such loans is secured by a first mortgage on the underlying real estate and improvements thereon, if any. At June 30, 1996, American's one- to four-family residential real estate loan portfolio, including construction loans secured by one- to four-family residences, was approximately $50.6 million, or 71.3%, 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 such regulations, American makes loans on one- to four-family residences with LTVs of up to 90%. The principal amount of any loan which exceeds an 80% LTV at the time of origination is usually covered by private mortgage insurance at the expense of the borrower. Fixed-rate loans are offered by American, currently for terms of up to 20 years. Although fixed-rate loans were offered by American for terms of up to 25 years prior to October 1993, most of the fixed-rate loans in American's portfolio have terms of 15 years or less. Adjustable-rate residential real estate loans ("ARMs") are offered by American 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 the one-year and three-year Treasury Bill rates or the Previously Occupied Homes index published by the Federal Home Loan Bank. 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. LOANS SECURED BY MULTIFAMILY REAL ESTATE. In addition to loans on one- to four-family properties, American originates and purchases interests in loans secured by multifamily properties containing over four units. Multifamily loans originated by American have terms of up to 15 years and a maximum LTV of 75%. Approximately 91% 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 that all borrowers submit financial statements annually to enable American to monitor the loan. At June 30, 1996, loans secured by multifamily properties totaled approximately $8.3 million, or 11.6% of total loans. LOANS SECURED BY NONRESIDENTIAL REAL ESTATE AND LAND. At June 30, 1996, approximately $3.4 million, or 4.8%, 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, a hotel and an automobile dealership located in American's primary market area. Also included in American's nonresidential real estate loan portfolio are $1.5 million in participation interests which have been purchased in loans originated by other financial institutions. -4- 5 Land loans include five loans having an aggregate principal balance of $148,000 secured by developed land which has been subdivided for single-family home construction in Scioto County. 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 and characteristics of the income stream generated by the property and appraisals supporting the property's valuation. CONSTRUCTION LOANS. Loans for the construction of single-family houses are made to individuals for the construction and permanent financing of their primary residences. Such loans are offered with adjustable rates for terms of up to 30 years and fixed rates for terms of up to 20 years. During the first year, while the residence is being constructed, the borrower is required to pay interest only. Loans for the construction of nonresidential real estate are occasionally made by American. At June 30, 1996, American had no outstanding nonresidential real estate construction loans. 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. The increased risks inherent in construction lending are not significant to American because construction loans, in the aggregate, comprise only 3.3% of American's total loans at June 30, 1996. Approximately 94% of American's construction loans are secured by property in Scioto County. CONSUMER AND OTHER LOANS. American makes various types of consumer loans, including loans made to depositors on the security of their passbook accounts, automobile loans, home improvement loans and other secured loans, including a loan to an automobile dealer leasing group, and unsecured personal loans. Consumer loans, other than passbook loans, are made at fixed rates of interest only and for varying terms based on the type of loan. At June 30, 1996, American had approximately $8.8 million, or 12.3% of total loans, invested in consumer loans. Home improvement loans, which are the largest segment of American's consumer loan portfolio, include loans insured by the Federal Housing Administration. Home improvement loans typically have a five-year term and fixed rates 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. Loan originations are developed 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. -5- 6 Loan applications for permanent real estate loans are taken by loan personnel. 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. 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 for review in accordance with American's underwriting guidelines to American's Executive Committee, the members of which are William J. Burke, Lee O. Fitch, Gerald R. Jenkins and Robert M. Smith. Any loan for more than $100,000 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 which will secure the mortgage loan. Most of the loans in American's portfolio have an attorney's opinion. Borrowers are required to carry satisfactory fire and casualty insurance and flood insurance, if applicable, and to name American as an insured mortgagee. The procedure for approval of construction loans is the same as for permanent real estate loans, except that an appraiser evaluates the building plans, construction specifications and estimates of construction costs. American also evaluates the feasibility of the proposed construction project and the experience and record of the builder. 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 and not with the intention of selling such loans in the secondary market. The documentation for most of the loans in American's portfolio do not conform to the secondary market standards of the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association (the "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. See "Loans Secured by Multifamily Real Estate" and "Loans Secured by Nonresidential Real Estate and Land." American does not purchase participation interests through a broker. Recent loan participations have been purchased primarily from a savings bank and a mortgage banking affiliate of a commercial bank headquartered in Ohio. Whole loans or participation interests purchased by American conform to American's underwriting criteria for loans American originates. American intends to continue to purchase loans as suitable investment opportunities become available. -6- 7 The following table presents American's loan origination, purchase and sale activity for the periods indicated:
Year ended June 30, ------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Loans originated: Adjustable-rate: One- to four-family real estate $ 1,827 $ 1,251 $ 1,771 Multifamily real estate 636 -- 150 Nonresidential real estate 112 782 100 ------- ------- ------- Total adjustable-rate 2,575 2,033 2,021 Fixed-rate: One- to four-family real estate 11,324 5,701 11,996 Nonresidential real estate 424 686 198 Consumer 9,562 5,314 2,314 ------- ------- ------- Total fixed-rate 21,310 11,701 14,508 Loans purchased 1,711 3,279 1,844 ------- ------- ------- Total loans originated and purchased 25,596 17,013 18,373 Reductions: Principal repayments 18,715 13,716 18,925 Transfers from loans to real estate owned and repossessed assets 138 525 -- ------- ------- ------- Total reductions 18,853 14,241 18,925 Increase (decrease) in other items, net (1) (441) 77 (688) ------- ------- ------- Net increase (decrease) $ 6,302 $ 2,849 $(1,240) ======= ======= =======
- ----------------------------- (1) Consists of loans in process, unearned discounts and deferred loan origination fees and allowance for loan losses. OTS regulations generally limit 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 under the OTS capital requirements. A savings association may loan one borrower an additional amount not to exceed 10% of the association's total capital if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable capital." In addition, the regulations require that loans to certain related or affiliated borrowers be aggregated for the purpose of such limits. Two exceptions to these limits permit loans to one borrower of up to $500,000 "for any purpose" and, subject to certain conditions, including OTS prior approval, loans to one borrower for the development of domestic residential housing units in amounts up to the lesser of $30 million, or 30% of the savings association's total capital. Based on such limits, American was able to lend approximately $4.5 million to one borrower at June 30, 1996. The largest loan American had outstanding to one borrower at June 30, 1996, was $2.4 million. Such loan was secured by automobile titles, assignments of leases and a guarantee of the leasing company and was current at June 30, 1996. LOAN ORIGINATION AND OTHER FEES. American realizes loan origination fee and other fee income from its lending activities and also realizes income from 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. -7- 8 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. 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. When loan payments have not been made by the thirtieth of the month, late notices are sent. If payment is not received by the sixtieth day, second notices and telephone calls are made to the borrower. Each of the loans bears a late payment penalty which is assessed as soon as such loan is more than 30 days delinquent. The late penalty for real estate loans is 3% and for consumer loans is 5% of the payment due. 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 security is performed. 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, a specific allowance for loss is established for the amount of the loan. -8- 9 The following table reflects the amount of loans in a delinquent status at the dates indicated:
At June 30, 1996 ------------------------------------------------------------------------------------------------------- Residential real estate Nonresidential real estate Consumer Total ----------------------- -------------------------- ----------------------- ----------------------- Number Amount % (1) Number Amount % (1) Number Amount % (1) Number Amount % (1) ------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- (Dollars in thousands) Loans delinquent for: 30-59 days 42 $1,386 2.0% -- $ -- --% 17 $ 65 .1% 59 $1,451 2.0% 60-89 days 14 1,317 1.8 1 38 -- 9 41 .1 24 1,396 2.0 90 days and over 9 1,026 1.4 1 115 .2 8 17 -- 18 1,158 1.6 --- ------ --- --- ---- --- --- ---- --- --- ------ --- Total delinquent loans 65 $3,729 5.2% 2 $153 .2% 34 $123 .2% 101 $4,005 5.6% === ====== === === ==== === === ==== === === ====== === At June 30, 1995 ------------------------------------------------------------------------------------------------------- Residential real estate Nonresidential real estate Consumer Total ----------------------- -------------------------- ----------------------- ----------------------- Number Amount % (1) Number Amount % (1) Number Amount % (1) Number Amount % (1) ------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- (Dollars in thousands) Loans delinquent for: 30-59 days 45 $1,469 2.3% 2 $195 .3% 10 $ 40 .1% 57 $1,704 2.7% 60-89 days 14 324 .5 1 77 .1 5 26 -- 20 427 .6 90 days and over 12 1,907 3.0 -- -- -- 5 22 -- 17 1,929 3.0 --- ------ --- --- ---- --- --- ---- --- --- ------ --- Total delinquent loans 71 $3,700 5.8% 3 $272 .4% 20 $ 88 .1% 94 $4,060 6.3% === ====== === === ==== === === ==== === === ====== === At June 30, 1994 ------------------------------------------------------------------------------------------------------- Residential real estate Nonresidential real estate Consumer Total ----------------------- -------------------------- ----------------------- ----------------------- Number Amount % (1) Number Amount % (1) Number Amount % (1) Number Amount % (1) ------ ------ ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- (Dollars in thousands) Loans delinquent for: 30-59 days 45 $1,726 2.8% -- $ -- --% 5 $ 12 --% 50 $1,738 2.8% 60-89 days 13 321 .5 1 124 .2 5 20 -- 19 465 .7 90 days and over 10 2,127 3.5 2 767 1.1 3 19 .1 15 2,913 4.7 --- ------ --- --- ---- --- --- ---- --- --- ------ --- Total delinquent loans 68 $4,174 6.8% 3 $891 1.3% 13 $ 51 .1% 84 $5,116 8.2% === ====== === === ==== === === ==== === === ====== ===
- ------------------------------------ (1) Percentages have been correlated to total loans before net items. -9- 10 Nonperforming assets include non-accrual 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 non-accrual 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, ----------- 1996 1995 1994 ---- ---- ---- Non-accrual loans: One- to four-family $ 164 $ 207 $ 136 Nonresidential 115 -- 767 Multifamily 862 1,700 1,991 Consumer 17 22 19 ------ ------ ------ Total 1,158 1,929 2,913 Accruing loans delinquent 90 days or more: -- -- -- ------ ------ ------ Total nonperforming loans 1,158 1,929 2,913 Real estate acquired through foreclosure: One- to four-family -- -- -- Nonresidential 663 525 -- Multifamily -- -- -- ------ ------ ------ Total real estate acquired through foreclosure 663 525 -- ------ ------ ------ Total nonperforming assets $1,821 $2,454 $2,913 ====== ====== ====== Allowance for loan losses $ 884 $ 893 $1,115 ====== ====== ====== Nonperforming assets as a percent of total assets (1) 1.61% 2.30% 3.10% Allowance for loan losses as a percent of nonperforming loans 76.34% 46.29% 38.28% Allowance for loan losses as a percent of nonperforming assets 48.54% 36.39% 38.28%
- ----------------------------- (1) The applicable asset totals are $112.9 million, $106.9 million and $93.9 million for the fiscal years ended June 30, 1996, 1995 and 1994, respectively. For the year ended June 30, 1996, gross interest income which would have been recorded had non-accruing loans been current in accordance with their original terms was $4,000. There was no interest recorded on such loans during such period. Real estate acquired by American as a result of foreclosure proceedings is classified as real estate owned ("REO") until it is sold. When property is so acquired it is recorded by American at the estimated fair value of the real estate, 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 all costs incurred -10- 11 from such date in maintaining the property are expensed. Costs relating to the development and improvement of the property are capitalized to the extent of fair value. 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. An asset classified "loss" is considered uncollectible and of such little value that its continuance as an asset of American is not warranted. The aggregate amounts of American's classified assets at the dates indicated were as follows:
At June 30, ----------- 1996 1995 1994 ---- ---- ---- Classified assets Substandard $1,804 $2,432 $2,902 Doubtful -- -- -- Loss 59 22 127 ------ ------ ------ Total classified assets $1,863 $2,454 $3,029 ====== ====== ======
American establishes general allowances for loan losses for loans classified as substandard or doubtful. Generally, American charges off the portion of any real estate loan deemed to be uncollectible, whereas a loss classification and corresponding reserve is used for consumer loans. American analyzes each classified asset on a monthly basis to determine whether changes in the classifications are appropriate under the circumstances. Such analysis focuses on a variety of factors, including the amount of any delinquency and the reasons for the delinquency, if any, the use of the real estate securing the loan, the status of the borrower and the appraised value of the real estate. As such factors change, the classification of the asset will change accordingly. ALLOWANCE FOR LOAN LOSSES. Senior management, with oversight by the Board, 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 loans, current and anticipated economic conditions in the 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 adjustments, and net earnings could be adversely affected if circumstances differ substantially from the assumptions used in making the final determination. -11- 12 The following table sets forth an analysis of American's allowance for loan losses for the periods indicated:
For the year ended June 30, --------------------------- 1996 1995 1994 ---- ---- ---- (Dollars in thousands) Balance at beginning of period $ 893 $1,115 $ 457 Charge-offs: Residential real estate loans (1) (9) -- (246) Nonresidential real estate loans -- (260) -- Consumer loans -- (4) (5) ----- ------ ------ Total charge-offs (9) (264) (251) Recoveries -- 32 160 ----- ------ ------ Net charge-offs (9) (232) (91) Provision for losses on loans -- 10 749 ----- ------ ------ Balance at end of period $ 884 $ 893 $1,115 ===== ====== ====== Ratio of net charge-offs to average loans outstanding during the period (.01)% (.38)% (.15)%
- ------------------------------ (1) Includes multifamily loans. 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, ------------------------------------------------------------------------ 1996 1995 1994 ---------------------- ---------------------- ---------------------- 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 $309 87.7% $615 92.2% $ 545 95.3 Consumer loans 13 12.3 22 7.8 12 4.7 Unallocated 562 -- 256 -- 558 -- ---- ----- ---- ----- ------ ----- Total $884 100.0% $893 100.0% $1,115 100.0% ==== ===== ==== ===== ====== =====
INVESTMENT ACTIVITIES OTS regulations require that American maintain a minimum amount of liquid assets, which may be invested in U.S. Treasury obligations, securities of various federal agencies, certificates of deposit at insured banks, bankers' acceptances and federal funds. American is also 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. See "REGULATION." -12- 13 The following table sets forth the composition of American's investments, other than mortgage-backed securities, at the dates indicated:
At June 30, ----------------------------------------------------------------------------- 1996 1995 1994 ----------------------- ----------------------- ----------------------- 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) $10,127 34.4% $14,942 48.5% $14,121 61.1% U.S. Government agency obligations (2) -- -- 14,107 45.8 8,954 38.8 FHLMC stock -- -- -- -- 24 .1 ------- ----- ------- ----- ------- ----- Total investments designated as held to maturity (3) 10,127 94.4 29,049 94.3 23,099 100.0 Investments designated as available for sale: U.S. Government agency obligations (2) 18,771 63.8 1,357 4.4 -- -- FHLMC stock 513 1.8 411 1.3 -- -- ------- ----- ------- ----- ------- ----- Total investments designated as available for sale 19,284 65.6% 1,768 5.7% -- -- ------- ----- ------- ----- ------- ----- Total investments $29,411 100.0% $30,817 100.0% $23,099 100.0% ======= ===== ======= ===== ======= =====
- ----------------------------- (1) Includes interest-bearing deposits and certificates of deposit. (2) Consists primarily of investments in FNMA and FHLB bonds. (3) At June 30, 1996, 1995 and 1994, the market value of American's investment securities, held to maturity, totalled $10.1 million, $29.0 million and $23.1 million, respectively. -13- 14 The following table sets forth information regarding the maturities, book value and weighted average yields of American's investment securities, other than mortgage-backed securities, at June 30, 1996:
Less than 1 Year 1-5 Years 5-10 Years Total --------------------- --------------------- --------------------- -------------------- Weighted Weighted Weighted Carrying average Carrying average Carrying average Carrying Market value yield value yield value yield value value ----- ----- ----- ----- ----- ----- ----- ----- (Dollars in thousands) Investments designated as held to maturity (1): Certificates of deposit in other financial institutions $5,348 6.51% $4,779 6.49% $ -- --% $10,127 $10,127 Investments designated as available for sale (1): U.S. Government agency obligations 1,374 5.4 4,383 5.9 13,527 6.35 19,284 18,771 ------ ---- ------ ---- ------- ---- ------- ------- Total $6,722 6.28% $9,162 6.22% $13,527 6.35% $29,411 $28,898 ====== ==== ====== ==== ======= ==== ======= =======
- ----------------------------- (1) American has no investment securities having a maturity of more than ten years. In addition to the foregoing investment securities, American has been an active purchaser of mortgage-backed securities. At June 30, 1996, mortgage-backed securities totalled $10.7 million, or 9.5% of total assets. All of the mortgage-backed securities in American's portfolio are government-guaranteed securities, primarily participations or pass-through securities, issued by the Government National Mortgage Association ("GNMA") or the FNMA. Although American's investment policy does not prohibit investment in collateralized mortgage obligations ("CMOs") or real estate mortgage investment conduits ("REMICs"), it has been American's practice generally not to purchase CMOs, REMICs or other forms of derivative instruments. -14- 15 American generally purchases such securities at or near par in order to avoid prepayment risk. All of American's mortgage-backed securities are fixed-rate securities. Although fixed-rate securities generally have a higher yield at the time of origination than adjustable-rate securities, the interest rate risk associated with fixed-rate securities is higher. The following table sets forth details of American's investment in mortgage-backed securities, including those designated as available for sale, at the dates indicated.
At June 30, 1996 At June 30, 1995 --------------------------------------------- --------------------------------------------- Gross Gross Gross Gross Amortized unrealized unrealized Estimated Amortized unrealized unrealized Estimated cost gains losses fair value cost gains losses fair value ---- ----- ------ ---------- ---- ----- ------ ---------- (In thousands) Held to maturity: FHLMC participation certificates $ -- $ -- $ -- $ -- $ 4,227 $ 27 $114 $ 4,140 GNMA participation certificates -- -- -- -- 2,089 36 15 2,110 FNMA participation certificates -- -- -- -- 1,519 21 2 1,538 FHLMC REMIC -- -- -- -- -- -- -- -- ------- ---- ---- ------- ------- ---- ---- ------- Total -- -- -- -- 7,835 84 131 7,788 Available for sale: FHLMC participation certificates 4,119 38 57 4,100 -- -- -- -- FNMA participation certificates 2,135 30 27 2,138 -- -- -- -- GNMA participation certificates 4,463 81 54 4,490 2,276 24 -- 2,300 ------- ---- ---- ------- ------- ---- ---- ------- Total mortgage-backed securities $10,717 $149 $138 $10,728 $10,111 $108 $131 $10,088 ======= ==== ==== ======= ======= ==== ==== ======= At June 30, 1994 ------------------------------------------------ Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value ---- ----- ------ ---------- (In thousands) Held to maturity: FHLMC participation certificates $4,162 $42 $184 $4,020 GNMA participation certificates 2,668 10 77 2,602 FNMA participation certificates 369 2 2 368 FHLMC REMIC 1,025 9 5 1,029 ------ --- ---- ------ Total 8,224 63 268 8,019 Available for sale: FHLMC participation certificates -- -- -- -- FNMA participation certificates -- -- -- -- GNMA participation certificates -- -- -- -- ------ --- ---- ------ Total mortgage-backed securities $8,224 $63 $268 $8,019 ====== === ==== ======
-15- 16 DEPOSITS AND BORROWINGS GENERAL. Deposits are the primary source of American's funds for use in lending and other investment activities. 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. DEPOSITS. Deposits are attracted principally from within American's primary market area through the offering of a broad selection of deposit instruments, including NOW accounts, demand deposit accounts, money market deposit accounts, money market checking accounts, regular passbook savings accounts, Christmas Club accounts, term certificate accounts and individual retirement accounts ("IRAs"). Interest rates paid, maturity terms, service fees and withdrawal penalties for the various types of accounts are established periodically by management of American based on American's liquidity requirements, growth goals and interest rates paid by competitors. American does not use brokers to attract deposits. The amount of deposits from outside American's primary market area is not significant. At June 30, 1996, American's certificates of deposit totaled $63.7 million, or 76.4% of total deposits. Of such amount, approximately $44.3 million in certificates of deposit mature within one year. Based on past experience and American's prevailing pricing strategies, management believes that a substantial percentage of such certificates will renew with American at maturity. If there is a significant deviation from historical experience, American can utilize excess liquidity and borrowings from the FHLB of Cincinnati as alternatives to this source of funds. 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, ----------------------------------------------------------------------------- 1996 1995 1994 ----------------------- ----------------------- ----------------------- Percent Percent Percent of total of total of total Amount deposits Amount deposits Amount deposits ------ -------- ------ -------- ------ -------- (Dollars in thousands) Transaction accounts: Passbook accounts $ 7,225 8.7% $ 7,278 9.2% $ 9,095 11.0% Demand, NOW and Super NOW accounts 3,448 4.2 2,471 3.1 3,563 4.3 Money market deposit accounts 9,001 10.8 8,319 10.5 14,847 18.0 ------- ----- ------- ----- ------- ----- Total transaction accounts 19,674 23.6 18,068 22.8 27,505 33.3 Certificates of deposit: 2.00 - 2.99% -- -- -- -- 71 .1 3.00 - 3.99% -- -- -- -- 10,116 12.3 4.00 - 4.99% 474 .5 723 .9 18,035 21.9 5.00 - 5.99% 27,525 33.0 40,949 52.0 18,201 22.1 6.00 - 6.99% 35,638 42.7 19,068 24.1 6,872 8.3 7.00 - 7.99% 36 .1 35 .1 1,182 1.4 8.00 - 8.99% 48 .1 45 .1 532 .6 ------- ----- ------- ----- ------- ----- Total certificates of deposit 63,721 76.4 60,820 77.2 55,009 66.7 ------- ----- ------- ----- ------- ----- Total deposits $83,395 100.0% $78,888 100.0% $82,514 100.0% ======= ===== ======= ===== ======= =====
-16- 17 The following table sets forth the remaining maturities of American's certificates of deposit at the dates indicated:
June 30, ----------------------------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Less than one year $44,345 $32,815 $31,592 One to two years 10,065 21,663 15,179 Two to three years 5,748 3,269 5,229 Over three years 3,563 3,073 3,009 ------- ------- ------- $63,721 $60,820 $55,009 ======= ======= =======
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, 1996:
At June 30, 1996 ---------------- (In thousands) Certificates of deposit with balances of $100,000 or more maturing in quarter ending (1): September 30, 1996 $1,983 December 31, 1996 1,464 March 31, 1997 1,677 June 30, 1997 1,535 After June 30, 1997 2,136 ------ Total certificates of deposit with balances over $100,000 $8,795 ======
- ----------------------------- (1) 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, ------------------- 1996 1995 1994 ---- ---- ---- (Dollars in thousands) Beginning balance $ 78,888 $ 82,514 $ 81,404 Deposits 91,423 107,396 77,731 Withdrawals (89,410) (113,796) (79,025) Interest credited 2,494 2,774 2,404 -------- --------- -------- Ending balance $ 83,395 $ 78,888 $ 82,514 ======== ========= ======== Net increase (decrease) $ 4,507 $ (3,626) $ 1,110 ======== ========= ======== Percent increase (decrease) 5.71% (4.39)% 1.36% ======== ========= ========
BORROWINGS. American's other sources of funds include advances from the FHLB. As a member of the FHLB, American is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturity. The FHLB may prescribe the acceptable uses for these advances, as well as limitations on the size of the advances and repayment provisions. -17- 18 The following table sets forth certain information as to American's FHLB advances at the dates indicated:
At June 30, ----------- 1996 1995 1994 ---- ---- ---- (Dollars in thousands) FHLB advances $2,413 $ 442 $ 469 Weighted average interest rate of FHLB advances 4.95% 3.16% 3.16%
The following table sets forth the maximum balance and average balance of FHLB advances during the periods indicated:
Year ended June 30, ------------------- 1996 1995 1994 ---- ---- ---- (Dollars in thousands) Maximum Balance: FHLB advances $2,413 $466 $493 Average Balance: FHLB advances 684 460 480 Weighted average interest rate of FHLB advances 5.12% 3.16% 3.16%
-18- 19 YIELDS EARNED AND RATES PAID The following table sets forth certain information relating to American's average balance sheet information 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 month-end balances, which include non-accruing loans in the loan portfolio, net of the allowance for loan losses. Management does not believe that the use of month-end balances instead of daily balances has caused any material differences in the information presented.
Year ended June 30, ------------------------------------------------------------------ 1996 1995 -------------------------------- ------------------------------- Average Interest Average Interest outstanding earned/ Yield outstanding earned/ Yield/ balance paid rate balance paid rate ------- ---- ---- ------- ---- ---- (Dollars in thousands) Interest-earning assets: Loans receivable $ 66,152 $5,498 8.31% $60,395 $4,865 8.06% Mortgage-backed securities 10,555 750 7.11 7,913 532 6.72 Investment securities and other interest-earning assets 27,886 1,925 6.90 26,553 1,615 6.08 -------- ------ ------ ------- ------ ------ Total interest-earning assets 104,593 8,173 7.81 94,861 7,012 7.39 Non-interest earning assets 5,332 5,027 -------- ------- Total assets $109,925 $99,888 ======== ======= Interest-bearing liabilities: Deposits $ 81,114 4,267 5.26 $84,858 3,870 4.56 Borrowings 889 43 4.84 457 23 5.03 -------- ------ ------ ------- ------ ------ Total interest-bearing liabilities 82,003 4,310 5.26 85,315 3,893 4.56 ------ ------ ------ ------ Non interest-bearing liabilities 2,086 3,826 -------- ------- Total liabilities 84,089 89,141 Shareholders' equity(1) 25,836 10,747 -------- ------- Total liabilities and shareholders' equity $109,925 $99,888 ======== ======= Net interest income $3,863 $3,119 ====== ====== Interest rate spread 2.55% 2.83% ====== ====== Net interest margin (net interest income as a percent of average interest-earning assets) 3.69% 3.29% ====== ====== Average interest-earning assets to interest-bearing liabilities 127.55% 111.19% ====== ====== Year ended June 30, ------------------------------- 1994 ------------------------------- Average Interest outstanding earned/ Yield/ balance paid rate ------- ---- ---- (Dollars in thousands) Interest-earning assets: Loans receivable $60,884 $4,989 8.19% Mortgage-backed securities 7,469 554 7.42 Investment securities and other interest-earning assets 21,106 1,094 5.18 ------- ------ ------ Total interest-earning assets 89,459 6,637 7.42 Non-interest earning assets 3,618 ------- Total assets $93,077 ======= Interest-bearing liabilities: Deposits $81,373 3,287 4.04 Borrowings 482 20 4.15 ------- ------ ------ Total interest-bearing liabilities 81,855 3,307 4.04 ------ ------ Non interest-bearing liabilities 1,878 ------- Total liabilities 83,733 Shareholders' equity(1) 9,344 ------- Total liabilities and shareholders' equity $93,077 ======= Net interest income $3,330 ====== Interest rate spread 3.38% ====== Net interest margin (net interest income as a percent of average interest-earning assets) 3.72% ====== Average interest-earning assets to interest-bearing liabilities 109.29% ======
- ------------------------------------ (1) Consists solely of retained earnings for the year ended June 30, 1994. -19- 20 The following table sets forth the weighted average yields earned on American's interest-earning assets, the weighted average interest rates paid on interest-bearing liabilities and the interest rate spread between the weighted average yields and rates at the dates indicated. Non-accruing loans have been included in the table as having a yield of zero.
At June 30, ------------------------------ 1996 1995 1994 ---- ---- ---- Weighted-average yield on: Loans receivable 8.14% 8.23% 8.02% Mortgage-backed securities 7.61 7.77 8.19 Investment securities 6.89 6.43 5.27 Other interest-earning assets 6.27 6.54 5.25 Combined weighted-average yield on interest-earning assets 7.74 7.66 7.37 Weighted-average rate paid on: Deposits 5.20 5.15 4.07 Borrowings 4.95 3.16 3.16 Combined weighted-average rate paid on interest-bearing liabilities 5.18 5.14 4.06 Interest rate spread 2.56 2.52 3.31
-20- 21 The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in volume (i.e., changes in volume multiplied by the old rate) and changes in rate (i.e., changes in rate multiplied by the old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the absolute value of the change due to volume and the change due to rate.
Year ended June 30, ----------------------------------------------------------------- 1996 vs. 1995 1995 vs. 1994 ------------------------------ ------------------------------ Increase Increase (decrease) (decrease) due to due to ------------------ ------------------ Volume Rate Total Volume Rate Total ------ ------ ------ ------ ------ ------ (In thousands) Interest-earning assets: Loans receivable $ 478 $ 155 $ 633 $ (40) $ (84) $ (124) Mortgage-backed securities 186 32 218 32 (54) (22) Investments and interest- bearing deposits 84 226 310 211 310 521 ------ ------ ------ ------ ------ ------ Total interest-earning assets 748 413 1,161 203 172 375 ------ ------ ------ ------ ------ ------ Interest-bearing liabilities: Deposits (177) 574 397 145 438 583 Borrowings 21 (1) 20 (1) 4 3 ------ ------ ------ ------ ------ ------ Total interest-bearing liabilities (156) 573 417 144 442 586 ------ ------ ------ ------ ------ ------ Increase (decrease) in net interest income $ 904 $ (160) $ 744 $ 59 $ (270) $ (211) ====== ====== ====== ====== ====== ======
ASSET AND LIABILITY MANAGEMENT American's interest rate spread is the principal determinant of American's income. The interest rate spread, and therefore net interest income, can vary considerably over time because asset and liability repricing do not coincide. Moreover, the long-term and cumulative effect of interest rate changes can be substantial. Interest rate risk is defined as the sensitivity of an institution's earnings and net asset values to changes in interest rates. The management and Board of Directors attempt to manage American's exposure to interest rate risk in a manner to maintain the projected four-quarter percentage change in net interest income and the projected change in the market value of portfolio equity within limits established by the Board of Directors, assuming a permanent and instantaneous parallel shift in interest rates. 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 adopted by the OTS as part of its final rules related to revisions in the risk-based capital regulations. Although American is not currently subject to the NPV regulation, the application of the NPV methodology may illustrate American's interest rate risk. 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 application of the methodology attempts to quantify interest rate risk as the change in the NPV which would result from a theoretical 200 basis point (1 basis point equals .01%) change in market interest rates. Both a 200 basis point increase in market interest rates and a 200 basis point decrease in market interest rates are considered. If the NPV would decrease in an amount greater than 2% of the present value of the institution's assets with either an increase or a decrease in market rates, the institution must deduct 50% of the amount of the decrease in excess of such 2% in the calculation of the institution's risk-based capital. -21- 22 At March 31, 1996, (the latest date as of which data was available) 2% of the present value of American's assets was approximately $2.0 million. Because the interest rate risk of a 200 basis point increase in market interest rates (which was greater than the interest rate risk of a 200 basis point decrease) was $3.4 million at March 31, 1996, American would have been required to deduct $700,000 (50% of the $1.4 million difference) from its capital in determining whether American met its risk-based capital requirement. Regardless of such reduction, however, American's risk-based capital at June 30, 1996, would still have exceeded the regulatory requirement by approximately $13.5 million. The following table presents, at March 31, 1996 (the latest date as of which data was available), 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. The table also contains the policy limits set by the Board of Directors of American as the maximum change in NPV that the Board of Directors deems advisable in the event of various changes in interest rates. Such limits have been established with consideration of the dollar impact of various rate changes and the strong capital position of American.
March 31, 1996 --------------------------------------------------------------- Change in interest rate Board limit $ Change % Change (basis points) % change in NPV in NPV -------------- ----------- -------- -------- (Dollars in thousands) +300 (40)% $(5,152) (26)% +200 (30) (3,395) (17) +100 (20) (1,634) ( 8) 0 0 - - -100 20 1,309 7 -200 30 2,189 11 -300 40 2,887 15
As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, 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 changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawal levels from certificates of deposit would likely deviate significantly from those assumed in making the risk calculations. In the event that interest rates continue to rise, American's net interest income could be expected to be negatively affected. Moreover, rising interest rates could negatively affect American's earnings due to diminished loan demand. 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, 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 it provides to borrowers. 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. The size of financial institutions competing with American is likely to increase as a result of changes in statutes and regulations eliminating various restrictions on interstate and inter-industry branching and acquisitions. Such increased competition may have an adverse effect upon American. In addition, disparities with respect to the deposit assessments for banks and savings associations may have an adverse affect upon American. See "REGULATION Federal Deposit Insurance Corporation - Assessments." -22- 23 SUBSIDIARY ACTIVITIES American has one wholly-owned subsidiary, A.S.L. Services, Inc., which owns stock in Intrieve, Inc., American's data processing service provider. At June 30, 1996, the stock held by the service corporation had a book value of $15,000. PERSONNEL As of June 30, 1996, American had 22 full-time employees and 2 part-time employees. American believes that relations with its employees are excellent. American offers health, disability and life benefits and has established the ASB Financial Corp. Employee Stock Ownership Plan. None of the employees of American are represented by a collective bargaining unit. REGULATION GENERAL ASB is a savings and loan holding company within the meaning of the Home Owners Loan Act of 1933, as amended (the "HOLA"). Consequently, ASB is subject to regulation, examination and oversight by the OTS and must submit periodic reports thereto. Because ASB is a corporation organized under Ohio law, it is subject to provisions of the Ohio Revised Code applicable to corporations generally. As a federal savings bank, American is subject to regulation, examination and oversight by the OTS. American became a federal savings bank on July 21, 1995. Prior to that it had been an Ohio savings and loan association since February 1, 1995, when it converted from an Ohio savings bank. Because American's deposits are insured by the FDIC, American is also subject to regulation and examination by the FDIC. American must file periodic reports with the OTS concerning its activities and financial condition. Examinations are conducted periodically by both 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. Because it accepts federally insured deposits and offers transaction accounts, American is also subject to certain regulations issued by the Board of Governors of the Federal Reserve System ("FRB"). American is a member of the FHLB of Cincinnati. OFFICE OF THRIFT SUPERVISION GENERAL. The OTS is an office in the Department of the Treasury and is subject to the general oversight of the Secretary of the Treasury. The Director of 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 through the Savings Association Insurance Fund (the "SAIF") and all federally chartered savings institutions. 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 cost of general supervision and examination. The OTS charters federally chartered associations, such as American, and prescribes their permissible investments and activities, including the types of loans and investments in real estate, subsidiaries and securities they may make. The OTS has authority over mergers and acquisitions of control of federally chartered savings and loan associations. 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. If the grounds provided by law exist, 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 disclosure, equal credit opportunity, fair credit reporting and community reinvestment. 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. Community investment regulations focus on how well and to what extent an institution meets in its last examination the credit needs in its community, particularly in low-to-moderate income areas. American received an "outstanding" rating under these regulations. REGULATORY CAPITAL REQUIREMENTS. American is required by OTS regulations to meet certain minimum capital requirements, which requirements must be generally as stringent as the requirements established for banks. Current capital -23- 24 requirements call for tangible capital of 1.5% of adjusted total assets, core capital (which for American consists solely of tangible capital) of 3.0% of adjusted total assets and risk-based capital (which for American consists of core capital and certain general valuation allowances) of 8% of risk-weighted assets (assets are weighted at percentage levels ranging from 0% to 100% depending on their relative risk). The OTS has proposed to amend the core capital requirement so that those associations that do not have the highest examination rating and an acceptable level of risk will be required to maintain core capital of from 4% to 5%, depending on the association's examination rating and overall risk. American does not anticipate that it will be adversely affected if the core capital requirements regulation is amended as proposed. The following table sets forth the amount and percentage level of regulatory capital of American at June 30, 1995, and the amount by which it exceeds minimum requirements. 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, 1996 -------------------------- Amount Percent ------- ------- (In thousands) Tangible capital $17,402 16.3% Requirement 1,604 1.5 ------- ---- Excess $15,798 14.8% ======= ==== Core capital $17,402 16.3% Requirement 3,209 3.0 ------- ---- Excess $14,193 13.3% ======= ==== Risk-based capital $18,000 37.6% Risk-based requirement 3,833 8.0 ------- ---- Excess $14,167 29.6% ======= ====
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 numerous mandatory or discretionary regulatory actions or limits, and the OTS has less flexibility in determining how to resolve the problems of the institution. The OTS has defined these capital levels as follows: (i) well-capitalized associations must have total risk-based capital of at least 10%, core risk-based capital (consisting only of items that qualify for inclusion in core capital) of at least 6% and core capital of at least 5%; (ii) adequately capitalized associations are those that meet the regulatory minimum of total risk-based capital of 8%, core risk-based capital of 4% and core capital of 4% (except for associations receiving the highest examination rating, in which case the level is 3%) but are not well-capitalized; (iii) undercapitalized associations are those that do not meet regulatory limits, but that are not significantly undercapitalized; (iv) significantly undercapitalized associations have total risk-based capital of less than 6%, core risk-based capital of less than 3% or core capital of less than 3%; and (v) critically undercapitalized associations are those with tangible capital of less than 2% of total assets. In addition, the OTS generally can downgrade an association's capital category, notwithstanding its capital level, based on less than satisfactory examination ratings in areas other than capital or, after notice and opportunity for hearing, if the association is deemed to be in an unsafe or unsound condition or to be engaging in an unsafe or unsound practice. Each undercapitalized association must submit a capital restoration plan to the OTS within 45 days after it becomes undercapitalized. Such institution 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. Furthermore, 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, 1996, meets the standards for a well-capitalized institution. Federal law prohibits an insured institution from making a capital distribution to anyone or paying management fees to any person having control of the institution if, after such distribution or payment, the institution would be undercapitalized. In addition, each company controlling an undercapitalized institution must guarantee that the institution will comply with its capital plan until the institution has been adequately capitalized on an average during each of four preceding calendar quarters and must provide adequate assurances of performance. The aggregate liability pursuant to such -24- 25 guarantee is limited to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized or (ii) the amount that is necessary to bring the institution into compliance with all capital standards applicable to such association at the time the institution fails to comply with its capital restoration plan. LIQUIDITY. OTS regulations require that savings associations maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances and specified United States government, state or federal agency obligations) equal to a monthly average of not less than 5% of its net withdrawable savings deposits plus borrowings payable in one year or less. Federal regulations also require each association to maintain an average daily balance of short-term liquid assets at a specified percentage, currently 1%, of the total of its net withdrawable savings accounts and borrowings payable in one year or less. Monetary penalties may be imposed upon associations failing to meet liquidity requirements. The eligible liquidity of American, as computed under current regulations, at June 30, 1996, was approximately $15.6 million, or 18.3%, and exceeded the then applicable 5.0% liquidity requirement by approximately $11.4 million, or 13.3%. QUALIFIED THRIFT LENDER TEST. Savings associations are required to maintain a specified level of investments in assets that are designated as qualifying thrift investments. Such investments are generally related to domestic residential real estate and manufactured housing and include stock issued by any FHLB, the FHLMC or the FNMA. The QTL test, as amended by the Improvement Act, requires that 65% of an institution's "portfolio assets" (total assets less goodwill and other intangibles, property used to conduct business and 20% of liquid assets) consist of qualified thrift investments on a monthly average basis in 9 out of every 12 months. The OTS may grant exceptions to the QTL test under certain circumstances. If a savings association fails to meet the QTL Test, the association and its holding company will be subject to certain operating and regulatory restrictions. A savings association that fails to meet the QTL Test will not be eligible for new FHLB advances. See "Federal Home Loan Banks." At June 30, 1996, American had QTL investments equal to approximately 87.72% of its total portfolio assets. LENDING LIMIT. OTS regulations generally limit the aggregate amount that a savings association can lend to one borrower or group of related borrowers to an amount equal to 15% of the association's unimpaired capital which is defined for OTS purposes as total capital for regulatory purposes. A savings association may loan to one borrower an additional amount not to exceed 10% of the association's unimpaired capital, if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." Notwithstanding the level of unimpaired capital and surplus, a savings association may lend up to $500,000 to any one borrower or group of related borrowers. At June 30, 1996, American was in compliance with this lending limit. See "Lending Activities - Loan Originations, Purchases and Sales." TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers, directors and principal shareholders and their related interests must conform to the lending limit, and the total of such loans to executive officers, directors, principal shareholders and their related interests cannot exceed the association's Unimpaired Capital (or 200% of Unimpaired Capital for qualifying institutions with less than $100 million in assets). 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, and loans to executive officers are subject to additional limitations. American was in compliance with such restrictions at June 30, 1996. All transactions between savings associations and their affiliates must comply with Sections 23A and 23B of the Federal Reserve Act ("FRA"). 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 (i) limit the extent to which a savings association or its subsidiaries may engage in "covered transactions" with any one affiliate 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 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, purchase of assets, issuance of a guarantee and other similar types of transactions. American was in compliance with these requirements and restrictions at June 30, 1996. -25- 26 LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various restrictions or requirements on the ability of associations to make capital distributions according to ratings of associations based on their capital level and supervisory condition. Capital distributions, for purposes of such regulation, include, without limitation, 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. The first rating category is Tier 1, consisting of associations that, before and after the proposed capital distribution, meet their fully phased-in capital requirement. Associations in this category may make capital distributions during any calendar year equal to the greater of 100% of its net income, current year-to-date, plus 50% of the amount by which the lesser of the association's tangible, core or risk-based capital exceeds its fully phased-in capital requirement for such capital component, as measured at the beginning of the calendar year, or the amount authorized for a Tier 2 association. The second category, Tier 2, consists of associations that, before and after the proposed capital distribution, meet their current minimum, but not fully phased-in capital requirement. Associations in this category may make capital distributions up to 75% of their net income over the most recent four quarters. Tier 3 associations do not meet their current minimum capital requirement and must obtain OTS approval of any capital distribution. A Tier 1 association deemed to be in need of more than normal supervision by the OTS may be treated as a Tier 2 or a Tier 3 association. American meets the requirements for a Tier 1 association and has not been notified of any need for more than normal supervision. As a subsidiary of ASB, American is required to give the OTS 30 days notice prior to declaring any dividend on its common shares. The OTS may object to the dividend during that 30 day period based on safety and soundness concerns. Moreover, the OTS may prohibit any capital distribution otherwise permitted by regulation if the OTS determines that such distribution would constitute an unsafe or unsound practice. HOLDING COMPANY REGULATION. ASB is a savings and loan holding company within the meaning of the HOLA. The HOLA generally prohibits a savings and loan holding company from controlling any other savings association or savings and loan holding company, without prior approval of the Director of the OTS, 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. 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 Director 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 company's stock may also acquire control of any savings institution, other than a subsidiary institution, or any other savings and loan holding company. ASB is a unitary savings and loan holding company. Under current law, there are generally no restrictions on the activities of a unitary savings and loan holding company and such companies are the only financial institution holding companies which may engage in any commercial, securities and insurance activities. U.S. Congressional legislative proposals that have been introduced or are under consideration might limit the authorities of unitary savings and loan holding companies or expand the activities of bank and multiple savings and loan holding companies. ASB cannot predict if and in what form these proposals might become law. The broad latitude to engage in activities under current law can be restricted, if 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, 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 the holding company and its affiliates may be imposed on the savings association. Notwithstanding the foregoing rules as to permissible business activities of a unitary savings and loan holding company, if the savings association subsidiary of a holding company fails to meet the QTL Test, then such unitary holding company would become subject to the activities restrictions applicable to multiple holding companies. At June 30, 1996, American met the QTL Test. If ASB were to acquire control of another savings institution, other than through a merger or other business combination with American, ASB would become a multiple savings and loan holding company. Unless the acquisition is an emergency thrift acquisition and each subsidiary savings association meets the QTL Test, the activities of ASB and any of its subsidiaries (other than American or other subsidiary savings associations) would thereafter be subject to activity restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof that is not a savings institution shall commence or continue for a limited period of time after becoming a multiple -26- 27 savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings institution, (ii) conducting an insurance agency or escrow business, (iii) holding, managing or liquidating assets owned by or acquired from a subsidiary savings institution, (iv) holding or managing properties used or occupied by a subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by federal regulation as of March 5, 1987, to be engaged in by multiple holding companies, or (vii) those activities authorized by the FRB as permissible for bank holding companies, unless the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the OTS prior to being engaged in by a multiple holding company. The OTS may approve acquisitions resulting in the formation of a multiple savings and loan holding company that controls savings associations in more than one state, only if the multiple savings and loan holding company involved controls a savings association that operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). As under prior law, the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. Bank holding companies have had more expansive authority to make interstate acquisitions than savings and loan holding companies since August 1995. No subsidiary savings association of a savings and loan holding company may declare or pay a dividend on its permanent or nonwithdrawable stock unless it first gives the Director of the OTS 30 days' notice of such declaration and payment. Any dividend declared during such period or without the giving of such notice shall be invalid. FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF ASB AND AMERICAN. In addition to the Ohio law limitations on the merger and acquisition of ASB previously discussed, 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 as a savings and loan holding company. In addition, any merger of American or of ASB must either be approved by the OTS, or is subject to prior notification of the OTS. FEDERAL DEPOSIT INSURANCE CORPORATION. DEPOSIT INSURANCE. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and thrifts and safeguards the safety and soundness of the bank and thrift industries. The FDIC administers two separate insurance funds, the Bank Insurance Fund (the "BIF") for commercial banks and state savings banks and the SAIF for savings associations and banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. The reserves of the SAIF are below the level required by law because a significant portion of the assessments paid into the fund are used to pay the cost of prior thrift failures. The reserves of the BIF met the level required by law in May 1995. Depository institutions are generally prohibited from converting from one insurance fund to the other until the SAIF meets its designated reserve level, except with the prior approval of the FDIC in certain limited cases, provided applicable exit and entrance fees are paid. The insurance fund conversion provisions do not prohibit a SAIF member from converting to a bank charter or merging with a bank during the moratorium, as long as the resulting bank continues to pay the applicable insurance assessments to the SAIF during that period and certain other conditions are met. 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 federally 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. -27- 28 ASSESSMENTS. The FDIC is authorized to establish separate annual assessment rates for deposit insurance each for members of the BIF and the SAIF. 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 reserves of the SAIF are below the level required by law because a significant portion of the assessments paid into the SAIF are used to pay the cost of prior thrift failures. BIF has, however, met its required reserve level. The assessments paid by healthy savings associations exceeded those paid by healthy BIF members by approximately $.19 per $100 in deposits for 1995, and no BIF assessments are required of healthy commercial banks in 1996 except a $2,000 minimum fee. The disparity between the premiums paid by savings associations and commercial banks could have a negative competitive impact on American and other savings associations. Congress is considering legislation to recapitalize the SAIF and to eliminate the significant premium disparity between the SAIF and the BIF by imposing a special assessment on SAIF members to increase SAIF reserves to the level required by law. Currently, the special assessment is estimated to be approximately $.71 per $100 of SAIF deposits held at March 31, 1995. In addition, the proposed legislation provides that the cost of prior thrift failures currently assessed against the SAIF would be shared by the BIF or certain government sponsored entities. This recapitalization plan also provides for the merger of the SAIF and BIF on January 1, 1998. As currently proposed, the SAIF recapitalization legislation provides for an elimination of the thrift charter or of the separate federal regulation of thrifts prior to the merger of the deposit insurance funds. If such proposal is adopted, ASB would be required to become a bank holding company and would be subject to more restrictive activity limits and to capital requirements similar to those imposed on American. American had $83.9 million in deposits at March 31, 1995. If the special assessment is $.71 per $100 in deposits, American will pay an additional assessment of $596,000 within 60 days of the enactment of the recapitalization plan. This assessment should be tax-deductible, but it will reduce earnings and capital for the quarter in which it is recorded. It is expected that quarterly SAIF assessments would then be reduced thereafter, but could never be reduced below the level set for BIF institutions. No assurance can be given that the SAIF recapitalization plan will be enacted into law or in what form it may be enacted. In addition, ASB can give no assurance that the disparity between BIF and SAIF assessments will be eliminated and that the impact of ASB being regulated as a bank holding company will not be material until the legislation requiring such changes is enacted. FRB REGULATIONS RESERVE REQUIREMENTS. FRB regulations require savings associations to maintain reserves of 3% of net transaction accounts (primarily NOW accounts) up to $52 million (subject to an exemption of $4.3 million), and 10% of net transaction accounts over $52 million. At June 30, 1996, American was in compliance with the FRB's reserve requirements. FEDERAL HOME LOAN BANKS The FHLBs provide credit to their members in the form of advances. American is a member of the FHLB of Cincinnati and must maintain an investment in the capital stock of that FHLB in an amount equal to the greater of 1.0% of the aggregate outstanding principal amount of its residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances from the FHLB. American is in compliance with this requirement with an investment in stock of the FHLB of Cincinnati of $667,000 at June 30, 1996. Upon the origination or renewal of a loan or advance, the FHLB of Cincinnati is required by law to obtain and maintain a security interest in 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 United States government or an agency thereof; deposits in any FHLB; or other real estate related collateral (up to 30% of the member association's capital) acceptable to the applicable FHLB, if such collateral has a readily ascertainable value and the FHLB can perfect its security interest in the collateral. -28- 29 Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the Community Reinvestment Act and its record of lending to first-time home buyers. All long-term advances by each FHLB must be made only to provide funds for residential housing finance. The FHLB has established an "Affordable Housing Program" to subsidize the interest rate of advances to member associations engaged in lending for long-term, low- and moderate-income, owner-occupied and affordable rental housing at subsidized rates. The FHLB of Cincinnati reviews and accepts proposals for subsidies under that program twice a year. American has participated in this program. OHIO CORPORATION LAW MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code regulates certain takeover bids affecting certain 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 such 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 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. An Ohio corporation may, under certain circumstances, "opt out" of the statute by specifically providing in its articles of incorporation that the statute does not apply to any business combination of such corporation. However, the statute still prohibits for twelve months any business combination that would have been prohibited but for the adoption of such an opt-out amendment. The statute also provides that it will continue to apply to any business combination between a person who became an Interested Shareholder prior to the adoption of such an amendment as if the amendment had not been adopted. Neither the Articles of Incorporation of ASB nor American opt out of the protection afforded by Chapter 1704. CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code (the "Control Share Acquisition Statute") requires that certain acquisitions of voting securities which would result in the acquiring shareholder owning 20%, 33-1/3%, or 50% of the outstanding voting securities of ASB (a "Control Share Acquisition") must be approved in advance by the holders of at least a majority of the outstanding voting shares 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. The Control Share Acquisition Statute was intended, in part, to protect shareholders of Ohio corporations from coercive tender offers. TAKEOVER BID STATUTE. Ohio law also contains a statute regulating takeover bids for any Ohio corporation. Such statute provides that no offeror may make a takeover bid unless (i) at least 20 days prior thereto the offeror announces publicly the terms of the proposed takeover bid and files with the Ohio Division of Securities (the "Securities Division") and provides the target company with certain information in respect of the offeror, his ownership of the company's shares and his plans for the company, and (ii) within ten days following such filing either (a) no hearing is required by the Securities Division, (b) a hearing is requested by the target company within such time but the Securities Division finds no cause for hearing exists, or (c) a hearing is ordered and upon such hearing the Securities Division adjudicates that the offeror proposes to make full, fair and effective disclosure to offerees of all information material to a decision to accept or reject the offer. The takeover bid statute also states that no offeror shall make a takeover bid if he owns 5% or more of the issued and outstanding equity securities of any class of the target company, any of which were purchased within one year before the proposed takeover bid, and the offeror, before making any such purchase, failed to announce his intention to gain control of the target company, or otherwise failed to make full and fair disclosure of such intention to the persons from -29- 30 whom he acquired such securities. The United States District Court for the Southern District of Ohio has determined that the Ohio takeover bid statute is preempted by federal regulation. TAXATION FEDERAL TAXATION ASB and American are both subject to the federal tax laws and regulations which apply to corporations generally. Prior to the enactment of the Small Business Jobs Protection Act, which was signed into law on August 21, 1996, certain thrift institutions such as American were allowed deductions for bad debts under methods more favorable than those granted to other taxpayers. Qualified thrift institutions could compute deductions for bad debts using either the specific charge off method of Section 166 of the Code or the reserve method of Section 593 of the Internal Revenue Code of 1986, as amended (the "Code"). Under Section 593 of the Code, a thrift institution annually could elect to deduct bad debts under either (i) the "percentage of taxable income" method applicable only to thrift institutions, or (ii) the "experience" method that also was available to small banks. Under the "percentage of taxable income" method, a thrift institution generally was allowed a deduction for an addition to its bad debt reserve equal to 8% of its taxable income (determined without regard to this deduction and with additional adjustments). Under the experience method, a thrift institution was 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. A thrift institution could elect annually to compute its allowable addition to bad debt reserves for qualifying loans either under the experience method or the percentage of taxable income method. For tax years 1993, 1992 and 1991, American used the percentage of taxable income method because such method provided a higher bad debt deduction than the experience method. Section 1616(a) of the Small Business Job Protection Act repealed the Section 593 reserve method of accounting for bad debts by thrift institutions, effective for taxable years beginning after 1995. 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. The percentage of taxable income method of accounting for bad debts is no longer available for any financial institution. 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 taxpayers 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 amount to be recaptured will be determined solely with respect to the "applicable excess reserves" of the taxpayer. The amount of the applicable excess reserves will be taken into account ratably over a six taxable year period, beginning 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 (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 American's reserves would have been at the close of its last tax year beginning before January 1, 1996, had American always used the experience method. For taxable years that begin after December 31, 1995, and before January 1, 1998, if a thrift meets the residential loan requirement for a tax year, the recapture of the applicable excess reserves otherwise required to be taken into account as a Code Section 481(a) adjustment for the year will be suspended. A thrift meets the residential loan requirement if, for the tax year, the principal amount of residential loans made by the thrift during the year is not less than its base amount. The "base amount" generally is the average of the principal amounts of the residential loans made by the thrift during the six most recent tax years beginning before January 1, 1996. -30- 31 A residential loan is a loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by residential or church property and certain mobile homes), but only to the extent that the loan is made to the owner of the property to acquire, construct, or improve the property. The balance of the pre-1988 reserves is subject to the provisions of Section 593(e) as modified by the Small Business Job Protection Act which requires 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 American's gross income 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, 1996, American's pre-1988 reserves for tax purposes totaled approximately $1.9 million. American believes it had approximately $8.4 million of accumulated earnings and profits for tax purposes as of June 30, 1996, 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. In addition to the regular income tax, ASB and American are subject to a 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. Such tax preference items include interest on certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the amount by which a corporation's "adjusted current earnings" exceeds its alternative minimum taxable income computed without regard to this preference item 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. In addition, for taxable years after 1986 and before 1996, ASB and American are also subject to an environmental tax equal to 0.12% of the excess of alternative minimum taxable income for the taxable year (determined without regard to net operating losses and the deduction for the environmental tax) over $2.0 million. The tax returns of American have been audited or closed without audit through fiscal year 1992. 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 8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% times 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 after the Conversion, 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 ASB. 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. A special litter tax is also applicable to all corporation, including ASB, subject to the Ohio corporation franchise tax other than "financial institutions." If the franchise tax is paid on the net income basis, the litter tax is equal to .11% of the first $50,000 of computed Ohio taxable income and .22% of computed Ohio taxable income in excess of $50,000. If the franchise tax is paid on the net worth basis, the litter tax is equal to .014% times taxable net worth. 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 1.5% of American's book net worth -31- 32 determined in accordance with generally accepted accounting principles. As a "financial institution," American is not subject to any tax based upon net income or net profits imposed by the State of Ohio. ITEM 2. DESCRIPTION OF PROPERTY American owns the property at 503 Chillicothe Street, Portsmouth, Ohio, on which its main office is located. At June 30, 1996, the net book value of the main office property was $541,000, and American's office premises and equipment had a total net book value of $940,000. For additional information regarding American's office premises and equipment, see Notes A-6 and E of Notes to Consolidated Financial Statements. American also owns a parcel of real estate in downtown Portsmouth, Ohio, with a book value of $126,000. The property was purchased in November 1994. American plans to construct a new drive-through and ATM facility on the property. 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. PART II ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable 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, 1996 (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. CONSOLIDATED FINANCIAL STATEMENTS The Consolidated Financial Statements contained in the Annual Report and the opinion of Grant Thornton LLP, dated July 12, 1996 (except for Note J, as to which the date is August 20, 1996), are incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 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 1996 Annual Meeting of Shareholders of ASB Financial Corp. (the "Proxy Statement") under the captions "Board of Directors," "Executive Officers" and "Voting Securities and Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference. -32- 33 ITEM 10. EXECUTIVE COMPENSATION The information contained in the Proxy Statement under the caption "Compensation of Executive Officers and Directors" is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained in the Proxy Statement under the caption "Voting Securities and Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference. 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 10.2 American Savings Bank, fsb Management Recognition and Retention Plan and Trust Agreement 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. 27 Financial Data Schedule (b) No reports on Form 8-K have been filed during the last quarter of the fiscal year covered by this Report. -33- 34 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ASB FINANCIAL CORP. By /s/ Gerald R. Jenkins ------------------------------ Gerald R. Jenkins President (Principal Executive Officer) Date: September 23, 1996 In accordance with the Securities Exchange Act of 1934, 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/ Robert M. Smith ----------------------------- ----------------------------------- Gerald R. Jenkins Robert M. Smith President and Director Vice President and Director (Principal Financial Officer) Date: September 23, 1996 Date: September 23, 1996 By /s/ William J. Burke By /s/ Lee O. Fitch ----------------------------- ----------------------------------- William J. Burke Lee O. Fitch Director Director Date: September 23, 1996 Date: September 23, 1996 By /s/ Victor W. Morgan By /s/ Louis M. Schoettle ----------------------------- ----------------------------------- Victor W. Morgan Louis M. Schoettle Director Director Date: September 23, 1996 Date: September 23, 1996 -34- 35 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 by ASB on September 28, 1995 (the "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 Form 10-KSB, Exhibit 3.5 10.1 ASB Financial Corp. 1995 Stock Option and Incentive Plan 10.2 American Savings Bank, fsb Recognition and Retention Plan and Trust Agreement 13 1996 Annual Report to Shareholders 20 Proxy Statement 21 Subsidiaries of ASB Financial Corp. Incorporated by reference to the Form 10-KSB, Exhibit 21 27 Financial Data Schedule
-35- EX-10.1 2 EXHIBIT 10.1 1 Exhibit 10.1 ASB FINANCIAL CORP. 1995 STOCK OPTION AND INCENTIVE PLAN 1. PURPOSE. The purpose of the ASB Financial Corp. 1995 Stock Option and Incentive Plan (this "Plan") is to promote and advance the interests of ASB Financial Corp. (the "Company") and its shareholders by enabling the Company to attract, retain and reward directors, managerial and other key employees of the Company and any Subsidiary (hereinafter defined), and to strengthen the mutuality of interests between such directors and employees and the Company's shareholders, by providing such persons with a proprietary interest in pursuing the long-term growth, profitability and financial success of the Company. 2. DEFINITIONS. For purposes of this Plan, the following terms shall have the meanings set forth below: (a) "Award" or "Awards" means an award or grant made to a Participant under Section 6 of this Plan. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended, or any successor thereto, together with rules, regulations and interpretations promulgated thereunder. (d) "Committee" means the Committee of the Board constituted as provided in Section 3 of this Plan. (e) "Common Shares" means the common shares, without par value, of the Company or any security of the Company issued in substitution, in exchange or in lieu thereof. (f) "Company" means ASB Financial Corp., an Ohio corporation, or any successor corporation. (g) "Employment" means regular employment with the Company or a Subsidiary and does not include service as a director only. (h) "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute. (i) "Fair Market Value" shall be determined as follows: 2 (i) If the Common Shares are traded on a national securities exchange at the time of grant of the Stock Option, then the Fair Market Value shall be the average of the highest and the lowest selling price on such exchange on the date such Stock Option is granted or, if there were no sales on such date, then on the next prior business day on which there was a sale. (ii) If the Common Shares are not listed on a national securities exchange at the time of the grant of the Stock Option, then the Fair Market Value shall be the mean between the closing high bid and low asked quotation with respect to a Common Share on such date on The Nasdaq Stock Market. (iii) If the Common Shares are not traded on a national securities exchange or quoted on The Nasdaq Stock Market, then the Fair Market Value shall be as determined by the Committee. (j) "Incentive Stock Option" means any Stock Option granted pursuant to the provisions of Section 6 of this Plan that is intended to be and is specifically designated as an "incentive stock option" within the meaning of Section 422 of the Code. (k) "Non-Qualified Stock Option" means any Stock Option granted pursuant to the provisions of Section 6 of this Plan that is not an Incentive Stock Option. (l) "OTS" means the Office of Thrift Supervision, Department of the Treasury. (m) "Participant" means an employee or director of the Company or a Subsidiary who is granted an Award under this Plan. Notwithstanding the foregoing, for the purposes of the granting of any Incentive Stock Option under this Plan, the term "Participant" shall include only employees of the Company or a Subsidiary. (n) "Plan" means the ASB Financial Corp. 1995 Stock Option and Incentive Plan, as set forth herein and as it may be hereafter amended from time to time. (o) "Stock Option" means an Award to purchase Common Shares granted pursuant to the provisions of Section 6 of this Plan. -2- 3 (p) "Subsidiary" means any corporation or entity in which the Company directly or indirectly controls 50% or more of the total voting power of all classes of its stock having voting power, and includes, without limitation, American Savings Bank, fsb. (q) "Terminated for Cause" has the meaning set forth in Section 12(c) of this Plan. 3. ADMINISTRATION. (a) This Plan shall be administered by the Committee to be comprised of not less than three of the members of the Board who are not employees of the Company, to be appointed from time to time by the Board. Members of the Committee shall serve at the pleasure of the Board, and the Board may from time to time remove members from, or add members to, the Committee. A majority of the members of the Committee shall constitute a quorum for the transaction of business. Action approved in writing by the unanimous consent of the members of the Committee then serving shall be fully as effective as if the action had been taken by unanimous vote at a meeting duly called and held. (b) The Committee is authorized to construe and interpret this Plan; to promulgate, amend and rescind rules and regulations relating to the implementation of this Plan; and to make all other determinations necessary or advisable for the administration of this Plan. The Committee may designate persons other than members of the Committee to carry out its responsibilities under such conditions and limitations as it may prescribe. Any determination, decision or action of the Committee in connection with the construction, interpretation, administration, or application of this Plan shall be final, conclusive and binding upon all persons participating in this Plan and any person validly claiming under or through persons participating in this Plan. The Company shall effect the granting of Awards under this Plan in accordance with the determinations made by the Committee, by execution of instruments in writing in such form as approved by the Committee. 4. DURATION OF, AND COMMON SHARES SUBJECT TO, THIS PLAN. (a) Term. This Plan shall terminate on the date which is ten (10) years from the date on which this Plan is adopted by the Board, except with respect to Awards then outstanding. Notwithstanding the foregoing, no Incentive Stock Option may be granted under this Plan after the date which is ten (10) years from the date on which this Plan is adopted by the Board or the -3- 4 date on which this Plan is approved by the shareholders of the Company, whichever is earlier. (b) Common Shares Subject to Plan. The maximum number of Common Shares in respect of which Awards may be granted under this Plan, subject to adjustment as provided in Section 9 of this Plan, shall be ten percent (10%) of the total Common Shares sold in connection with the conversion of American Savings Bank, fsb (formerly known as American Savings Association) from mutual to stock form. In addition, no more than 25% of the shares subject to Awards may be awarded to any individual, no more than 5% of such shares may be awarded to any non-employee director and no more than 30% of such shares may be awarded to non-employee directors in the aggregate. For the purpose of computing the total number of Common Shares available for Awards under this Plan, there shall be counted against the foregoing limitations the number of Common Shares subject to issuance upon exercise or settlement of Awards as of the dates on which such Awards are granted. If any Awards are forfeited, terminated, expire unexercised, or exchanged for other Awards, the Common Shares which were theretofore subject to such Awards shall again be available for Awards under this Plan to the extent of such forfeiture or expiration of such Awards. Common Shares which may be issued under this Plan may be either authorized and unissued shares or issued shares which have been reacquired by the Company. No fractional shares shall be issued under this Plan. 5. ELIGIBILITY AND GRANTS. Persons eligible for Awards under this Plan shall consist of directors and managerial and other key employees of the Company or a Subsidiary who hold positions with significant responsibilities or whose performance or potential contribution, in the judgment of the Committee, will benefit the future success of the Company or a Subsidiary. In selecting the directors and employees to whom Stock Options will be awarded and the number of shares subject to such Stock Options, the Committee shall consider the position, duties and responsibilities of the eligible directors and employees, the value of their services to the Company and the Subsidiaries and any other factors the Committee may deem relevant. 6. STOCK OPTIONS. Stock Options granted under this Plan may be in the form of Incentive Stock Options or Non-Qualified Stock Options, and such Stock Options shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the express provisions of this Plan, as the Committee shall deem desirable: -4- 5 (a) Grant. Stock Options may be granted under this Plan on terms and conditions not inconsistent with the provisions of this Plan and in such form as the Committee may from time to time approve. (b) Stock Option Price. The option exercise price per Common Share purchasable under a Stock Option shall be determined by the Committee at the time of grant; provided, however, that in no event shall the exercise price of a Stock Option be less than one hundred percent (100%) of the Fair Market Value of the Common Shares on the date of the grant of such Stock Option. Notwithstanding the foregoing, in the case of a Participant who owns Common Shares representing more than ten percent (10%) of the outstanding Common Shares at the time the Incentive Stock Option is granted, the option exercise price shall in no event be less than one hundred and ten percent (110%) of the Fair Market Value of the Common Shares at the time the Incentive Stock Option is granted. (c) Stock Option Terms. Subject to the right of the Company to provide for earlier termination in the event of any merger, acquisition or consolidation involving the Company, the term of each Stock Option shall be fixed by the Committee; except that the term of Incentive Stock Options will not exceed ten (10) years after the date the Incentive Stock Option is granted; provided, however, that in the case of a Participant who owns a number of Common Shares representing more than ten percent (10%) of the Common Shares outstanding at the time the Incentive Stock Option is granted, the term of the Incentive Stock Option shall not exceed five (5) years. (d) Exercisability. Except as set forth in Section 6(f) of this Plan, Stock Options awarded under this Plan shall become exercisable at the rate of one-fifth of the Award per year commencing on the date that is one year after the date of the grant of the Award and shall be subject to such other terms and conditions as shall be determined by the Committee at the date of grant. (e) Method of Exercise. A Stock Option may be exercised, in whole or in part, by giving written notice of exercise to the Company specifying the number of Common Shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price in cash or, if acceptable to the Committee in its sole discretion, in Common Shares already owned by the Participant, or by surrendering outstanding Awards. The Committee may also -5- 6 permit Participants, either on a selective or aggregate basis, to simultaneously exercise Options and sell Common Shares thereby acquired, pursuant to a brokerage or similar arrangement, approved in advance by the Committee, and use the proceeds from such sale as payment of the purchase price of such shares. (f) Special Rule for Incentive Stock Options. With respect to Stock Options granted under this Plan, to the extent the aggregate Fair Market Value (determined as of the date the Incentive Stock Option is granted) of the number of shares with respect to which Incentive Stock Options are exercisable under all plans of the Company or a Subsidiary for the first time by a Participant during any calendar year exceeds One Hundred Thousand Dollars ($100,000) or such other limit as may be required by the Code, such Stock Options shall be Non-Qualified Stock Options to the extent of such excess. 7. TERMINATION OF EMPLOYMENT OR DIRECTORSHIP. Except in the event of the death or disability of a Participant, upon the resignation, removal of retirement from the Board of Directors of any Participant who is a director of the Company or any Subsidiary or upon the termination of Employment of a Participant who is not a director of the Company or any Subsidiary, any option which has not yet become exercisable shall thereupon terminate and be of no further force or effect. 8. NON-TRANSFERABILITY OF AWARDS. No Award under this Plan, and no rights or interests therein, shall be assignable or transferable by a Participant except by will or the laws of descent and distribution. During the lifetime of a Participant, Stock Options are exercisable only by, and payments in settlement of Awards will be payable only to, the Participant or his or her legal representative. 9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. (a) The existence of this Plan and the Awards granted hereunder shall not affect or restrict in any way the right or power of the Board or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger, acquisition or consolidation of the Company, any issuance of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Company's capital stock or the rights thereof, the dissolution or liquidation of the Company or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, including any merger or acquisition which would result in the exchange of cash, -6- 7 stock of another company or options to purchase the stock of another company for any Stock Option outstanding at the time of such corporate transaction or which would involve the termination of all Stock Options outstanding at the time of such corporate transaction. (b) In the event of any change in capitalization affecting the Common Shares of the Company, such as a stock dividend, stock split, recapitalization, merger, consolidation, split-up, combination or exchange of shares or other form of reorganization, or any other change affecting the Common Shares, such proportionate adjustments, if any, as the Board in its discretion may deem appropriate to reflect such change shall be made with respect to the aggregate number of Common Shares for which Awards in respect thereof may be granted under this Plan, the maximum number of Common Shares which may be sold or awarded to any Participant, the number of Common Shares covered by each outstanding Award, and the price per share in respect of outstanding Awards. (c) The Committee may also make such adjustments in the number of shares covered by, and the price or other value of, any outstanding Awards in the event of a spin-off or other distribution (other than normal cash dividends) of Company assets to shareholders. In the event that another corporation or business entity is being acquired by the Company, and the Company agrees to assume outstanding employee stock options and/or the obligation to make future grants of options or rights to employees of the acquired entity, the aggregate number of Common Shares available for Awards under Section 4 of this Plan may be increased accordingly. 10. AMENDMENT AND TERMINATION OF THIS PLAN. Without further approval of the shareholders, the Board may at any time terminate this Plan, or may amend it from time to time in such respects as the Board may deem advisable, except that the Board may not, without approval of the shareholders, make any amendment which would (a) increase the aggregate number of Common Shares which may be issued under this Plan (except for adjustments pursuant to Section 9 of this Plan), (b) materially modify the requirements as to eligibility for participation in this Plan, or (c) materially increase the benefits accruing to Participants under this Plan. The above notwithstanding, the Board may amend this Plan to take into account changes in applicable securities, federal income tax and other applicable laws. 11. MODIFICATION OF OPTIONS. The Board may authorize the Committee to direct the execution of an instrument providing for the modification of any outstanding Stock Option which the Board believes to be in the best interests of the Company; -7- 8 provided, however, that no such modification, extension or renewal shall confer on the holder of such Stock Option any right or benefit which could not be conferred on him by the grant of a new Stock Option at such time and shall not materially decrease the Participant's benefits under the Stock Option without the consent of the holder of the Stock Option, except as otherwise permitted under this Plan. 12. MISCELLANEOUS. (a) Tax Withholding. The Company shall have the right to deduct from any settlement, including the delivery or vesting of Common Shares, made under this Plan any federal, state or local taxes of any kind required by law to be withheld with respect to such payments or to take such other action as may be necessary in the opinion of the Company to satisfy all obligation for the payment of such taxes. If Common Shares are used to satisfy tax withholding, such shares shall be valued based on the Fair Market Value when the tax withholding is required to be made. (b) No Right to Employment. Neither the adoption of this Plan nor the granting of any Award shall confer upon any employee of the Company or a Subsidiary any right to continued employment with the Company or any Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time, with or without cause. (c) Annulment of Awards. The grant of any Award under this Plan payable in cash is provisional until cash is paid in settlement thereof. The grant of any Award payable in Common Shares is provisional until the Participant becomes entitled to the certificate in settlement thereof. In the event the Employment or the directorship of a Participant is Terminated for Cause (hereinafter defined), any Award which is provisional shall be annulled as of the date of such termination for cause. For the purpose of this Section 12(c), the term "Terminated for Cause" means any removal of a director or discharge of an employee for the personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profits, intentional failure to perform stated duties, willful violation of a material provision of any law, rule or regulation (other than traffic violations or similar offenses), a material violation of a final cease-and-desist order or any other action of a director or employee which results in a substantial financial loss to the Company or a Subsidiary. (d) Other Company Benefit and Compensation Programs. Payments and other benefits received by a Participant under an -8- 9 Award made pursuant to this Plan shall not be deemed a part of a Participant's regular, recurring compensation for purposes of the termination indemnity or severance pay law of any country and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan or similar arrangement provided by the Company or a Subsidiary unless expressly so provided by such other plan or arrangements, or except where the Committee expressly determines that an Award or portion of an Award should be included to accurately reflect competitive compensation practices or to recognize that an Award has been made in lieu of a portion of competitive annual cash compensation. Awards under this Plan may be made in combination with or in tandem with, or as alternatives to, grants, awards or payments under any other Company or Subsidiary plans. This Plan notwithstanding, the Company or any Subsidiary may adopt such other compensation programs and additional compensation arrangements as it deems necessary to attract, retain and reward directors and employees for their service with the Company and its Subsidiaries. (e) Securities Law Restrictions. No Common Shares shall be issued under this Plan unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal and state securities laws. Certificates for Common Shares delivered under this Plan may be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Shares are then listed, and any applicable federal or state securities law. The Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (f) Award Agreement. Each Participant receiving an Award under this Plan shall enter into an agreement with the Company in a form specified by the Committee agreeing to the terms and conditions of the Award and such related matters as the Committee shall, in its sole discretion, determine. (g) Cost of Plan. The costs and expenses of administering this Plan shall be borne by the Company. (h) Governing Law. This Plan and all actions taken hereunder shall be governed by and construed in accordance with the laws of the State of Ohio, except to the extent that federal law shall be deemed applicable. (i) Effective Date. This Plan shall be effective upon the later of adoption by the Board and approval by the Company's shareholders. -9- EX-10.2 3 EXHIBIT 10.2 1 AMERICAN SAVINGS BANK, fsb MANAGEMENT RECOGNITION PLAN AND TRUST AGREEMENT ARTICLE I ESTABLISHMENT OF THE PLAN AND TRUST 1.01 American Savings Bank, fsb (the "Association"), hereby establishes a Management Recognition Plan and Trust upon the terms and subject to the conditions set forth in this Management Recognition Plan and Trust Agreement (this "Agreement"). 1.02 The Trustee (hereinafter defined) hereby accepts the Trust (hereinafter defined) and agrees to hold the Trust assets existing on the date of this Agreement (hereinafter defined) and all additions and accretions thereto upon the terms and conditions of this Agreement. ARTICLE II PURPOSE OF THE PLAN 2.01 The purpose of the Plan (hereinafter defined) is to reward and retain the directors of the Association and employees of the Association and the Subsidiaries (hereinafter defined) who are in key positions of responsibility by providing such directors and employees with an equity interest in the Corporation (hereinafter defined) as reasonable compensation for their contributions to the Association and the Subsidiaries. ARTICLE III DEFINITIONS The following words and phrases when used in this Agreement with an initial capital letter shall have the meanings set forth below, unless the context clearly indicates otherwise. Wherever appropriate, the masculine pronoun shall include the feminine pronoun and the singular shall include the plural: 3.01 "Agreement" means the American Savings Bank, fsb Management Recognition Plan and Trust Agreement. 3.02 "Association" means American Savings Bank, fsb, a federal savings bank. -1- 2 3.03 "Award" means a right granted to a Director or an Employee under this Plan to receive Plan Shares. 3.04 "Beneficiary" means the person or persons designated by a Recipient to receive any benefits payable under this Plan in the event of such Recipient's death. Such person or persons shall be designated in writing on forms provided for this purpose by the Committee and may be changed from time to time by similar written notice to the Committee. In the absence of a written designation, the Beneficiary shall be the Recipient's estate. 3.05 "Board" means the Board of Directors of the Association. 3.06 "Change of Control" means the acquisition of the beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934 (the "1934 Act")) of twenty-five percent (25%) or more of the voting securities of the Corporation by any person or by persons acting as a group within the meaning of Section 13(d) of the 1934 Act. 3.07 "Committee" means the Management Recognition Plan Committee appointed by the Board pursuant to Article IV hereof. 3.08 "Common Shares" means common shares of the Corporation. 3.09 "Conversion" means the conversion of the Association from mutual to stock form. 3.10 "Corporation" means ASB Financial Corp., a savings and loan holding company incorporated under the laws of the State of Ohio for the purpose of acquiring all of the common shares of the Association to be issued by the Association in connection with the Conversion. 3.11 "Director" means any person who is a member of the Board of Directors of the Corporation, the Association or a Subsidiary. 3.12 "Employee" means any person who is employed by the Corporation, the Association or a Subsidiary. 3.13 "Person" means an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. -2- 3 3.14 "Plan" means the Management Recognition Plan established by this Agreement. 3.15 "Plan Shares" means the Common Shares held pursuant to the Trust and which are awarded or issuable to a Recipient pursuant to the Plan. 3.16 "Plan Share Reserve" means the Common Shares held by the Trustee pursuant to Sections 5.03 and 5.04 of this Agreement. 3.17 "Recipient" means any Director or Employee who receives an Award under the Plan. 3.18 "Subsidiaries" means subsidiaries of the Association which, with the consent of the Board, agree to participate in the Plan. 3.19 "Trust" means the trust established by this Agreement. 3.20 "Trustee(s)" means the person(s) or entity nominated by the Committee and approved by the Board pursuant to Sections 4.01 and 4.02 to hold legal title to the Plan assets for the purposes set forth herein. ARTICLE IV ADMINISTRATION OF THE PLAN 4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and interpreted by the Committee, which shall consist of not less than three (3) members of the Board who are not employees of the Association. The Committee shall have all of the powers set forth in this Plan. The interpretation and construction by the Committee of any provisions of this Agreement or of any Award granted hereunder shall be final, conclusive and binding, subject to the role of the Board pursuant to Section 4.02 of this Agreement. The Committee shall act by the vote of a majority of its members. Action approved in writing by the unanimous consent of the members of the Committee then serving shall be fully as effective as if the action had been taken by unanimous vote at a meeting duly called and held. Subject to the express provisions and limitations of this Agreement, the Committee may adopt such rules, regulations and procedures as the Committee deems appropriate for the conduct of its affairs. The Committee shall report actions and decisions with respect to the Plan to the Board at appropriate times, but in no event less than one time per calendar year. The Committee shall recommend to the Board -3- 4 one or more persons or entities to act as Trustee(s) in accordance with the provisions of the Plan and the Trust and the terms of Article VIII of this Agreement. 4.02 ROLE OF THE BOARD. The members of the Committee and the Trustee(s) shall be appointed or approved by and will serve at the pleasure of the Board. The Board may in its discretion from time to time remove members from or add members to the Committee and may remove, replace or add Trustee(s). The Board, in its absolute discretion, may take any action under or with respect to the Plan which the Committee is authorized to take and may reverse or override any action taken or decision made by the Committee under or with respect to the Plan or take any other action reserved to the Board under this Agreement; provided, however, that the Board may not revoke any Award already granted under this Agreement. All decisions, determinations and interpretations of the Board shall be final, conclusive and binding upon all parties having an interest in the Plan. 4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee, nor any Trustee, shall be liable for any determination made in good faith with respect to the Plan or any Plan Shares or Awards granted under the Plan. If a member of the Board or of the Committee or any Trustee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of anything done or not done by such member in such capacity under or with respect to this Plan, the Association shall indemnify such member against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such member in connection with such action, suit or proceeding if such member acted in good faith and in a manner such member reasonably believed to be in or not opposed to the best interests of the Association and the Subsidiaries and, with respect to any criminal action or proceeding, had no reasonable cause to believe such member's conduct was unlawful. ARTICLE V CONTRIBUTIONS; PLAN SHARE RESERVE 5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the amounts (or the method of computing the amounts) to be contributed by the Association to the Trust. Such amounts shall be paid to the Trustee at the time of contribution. No contributions to the Trust by Employees shall be permitted. 5.02 INITIAL INVESTMENT. Any funds held by the Trust before purchasing Common Shares shall be invested by the Trustee in such interest-bearing account or accounts at the Association as the Trustee shall determine to be appropriate. -4- 5 5.03 INVESTMENT OF TRUST ASSETS IN COMMON SHARES. The Trustee shall invest all of the Trust's assets, after providing for any required withholding as needed for tax purposes, exclusively in Common Shares; provided, however, that the Trust shall not purchase a number of Common Shares equal to more than three percent (3%) of the number of Common Shares issued in connection with the Conversion, except that if the Association's tangible capital exceeds 10%, the Trust may purchase a number of Common Shares equal to up to four percent (4%) of the Common Shares issued in connection with the Conversion. After such investment, the Common Shares shall be held by the Trustee in the Plan Share Reserve until such Common Shares are subject to one or more Awards. 5.04. EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON PLAN SHARE RESERVES. Upon the allocation of Awards under Section 6.02 of this Agreement, or the decision of the Committee to return Plan Shares to the Corporation, the Plan Share Reserve shall be reduced by the number of Plan Shares so allocated or returned. Any Plan Shares subject to an Award which is subject to a forfeiture by the Recipient pursuant to Section 7.01 of this Agreement shall be retained in the Plan Share Reserve. ARTICLE VI ELIGIBILITY; ALLOCATIONS 6.01 ELIGIBILITY. Directors and Employees are eligible to receive Awards within the sole discretion of the Committee, subject to review and approval or rejection by the Board. 6.02 ALLOCATIONS. The Committee will determine which of the Directors and Employees will be granted Awards and the number of Plan Shares covered by each Award; provided, however, that the aggregate number of Plan Shares covered by Awards to any one Director or Employee shall not exceed 25% of the total number of Plan Shares, no more than 5% of the Plan Shares may be awarded to any non-employee Director and no more than 30% of the Plan Shares may be awarded to non-employee Directors in the aggregate. The number of Plan Shares covered by such Awards may not exceed the number of Plan Shares in the Plan Share Reserve immediately before the grant of such Awards. In no event shall any Awards be made in a manner by which the Charter, Bylaws or Plan of Conversion of the Association, the Articles of Incorporation, Code of Regulations or Bylaws of the Corporation or any applicable federal or state law or regulation will be violated. In the event Plan Shares are forfeited for any reason or additional Plan Shares are purchased by the Trustee, the Committee may, from time to time, determine which of the Employees will be granted additional Awards to be awarded from forfeited or additional Plan Shares. -5- 6 In selecting the Directors and Employees to whom Awards will be granted and the number of shares covered by such Awards, the Committee shall consider the position, duties and responsibilities of the eligible Directors and Employees, the value of their services to the Association and the Subsidiaries and any other factors the Committee may deem relevant. All allocations by the Committee shall be subject to review and approval or rejection by the Board. 6.03 FORM OF ALLOCATION. As promptly as practicable after a determination is made pursuant to Section 6.02 of this Agreement that an Award is to be made, the Committee shall notify the Recipient in writing of the grant of the Award, the number of Plan Shares covered by the Award and the terms upon which the Plan Shares subject to the Award may be earned. The date on which the Committee determines that an Award is to be made or a later date designated by the Committee shall be considered the date of grant of the Awards. The Committee shall maintain records as to all grants of Awards under the Plan. 6.04 ALLOCATIONS NOT REQUIRED. Notwithstanding anything to the contrary in Sections 6.01 and 6.02 of this Agreement, all Awards shall be made by the Committee and shall be subject to review and approval or rejection by the Board. None of the Directors or Employees, either individually or as a group, shall have any right or entitlement to receive an Award under the Plan. The Committee may, with the approval of the Board, and shall, if so directed by the Board, return all Common Shares in the Plan Share Reserve to the Corporation at any time and thereafter cease issuing Awards. 6.05 SHAREHOLDER APPROVAL. Notwithstanding anything to the contrary in this Agreement, no Awards may be granted hereunder until the shareholders of the Corporation approve this Agreement. ARTICLE VII EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS 7.01 EARNING PLAN SHARES; FORFEITURES. (a) GENERAL RULES. Unless the Committee shall specifically state to the contrary at the time an Award is granted and subject to Section 6.05 of this Agreement, one-fifth of the Plan Shares subject to each Award shall be earned and non-forfeitable by a Recipient on the date which is one year after the date of the grant of such Award; one-fifth of the Plan Shares subject to each Award shall be earned and non-forfeitable by a Recipient on the date which is two years after the date of the grant of such -6- 7 Award; one-fifth of the Plan Shares subject to each Award shall be earned and non-forfeitable by a Recipient on the date which is three years after the date of the grant of such Award; one-fifth of the Plan Shares subject to each Award shall be earned and non-forfeitable by a Recipient on the date which is four years after the date of grant of such Award; and one-fifth of the Plan Shares subject to each Award shall be earned and non-forfeitable by a Recipient on the date which is five years after the date of grant of such Award. (b) REVOCATION. Notwithstanding anything herein to the contrary, Plan Shares that have not been earned and are not non-forfeitable in accordance with Section 7.01(a) of this Agreement shall be forfeited in the event that (i) a Recipient who is a director of the Association ceases to serve on the Board of Directors of the Association or (ii) a Recipient who is not a director of the Association ceases to be an Employee of the Association, except as otherwise provided in subsection (c) of this Section 7.01. (c) EXCEPTION FOR TERMINATIONS DUE TO DEATH OR DISABILITY. Notwithstanding Section 7.01(a) of this Agreement and subject to Section 6.05 of this Agreement, all Plan Shares subject to an Award held by a Recipient whose service as a Director or Employee of the Association or a Subsidiary terminates due to (i) death or (ii) disability (as determined by the Committee) shall be deemed fully earned and non-forfeitable as of the later of the Recipient's last day of service as a Director or as an Employee and shall be distributed as soon as practicable thereafter. 7.02 DISTRIBUTION OF PLAN SHARES. (a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except as otherwise provided in this Agreement, Plan Shares shall be distributed to the Recipient or his Beneficiary, as the case may be, as soon as practicable after they have been earned. Notwithstanding the foregoing, no Plan Shares shall be distributed before the date which is five years from the effective date of the Conversion to the extent the Recipient or Beneficiary, as the case may be, would, after the receipt of such Plan Shares, own in excess of ten percent (10%) of the issued and outstanding Common Shares. Any Plan Shares remaining undistributed solely by reason of the operation of this provision shall be distributed to the Recipient or his Beneficiary on the date which is five years from the effective date of the Conversion. (b) FORM OF DISTRIBUTION. All distributions of Plan Shares, together with any shares representing stock dividends, shall be distributed in the form of Common Shares. No fractional shares shall be distributed. Payments representing cash dividends (and earnings thereon) shall be made in cash. -7- 8 (c) WITHHOLDING. The Trustee may withhold from any cash payment made under this Plan sufficient amounts to cover any applicable withholding and employment taxes and, if the amount of such cash payment is not sufficient, the Trustee may require the Recipient or Beneficiary to pay to the Trustee the amount required to be withheld as a condition of delivering the Plan Shares. The Trustee shall pay over to the Association or the Subsidiary which employs or employed such Recipient or which the Recipient serves or served as a Director, any such amount withheld from or paid by the Recipient or Beneficiary. (d) REGULATORY EXCEPTIONS. Notwithstanding anything to the contrary in this Agreement, no Plan Shares, upon becoming fully earned and non-forfeitable, shall be distributed unless and until all of the requirements of all applicable laws and regulations shall have been met. 7.03 VOTING OF PLAN SHARES. After an Award has been granted, the Recipient shall be entitled to direct the Trustee as to the voting of the Plan Shares which are covered by the Award and which have not yet been earned and distributed to him pursuant to Section 7.02 of this Agreement, subject to rules and procedures adopted by the Committee for this purpose and provided that no Recipient shall be permitted, before the date which is five years from the effective date of the Conversion, to direct the voting of Plan Shares which have not yet been distributed to him to the extent the Recipient or Beneficiary, as the case may be, would, if permitted to direct the voting of such Plan Shares, be deemed to own in excess of ten percent (10%) of the issued and outstanding Common Shares. All Common Shares held by the Trustee in the Plan Share Reserve and as to which Recipients are not entitled to direct, or have not directed, the voting, shall be voted by the Trustee as directed by the Committee. ARTICLE VIII TRUST 8.01 TRUST. The Trustee shall receive, hold, administer, invest and make distributions and disbursements from the Trust in accordance with the provisions of the Plan and the Trust and the applicable directions, rules, regulations, procedures and policies established by the Committee pursuant to this Agreement. 8.02 MANAGEMENT OF TRUST. The Trustee shall have complete authority and discretion with respect to the management, control and investment of the Trust, and the Trustee shall invest all assets of the Trust, except those attributable to cash dividends paid with respect to Plan Shares not held in the Plan Share Reserve, in Common Shares to the fullest extent practicable, and except to the extent that the Trustee determines that the holding of monies in cash or cash equivalents is necessary to meet the -8- 9 obligations of the Trust. In performing his duties, the Trustee shall have the power to do all things and execute such instruments as may be deemed necessary or proper, including the following powers: (a) To invest up to one hundred percent (100%) of all Trust assets in Common Shares without regard to any law now or hereafter in force limiting investments for Trustees or other fiduciaries. The investment authorized herein may constitute the only investment of the Trust, and, in making such investment, the Trustee is authorized to purchase Common Shares from the Corporation or from any other source. Such Common Shares so purchased may be outstanding, newly issued or Treasury shares; (b) To invest any Trust assets not otherwise invested in accordance with Section 8.02(a) of this Agreement in such deposit accounts and certificates of deposit (including those issued by the Association), obligations of the United States government or its agencies or such other investments as shall be considered the equivalent of cash; (c) To sell, exchange or otherwise dispose of any property, other than Common Shares, at any time held or acquired by the Trust; (d) To cause stocks, bonds or other securities to be registered in the name of a nominee, without the addition of words indicating that such security is an asset of the Trust (but accurate records shall be maintained showing that such security is an asset of the Trust); (e) To hold cash without interest in such amounts as may be reasonable, in the opinion of the Trustee, for the proper operation of the Plan and the Trust; (f) To employ brokers, agents, custodians, consultants and accountants; (g) To hire counsel to render advice with respect to the Trustee's rights, duties and obligations hereunder, and such other legal services or representation as the Trustee may deem desirable; and (h) To hold funds and securities representing the amounts to be distributed to a Recipient or his Beneficiary as a consequence of a dispute as to the disposition thereof, whether in a segregated account or held in common with other assets of the Trust. Notwithstanding anything herein contained to the contrary, the Trustee shall not be required to make any inventory, appraisal or -9- 10 settlement or report to any court, or to secure any order of court for the exercise of any power herein contained, or to give bond. 8.03 RECORDS AND ACCOUNTS. The Trustee shall maintain accurate and detailed records and accounts of all transactions of the Trust, which shall be available at all reasonable times for inspection by any legally entitled person or entity to the extent required by applicable law, or any other person determined by the Committee. 8.04 EARNINGS. All earnings, gains and losses with respect to Trust assets shall be allocated in accordance with a reasonable procedure adopted by the Committee to bookkeeping accounts for Recipients or to the general account of the Trust, depending on the nature and allocation of the assets generating such earnings, gains and losses. Without limiting the generality of the foregoing, any earnings on cash dividends received with respect to Common Shares shall be allocated to accounts for Recipients, if such shares are the subject of outstanding Awards, or otherwise to the Plan Share Reserve. 8.05 EXPENSES. All costs and expenses incurred in the operation and administration of the Plan shall be paid by the Association. ARTICLE IX MISCELLANEOUS 9.01 ADJUSTMENTS FOR CAPITAL CHANGES. The aggregate number of Plan Shares available for issuance pursuant to the Awards and the number of Plan Shares to which any Award relates shall be proportionately adjusted for any increase or decrease in the total number of outstanding Common Shares issued subsequent to the effective date of the Plan if such increase or decrease resulted from any split, subdivision or consolidation of shares or other capital adjustment, or other increase or decrease in such shares effected without receipt or payment of consideration by the Corporation. 9.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution, at any time amend or terminate the Plan. The power to amend or terminate the Plan shall include the power to direct the Trustee to return to the Corporation or the Association all or any part of the assets of the Trust, including Common Shares held in the Plan Share Reserve, as well as Common Shares and other assets subject to Awards which are not yet earned by the Directors or Employees to whom they are allocated; provided, however, that the termination of the Trust shall not affect a Recipient's right to earn Awards and to the distribution of Common Shares relating thereto, including earnings thereon, in -10- 11 accordance with the terms of this Agreement and the grant by the Committee or the Board. 9.03 NONTRANSFERABLE. Awards and rights to Plan Shares shall not be transferable by a Recipient. During the lifetime of the Recipient, Plan Shares may only be earned by and paid to the Recipient who was notified in writing of the Award by the Committee pursuant to Section 6.03 of this Agreement. No Recipient or Beneficiary shall have any right in or claim to any assets of the Plan or the Trust, nor shall the Corporation, the Association or any Subsidiary be subject to any claim for benefits hereunder. 9.04 DIRECTORSHIP RIGHTS. Neither this Agreement nor any grant of an Award of Plan Shares hereunder nor any action taken by the Trustee, the Committee or the Board in connection with the Plan shall create any right, either express or implied, on the part of any Director to continue to serve as a Director of the Association or a Subsidiary. 9.05 EMPLOYMENT RIGHTS. Neither this Agreement nor any grant of an Award of Plan Shares hereunder nor any action taken by the Trustee, the Committee or the Board in connection with the Plan shall create any right, either express or implied, on the part of any Employee to continue in the employ of the Association or a Subsidiary. 9.06 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or dividend rights or other rights of a shareholder in respect of any Plan Shares covered by an Award, except as expressly provided in Sections 7.02 and 7.03 of this Agreement, prior to the time such Plan Shares are actually distributed to such Recipient. 9.07 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Ohio, except to the extent that federal law shall be deemed applicable. 9.08 EFFECTIVE DATE. Subject to Section 6.05 of this Agreement, this Agreement shall be effective as of the 15th day of November, 1995. 9.09 TERM OF PLAN. The Plan shall remain in effect until the earlier of (a) the termination by the Board or (b) the distribution of all assets from the Trust. The termination of the Plan shall not affect any Awards previously granted and such Awards shall remain valid and in effect until they have been earned and paid or by their terms expire or are forfeited. 9.10 TAX STATUS OF TRUST. It is intended that the trust established hereby be treated as a grantor trust of the Association under the provisions of Section 671, ET SEQ., of the -11- 12 Internal Revenue Code of 1986, as amended (26 U.S.C. ss. 671 et seq.). IN WITNESS WHEREOF, the following Trustees execute this Agreement, accepting and binding themselves to undertake and perform the obligations and duties of the Trustee hereunder and consenting to the foregoing Agreement effective the 15th day of November, 1995. By: Lee O. Fitch (Trustee) --------------------------- By: ___________________________(Trustee) IN WITNESS WHEREOF, the Association has caused this Agreement to be executed by its duly authorized officer and duly attested, all as of the 15th day of November, 1995. AMERICAN SAVINGS BANK, fsb By: Gerald R. Jenkins ----------------------- Gerald R. Jenkins its President ATTEST: Robert M. Smith - -------------------------- Robert M. Smith its Secretary -12- EX-13 4 EXHIBIT 13 1 EXHIBIT 13 ASB FINANCIAL CORP. 1996 ANNUAL REPORT TO SHAREHOLDERS 2 To Our Shareholders and Valued Customers: It is with great pleasure that we present ASB Financial Corp.'s Second Annual Report to Shareholders covering the fiscal year ended June 30, 1996. We were very satisfied with our fiscal 1996 operating results. Net earnings for the fiscal year totaled $1.1 million, or $.69 per share, representing a $103,000, or 10.2%, increase over fiscal 1995 net earnings of $1.0 million. We posted a respectable level of asset growth for the fourth consecutive year. Total assets reached an unprecedented level of $112.9 million at June 30, 1996, reflecting a growth rate of 5.7% for fiscal 1996. We believe that our growth during the 1996 fiscal year is indicative of the consumer's preference for personalized banking services provided by community-based financial institutions. More importantly, this rate of growth in the past year has been attained without sacrificing our asset quality, as nonperforming assets declined during fiscal 1996 by $600,000, or 23.2%. We are also pleased with the performance of ASB Financial's common stock since our conversion in May 1995. ASB was honored by The Cleveland Plain Dealer as one of the top 100 performing publicly traded companies in Ohio. On June 25, 1996, Governor George Voinovich presented the "Best Initial Public Offering" (IPO) award to ASB for showing "the biggest change in its stock price of any IPO in the state". The market price for our common shares on September 6, 1996, was $14.50, representing a 45% increase over the $10.00 initial offering price in the first sixteen months of trading. We believe that our fiscal 1996 earnings performance, as well as a 25% increase in dividend yield, contributed to the increase in market price over the period. Notwithstanding our accomplishments during the year, we continue to operate at a competitive disadvantage to our commercial banking competitors as a result of the significant disparity in the amount of federal deposit insurance expense. Specifically, in fiscal 1996, our Savings Bank subsidiary paid approximately $180,000 more in deposit premiums than a comparable commercial bank. We are cautiously optimistic that this significant competitive disadvantage will be eliminated during fiscal 1997, but there is no assurance that favorable legislation will be enacted. In conclusion, the financial services landscape continues to rapidly evolve as the distinctions between banks, thrifts and securities firms blur. However, please be assured that your Board and management are committed to successfully adapting to such changes while meeting our primary goal of maximizing the return on your investment. We thank you very much for your continued support during the past year. Very truly yours, ASB FINANCIAL CORP. Gerald R. Jenkins President 3 BUSINESS OF ASB FINANCIAL CORP. =============================================================================== ASB Financial Corp. ("ASB"), a unitary savings and loan holding company incorporated under the laws of the State of Ohio, owns all of the issued and outstanding common stock of American Savings Bank, fsb ("American"), a savings bank chartered under the laws of the United States. In May 1995, ASB acquired all of the common stock issued by American upon its conversion from a mutual savings association to a stock savings association (the "Conversion"). Other than investing excess funds from the Conversion in investment and mortgage-backed and related securities, ASB's activities have been limited primarily to holding the common shares of American. Serving the Portsmouth, Ohio, area since 1892, American conducts business from its office at 503 Chillicothe Street in Portsmouth, 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 City of Portsmouth and contiguous areas of Scioto 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 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 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 Federal Deposit Insurance Corporation (the "FDIC"). As a savings and loan holding company, ASB is subject to regulation, supervision and examination by the Office of Thrift Supervision of the United States Department of the Treasury (the "OTS"). As a savings bank chartered under the laws of the United States, American is subject to regulation, supervision and examination by the OTS and the FDIC. American is also a member of the Federal Home Loan Bank (the "FHLB") of Cincinnati. ASB's office is located at 503 Chillicothe Street, Portsmouth, Ohio 45662. The telephone number is (614) 354-3177. MARKET PRICE OF ASB'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS =============================================================================== There were 1,713,960 common shares of ASB outstanding on September 6, 1996, held of record by approximately 958 shareholders. Price information with respect to ASB's common shares is quoted on the Nasdaq National Market ("Nasdaq") under the symbol "ASBP." ----- 2 4 The table below sets forth the high and low bid prices for the common shares of ASB, together with the respective dividends declared per share, for each quarter of fiscal 1996 and the quarter ended June 30, 1995. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
Cash dividends High Bid Low Bid declared -------- ------- -------- FISCAL 1995 Quarter Ended: June 30, 1995 $14.00 $11.25 $.075 FISCAL 1996 Quarter Ended: September 30, 1995 14.00 11.50 .075 December 31, 1995 16.75 13.50 .075 March 31, 1996 16.50 15.25 .075 June 30, 1996 16.00 14.00 .100
The income of ASB consists of interest on investment and mortgage-backed and related securities and dividends which may periodically be declared and paid by the Board of Directors of American 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. Under OTS regulations applicable to converted savings associations, American is not permitted to pay a cash dividend on its common shares if American's regulatory capital would, as a result of the payment of such dividend, be reduced below the amount required for the liquidation account established in connection with the Conversion or applicable regulatory capital requirements prescribed by the OTS. OTS regulations applicable to all savings associations provide that a savings association which immediately prior to, and on a pro forma basis after giving effect to, a proposed capital distribution (including a dividend) has total capital (as defined by OTS regulations) that is equal to or greater than the amount of its capital requirements is generally permitted without OTS approval (but subsequent to 30 days' prior notice to the OTS) to make capital distributions, including dividends, during a calendar year in an amount not to exceed the greater of (1) 100% of its net earnings to date during the calendar year, plus an amount equal to one-half the amount by which its total capital to assets ratio exceeded its required capital to assets ratio at the beginning of the calendar year, or (2) 75% of its net earnings for the most recent four-quarter period. Savings associations with total capital in excess of the capital requirements that have been notified by the OTS that they are in need of more than normal supervision will be subject to restrictions on dividends. A savings association that fails to meet current minimum capital requirements is prohibited from making any capital distributions without the prior approval of the OTS. American currently meets all of its regulatory capital requirements and, unless the OTS determines that American is an institution requiring more than normal supervision, American may pay dividends in accordance with the foregoing provisions of the OTS regulations. ----- 3 5 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. Information prior to the year ended June 30, 1995, the year in which the Conversion was completed, is for American only.
SELECTED CONSOLIDATED FINANCIAL At June 30, CONDITION DATA: 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------ (In thousands) Total amount of: Assets $112,922 $106,861 $ 93,931 $ 91,336 $ 84,951 Cash and cash equivalents (1) 3,836 5,926 5,969 7,198 5,602 Certificates of deposit in other financial institutions 6,702 9,301 8,324 7,170 4,581 Investment securities available for sale - at market 19,284 1,768 -- -- -- Investment securities - at amortized -- 14,107 8,978 6,373 4,847 cost Mortgage-backed securities available for sale - at market 10,728 2,300 -- -- -- Mortgage-backed securities - at amortized cost -- 7,835 8,224 7,218 7,961 Loans receivable - net 68,455 62,153 59,304 60,544 59,701 Real estate acquired through foreclosure - net 663 525 -- 561 281 Deposits 83,395 78,888 82,514 81,404 76,705 Advances from the FHLB 2,413 442 469 496 -- Shareholders' equity, restricted (2) (3) 25,613 26,058 9,740 8,950 7,758 - -----------------------------
(1) Consists of cash and due from banks and interest-bearing deposits in other financial institutions. (2) Consists solely of retained earnings at June 30, 1992 through 1994, inclusive. (3) At June 30, 1996 and 1995, includes $124,000 and $272,000, respectively, of unrealized gains on securities designated as available for sale, net of related tax effects, pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115. No such unrealized gains or losses were reflected as a component of shareholders' equity as of any of the other dates presented. ----- 4 6
SELECTED CONSOLIDATED OPERATING Year ended June 30 DATA: 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands, except per share data) Interest income $8,173 $7,012 $6,637 $7,058 $7,352 Interest expense 4,310 3,893 3,307 3,712 4,662 ------ ------ ------ ------ ------ Net interest income 3,863 3,119 3,330 3,346 2,690 Provision for losses on loans -- 10 749 272 130 ------ ------ ------ ------ ------ Net interest income after provision for losses on loans 3,863 3,109 2,581 3,074 2,560 Other income 195 143 451 134 169 General, administrative and other expense 2,373 1,726 2,044 1,407 1,340 ------ ------ ------ ------ ------ Earnings before income taxes 1,685 1,526 988 1,801 1,389 Federal income taxes 574 518 199 609 461 ------ ------ ------ ------ ------ Net earnings $1,111 $1,008 $ 789 $1,192 $ 928 ====== ====== ====== ====== ====== Earnings per share $ .69 N/A N/A N/A N/A ======
At or for the year ended June 30, --------------------------------- SELECTED FINANCIAL RATIOS: 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------ Return on average assets 1.01% 1.00% .85% 1.35% 1.12% Average interest rate spread during period 2.55 2.83 3.38 3.51 2.83 Net interest margin 3.69 3.29 3.72 3.89 3.31 Return on average equity 4.30 9.38 8.44 14.27 12.72 Equity to total assets at end of period 22.68 24.38 10.37 9.80 9.13 Average interest-earning assets to average interest-bearing liabilities 127.55 111.19 109.29 108.70 108.40 Net interest income to general, administrative and other expense 162.79 180.71 162.92 237.81 200.74 General, administrative and other expense to average total assets 2.16 1.72 2.21 1.60 1.62 Nonperforming assets to total assets 1.61 2.30 3.10 2.56 2.57 Loan loss allowance to nonperforming loans 76.34 46.29 38.28 25.75 16.86
----- 5 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS =============================================================================== GENERAL - ------------------------------------------------------------------------------- The following discussion and analysis of the consolidated financial conditions 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. ASB was incorporated for the purpose of owning all of the outstanding common shares of American following the Conversion. As a result, the discussion and analysis that follows focuses primarily on the financial condition and results of operations of American. American is primarily engaged in the business of attracting savings deposits from the general public and investing such funds in mortgage loans secured by one- to four-family residential real estate located primarily in Scioto County, Ohio. Loans secured by multifamily real estate (over four units) or nonresidential real estate and consumer loans, including passbook and home improvement loans, are also originated by American. In addition, American purchases interests in multifamily real estate and nonresidential real estate loans originated by other lenders outside of American's primary market area. American also invests in U.S. Government agency obligations, interest-bearing deposits in other financial institutions, mortgage-backed securities and other investments permitted by applicable law. American's profitability is primarily dependent upon its net interest income, which is the difference between interest income on its loan and investment portfolios and interest paid on deposits and borrowed funds. Net interest income is directly affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on such amounts. American's profitability is also affected by the provision for losses on loans and the level of other income and general and administrative expenses. Other income consists primarily of service charges and gains on the sale of assets. General, administrative and other expense include salaries and employee benefits, occupancy of premises, federal deposit insurance premiums, state franchise taxes and other operating expenses. The operating results of American are also affected by general economic conditions, the monetary and fiscal policies of federal agencies and the regulatory policies of agencies that regulate financial institutions. American's cost of funds is influenced by interest rates on competing investments and general market rates of interest. Lending activities are influenced by the demand for real estate loans and other types of loans, which is in turn affected by the interest rates at which such loans are made, general economic conditions affecting loan demand and the availability of funds for lending activities. ----- 6 8 CHANGES IN FINANCIAL CONDITION - ------------------------------------------------------------------------------- ASB's total assets amounted to $112.9 million at June 30, 1996, an increase of $6.1 million, or 5.7%, from 1995 levels. The increase in total assets was funded primarily by growth in deposits of $4.5 million, an increase in advances from the FHLB of $2.0 million, and by undistributed net earnings of $554,000. Cash, interest-bearing deposits and certificates of deposit totaled $10.5 million at June 30, 1996, a decline of $4.7 million, or 30.8%, from 1995 levels. This decrease resulted from management's decision to redeploy excess liquidity into higher yielding investment securities and into loan originations. Investment securities totaled $19.3 million at June 30, 1996, an increase of $3.4 million, or 21.5%, over the balance at June 30, 1995. During fiscal 1996, management purchased $12.2 million of investment securities, primarily intermediate- and long-term U.S. Government agency securities. Such purchases were partially offset by maturities totaling $9.1 million. Mortgage-backed securities increased by $593,000, or 5.9%, as purchases during fiscal 1996 of $3.5 million exceeded principal repayments of $2.8 million. Loans receivable increased by $6.3 million, or 10.1%, to a total of $68.5 million at June 30, 1996, compared to $62.2 million at June 30, 1995. Loan disbursements of $23.9 million and purchases of $1.7 million exceeded principal repayments of $18.7 million during fiscal 1996. Loan disbursements during fiscal 1996 exceeded those of fiscal 1995 by $8.6 million, or 50.4%. Growth in loans secured by residential real estate totaled $3.6 million, or 6.6%, and growth in the consumer loan portfolio amounted to $3.8 million, or 75.9%, year to year. At June 30, 1996, American's allowance for loan losses totaled $884,000, representing 1.2% of total loans and 76.3% of nonperforming loans. At June 30, 1995, the allowance for loan losses totaled $893,000, or 1.4% of total loans and 46.3% of nonperforming loans. Nonperforming loans amounted to $1.2 million and $1.9 million at June 30, 1996 and 1995, respectively, and represented 1.0% and 1.8% of total assets at those dates. Although management believes that its allowance for loan losses at June 30, 1996, was adequate based on facts and circumstances available to it, there can be no assurances that additions to such allowance will not be necessary in future periods, which could adversely affect ASB's results of operations. Savings deposits increased by $4.5 million, or 5.7%, during fiscal 1996 to a total of $83.4 million at June 30, 1996. The increase resulted primarily from management's continuing efforts to maintain a moderate rate of growth through marketing and pricing strategies. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 - ------------------------------------------------------------------------------- GENERAL. Net earnings amounted to $1.1 million for the fiscal year ended June 30, 1996, an increase of $103,000, or 10.2%, over the $1.0 million in net earnings recorded in fiscal 1995. The increase in net earnings resulted primarily from an increase in net interest income of $744,000, an increase in other income of $52,000 and a decline in the provision for losses on loans of $10,000, which were partially offset by an increase in general, administrative and other expense of $647,000 and an increase in the provision for federal income taxes of $56,000. ----- 7 9 NET INTEREST INCOME. Total interest income amounted to $8.2 million for the fiscal year ended June 30, 1996, an increase of $1.2 million, or 16.6%, over fiscal 1995. Interest income on loans totaled $5.5 million in fiscal 1996, an increase of $633,000, or 13.0%. This increase was due primarily to an increase in the weighted-average balance outstanding of $5.8 million and an increase in yield of 25 basis points to 8.31% in 1996. Interest income on mortgage-backed securities increased by $218,000, or 41.0%, as a result of a $2.6 million increase in the weighted-average balance outstanding coupled with a 39 basis point increase in yield to 7.11% in fiscal 1996. Interest income on investment securities and interest-bearing deposits increased by $310,000, or 19.2%, due primarily to an 82 basis point increase in yield to 6.90% in fiscal 1996 coupled with a $1.3 million increase in the weighted-average balance outstanding year to year. Interest expense totaled $4.3 million for the fiscal year ended June 30, 1996, an increase of $417,000, or 10.7%, over the $3.9 million total recorded in fiscal 1995. Interest expense on deposits increased by $397,000, or 10.3%, due primarily to a 70 basis point increase in the cost of funds to 5.26% in fiscal 1996, which was partially offset by a $3.7 million, or 4.4%, decline in the weighted-average balance outstanding year to year. As a result of the foregoing changes in interest income and interest expense, net interest income increased by $744,000, or 23.9%, to a total of $3.9 million for the fiscal year ended June 30, 1996, as compared to $3.1 million in fiscal 1995. The interest rate spread declined by 28 basis points to 2.55% in fiscal 1996 from 2.83% in fiscal 1995, while the net interest margin increased to 3.69% in 1996 from 3.29% in 1995. PROVISION FOR LOSSES ON LOANS. A provision for losses on loans is charged 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, as well as the aforementioned decline in nonperforming loans, management concluded that the allowance for loan losses was adequate and, as a result, no provision for losses on loans was established during fiscal 1996. 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 $195,000 for the fiscal year ended June 30, 1996, an increase of $52,000, or 36.4%, over the $143,000 recorded in fiscal 1995. The increase resulted primarily from a $25,000 increase in rental income received on a parcel of real estate acquired through foreclosure and from $13,000 received from the sale of non-deposit investment products under an agency arrangement with Money Concepts, Inc. GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other expense totaled $2.4 million for the fiscal year ended June 30, 1996, an increase of $647,000, or 37.5%, over the $1.7 million recorded in fiscal 1995. The increase resulted primarily from a $374,000, or 43.7%, increase in employee compensation and benefits, a $75,000, or 56.0%, increase in franchise taxes and a $172,000, or 60.1%, increase in other operating expense. The increase in employee compensation and benefits was due primarily to increased costs related to employee stock benefit plans and normal merit increases. The increase in franchise taxes resulted from ASB's increase in equity capital due to the common stock offering. The increase in other operating expense was due to increased costs related to the reporting requirements of a public company, an increase in expenses for real estate acquired through foreclosure and pro-rata increases in operating costs attendant to ASB's growth year to year. ----- 8 10 Congress is considering legislation to recapitalize the Savings Association Insurance Fund (the "SAIF") and eliminate the significant premium disparity between the SAIF and the Bank Insurance Fund (the "BIF"). Currently, that recapitalization plan provides for a special assessment ranging from approximately $.69 to $.85 per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to the level required by law. American had $83.9 million deposits at March 31, 1995. If the special assessment level is finalized at $.85 per $100 in deposits, American will pay an assessment of $713,000. This assessment should be tax deductible, but it will reduce earnings and capital for the quarter in which it is recorded. No assurances can be given that the SAIF recapitalization plan will be enacted into law or in what form it may be enacted. In addition, American can give no assurances that the disparity between BIF and SAIF assessments will be eliminated. FEDERAL INCOME TAXES. The provision for federal income taxes totaled $574,000 for the fiscal year ended June 30, 1996, an increase of $56,000, or 10.8%, over the $518,000 recorded in fiscal 1995. The increase was due primarily to a $159,000, or 10.4%, increase in pretax earnings year to year. ASB's effective tax rates were 34.1% and 33.9% for the fiscal years ended June 30, 1996 and 1995, respectively. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1995 AND 1994 - ------------------------------------------------------------------------------- GENERAL. Net earnings amounted to $1.0 million for the fiscal year ended June 30, 1995, an increase of $219,000, or 27.8%, over the $789,000 in net earnings for the fiscal year ended June 30, 1994. The increase in net earnings resulted primarily from a $739,000 decline in the provision for losses on loans and a $318,000 decline in general, administrative and other expense, which were partially offset by a $211,000 decline in net interest income, a $308,000 decline in other income and a $319,000 increase in the provision for federal income taxes. NET INTEREST INCOME. Interest income on loans and mortgage-backed securities decreased by $146,000, or 2.6%, to a total of $5.4 million for the fiscal year ended June 30, 1995, compared to 1994. The decrease resulted primarily from a decline in yield from 8.11% in 1994, to 7.90% in 1995. Interest income on investment securities and interest-bearing deposits increased by $521,000, or 47.6%, for the fiscal year ended June 30, 1995, compared to 1994. This increase generally reflects the return on the $15.2 million in net proceeds from ASB's offering of common shares which was completed in May 1995. Interest expense on deposits and borrowings increased by $586,000, or 17.7%, for the fiscal year ended June 30, 1995, compared to fiscal 1994. This increase resulted primarily from an increase in the average cost of funds year to year from 4.04% in 1994 to 4.56% in 1995, generally reflecting the increase in interest rates in the economy over the year. As a result of the foregoing changes in interest income and interest expense, net interest income declined during fiscal 1995 by $211,000, or 6.3%, to a total of $3.1 million, compared to $3.3 million for fiscal 1994. PROVISION FOR LOSSES ON LOANS. The provision for losses on loans amounted to $10,000 for the fiscal year ended June 30, 1995, compared to $749,000 for fiscal 1994, a decline of $739,000. ASB provides for additions to the loan loss allowance based upon management's overall assessment of current and anticipated economic conditions applied to the loan portfolio. The decline in the fiscal 1995 provision generally reflects the reduction in nonperforming loans year ----- 9 11 to year. Nonperforming loans declined during fiscal 1995 to $1.9 million, compared to $2.9 million at June 30, 1994. OTHER INCOME. Other income amounted to $143,000 for the fiscal year ended June 30, 1995, compared to $451,000 for fiscal 1994, a decrease of $308,000, or 68.3%. The decline resulted primarily from the recognition during 1994 of a gain on sale of real estate acquired through foreclosure of $95,000 and net proceeds from insurance on the life of an officer of $211,000. Other operating income declined by $2,000, or 1.4%, year to year. GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other expense totaled $1.7 million for the fiscal year ended June 30, 1995, compared to $2.0 million for fiscal 1994, a decrease of $318,000, or 15.6%. The decrease was primarily attributable to a $310,000, or 26.6%, decline in employee compensation and benefits and a $27,000, or 8.6%, decline in other operating expense, which were partially offset by a $26,000, or 24.1%, increase in franchise taxes. The decrease in employee compensation and benefits resulted primarily from the recognition during fiscal 1994 of a charge of $330,000 for enhanced benefits under American's salary continuation agreements with certain key members of management. The decline in other operating expense resulted primarily from a decrease in professional and consulting fees year to year, while the increase in franchise taxes resulted from ASB's growth in equity over the period. FEDERAL INCOME TAXES. The provision for federal income taxes totaled $518,000 for the fiscal year ended June 30, 1995, compared to $199,000 for fiscal 1994, an increase of $319,000, or 160.3%. The increase resulted primarily from a $538,000, or 54.5%, increase in net earnings before taxes, coupled with the absence in 1995 of nontaxable life insurance proceeds recognized in 1994 earnings. The effective tax rates were 33.9% and 20.1% for fiscal 1995 and 1994, respectively. ----- 10 12 AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA - ------------------------------------------------------------------------------- The following table sets forth certain information relating to ASB's average balance sheet information 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, 1996 1995 1994 ----------------------------- ---------------------------- ----------------------------- 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 $ 66,152 $5,498 8.31% $60,395 $4,865 8.06% $60,884 $4,989 8.19% Mortgage-backed securities 10,555 750 7.11 7,913 532 6.72 7,469 554 7.42 Investment securities and other interest- earning assets 27,886 1,925 6.90 26,553 1,615 6.08 21,106 1,094 5.18 ---------- ------- -------- -------- ------- ------ -------- ------- ------ Total interest- earning assets 104,593 8,173 7.81 94,861 7,012 7.39 89,459 6,637 7.42 Non-interest-earning asset 5,332 5,027 3,618 ------- ------- ------ Total assets $109,925 $99,888 $93,077 ======== ======== ======= Interest-bearing liabilities: Deposits $ 81,114 4,267 5.26 $84,858 3,870 4.56 $81,373 3,287 4.04 Borrowings 889 43 4.84 457 23 5.03 482 20 4.15 --------- ------- ----- ------- ------ ----- ------- ------ ----- Total interest-bearing liabilities 82,003 4,310 5.26 85,315 3,893 4.56 81,855 3,307 4.04 ------- -------- ----- ------ ----- ----- ------ ----- ---- Non-interest-bearing liabilities 2,086 3,826 1,878 ------- ------ ------ Total liabilities 84,089 89,141 83,733 Shareholders' equity (1) 25,836 10,747 9,344 ------- ------- ------ Total liabilities and shareholders' equity $109,925 $99,888 $93,077 ======== ======= ======= Net interest income $3,863 $3,119 $3,330 ====== ====== ====== Interest rate spread 2.55% 2.83% 3.38% ==== ===== ===== Net interest margin (net interest income as a percent of average interest-earning assets) 3.69% 3.29% 3.72% ==== ===== ===== Average interest-earning assets to interest-bearing liabilities 127.55% 111.19% 109.29% ====== ====== ====== ----------------------------------- (1) Consists solely of retained earnings for the year ended June 30, 1994.
----- 11 13 - ------------------------------------------------------------------------------- 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, 1996 vs. 1995 1995 vs. 1994 ------------------------- -------------------------- Increase Increase (decrease) (decrease) due to due to --------------- -------------- Volume Rate Total Volume Rate Total ------ ---- ----- ------ ---- ----- (In thousands) Interest-earning assets: Loans receivable $ 478 $ 155 $ 633 $ (40) $ (84) $ (124) Mortgage-backed securities 186 32 218 32 (54) (22) Investment securities and interest- earning assets 84 226 310 211 310 521 ------ ------ ------ ------ ------ ------ Total interest-earning assets 748 413 1,161 203 172 375 ------ ------ ------ ------ ------ ------ Interest-bearing liabilities: Deposits (177) 574 397 145 438 583 Borrowings 21 (1) 20 (1) 4 3 ------ ------ ------ ------ ------ ------ Total interest-bearing (156) 573 417 144 442 586 liabilities ------ ------ ------ ------ ------ ------ Increase (decrease) in net interest income $ 904 $ (160) $ 744 $ 59 $ (270) $ (211) ====== ====== ====== ====== ====== ======
ASSET AND LIABILITY MANAGEMENT - ------------------------------------------------------------------------------- American's interest rate spread is the principal determinant of American's income. The interest rate spread, and therefore net interest income, can vary considerably over time because asset and liability repricing do not coincide. Moreover, the long-term and cumulative effect of interest rate changes can be substantial. Interest rate risk is defined as the sensitivity of an institution's earnings and net asset values to changes in interest rates. The management and Board of Directors attempt to manage American's exposure to interest rate risk in a manner to maintain the projected four-quarter percentage change in net interest income and the projected change in the market value of portfolio equity within limits established by the Board of Directors, assuming a permanent and instantaneous parallel shift in interest rates. 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 adopted by the OTS as part of its final rules related to revisions in the risk-based capital regulations. Although American is not currently subject to the NPV regulation, the application of the NPV methodology may illustrate American's interest rate risk. ----- 12 14 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 application of the methodology attempts to quantify interest rate risk as the change in the NPV which would result from a theoretical 200 basis point (1 basis point equals .01%) change in market interest rates. Both a 200 basis point increase in market interest rates and a 200 basis point decrease in market interest rates are considered. If the NPV would decrease in an amount greater than 2% of the present value of the institution's assets with either an increase or a decrease in market rates, the institution must deduct 50% of the amount of the decrease in excess of such 2% in the calculation of the institution's risk-based capital. At March 31, 1996, (the latest date as of which data was available) 2% of the present value of American's assets was approximately $2.0 million. Because the interest rate risk of a 200 basis point increase in market interest rates (which was greater than the interest rate risk of a 200 basis point decrease) was $3.4 million at June 30, 1996, American would have been required to deduct $1.7 million (50% of the $3.4 million difference) from its capital in determining whether American met its risk-based capital requirement. Regardless of such reduction, however, American's risk-based capital at June 30, 1996, would still have exceeded the regulatory requirement by approximately $12.9 million. The following table presents, at March 31, 1996 (the latest date as of which data was available) and at June 30, 1995, 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. The table also contains the policy limits set by the Board of Directors of American as the maximum change in NPV that the Board of Directors deems advisable in the event of various changes in interest rates. Such limits have been established with consideration of the dollar impact of various rate changes and the strong capital position of American.
At March 31, 1996 At June 30, 1995 ------------------------ ---------------------- Changes in interest rate Board limit $ change % change $ change % change (basis points) % changes in NPV in NPV in NPV in NPV -------------- --------- ------ ------ ------ ------ (Dollars in thousands) +300 (40)% $(5,152) (26)% $(3,656) (33)% +200 (30) (3,395) (17) (2,376) (22) +100 (20) (1,634) (8) (1,132) (10) 0 0 0 0 0 0 -100 20 1,309 7 978 8 -200 30 2,189 11 1,673 15 -300 40 2,887 15 2,475 23
In the event that interest rates continue to rise from recent levels, American's net interest income could be expected to be negatively affected. Moreover, rising interest rates could negatively affect American's earnings due to diminished loan demand. ----- 13 15 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 equivalents, interest-bearing deposits in other financial institutions and investment securities, is a result of the operating, investing and financing activities of American. These activities on a consolidated basis, are summarized below for the years ended June 30, 1996, 1995, and 1994: Year ended June 30, ------------------- 1996 1995 1994 -------- -------- -------- (In thousands) Net cash from operating activities $ 1,286 $ 1,413 $ 1,458 Net cash used in investing activities (8,124) (12,860) (3,724) Net cash provided by financing activities 4,748 11,404 1,037 -------- -------- -------- Net change in cash and cash equivalents (2,090) (43) (1,229) Cash and cash equivalents at the beginning of the period 5,926 5,969 7,198 -------- -------- -------- Cash and cash equivalents at the end of the period $ 3,836 $ 5,926 $ 5,969 ======== ======== ======== American generally strives to maintain liquidity (defined as cash, interest-bearing deposits and investment securities with terms of less than five years) in a range of 10 to 25% of total assets. OTS regulations require that savings associations maintain an average daily balance of liquid assets (cash, certain time deposits and specified United States Government, state or federal agency obligations) equal to a monthly average of not less than 5% of its net withdrawable savings deposits plus borrowings payable in one year or less. Federal regulations also require each association to maintain an average daily balance of short-term liquid assets at a specified percentage, currently 1%, of the total of its net withdrawable savings accounts and borrowings payable in one year or less. Monetary penalties may be imposed upon associations failing to meet liquidity requirements. The eligible liquidity of American, as computed under current regulations, at June 30, 1996, was approximately $13.4 million, or 18.3%, and exceeded the then applicable 5.0% liquidity requirement by approximately $9.8 million, or 13.3%. At June 30, 1996, American had outstanding commitments of approximately $138,000 to originate loans. Additionally, American was obligated under unused lines of credit totaling $1.3 million. In the opinion of management, all loan commitments had interest rates which equaled or exceeded market interest rates as of June 30, 1996, and will be funded from existing excess liquidity and normal cash flow from operations. American is required by OTS regulations to maintain specified minimum amounts of capital. At June 30, 1996, American exceeded all applicable minimum capital requirements. The following table sets forth the amount and percentage level of regulatory capital of American at June 30, 1996, and the amount by which it exceeded minimum requirements. Tangible and core capital ----- 14 16 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, 1996 ------------------------------------ Amount Percent of Assets ------ ----------------- (Dollars in thousands) Tangible capital $17,402 16.3% Requirement 1,604 1.5 ------- ---- Excess $15,798 14.8% ======= ==== Core capital $17,402 16.3% Requirement 3,209 3.0 ------- ---- Excess $14,193 13.3% ======= ==== Risk-based capital $18,000 37.6% Requirement 3,833 8.0 ------- ---- Excess $14,617 29.6% ======= ====
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS - ------------------------------------------------------------------------------- In December 1991, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS No. 107 requires ASB to disclose the fair value of its financial instruments, which includes the majority of ASB's balance sheet accounts in addition to selected off-balance sheet items. SFAS No. 107 became effective for ASB in fiscal 1996 because ASB has less than $150 million in total assets. Earlier adoption was required for entities with assets in excess of $150 million. SFAS No. 107 focuses only on disclosure of fair values in the financial statements and, therefore, has no effect on consolidated financial position or results of operations. In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 specifies that allowances for loan losses on impaired loans should be determined using the present value of estimated future cash flows of the loan, discounted at the loan's effective interest rate. A loan is impaired when it is probable that all principal and interest amounts will not be collected according to the loan contract. SFAS No. 114 is effective for fiscal years beginning after December 15, 1994, which, for ASB, is the 1996 fiscal year. Management adopted SFAS No. 114 on July 1, 1995, without material impact on consolidated financial position or results of operations. In October 1994, the FASB amended certain of the revenue recognition provisions of SFAS No. 114 by the issuance of SFAS No. 118. Such revisions similarly had no material effect on the consolidated financial condition or results of operations of ASB. In October 1994, the FASB issued SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments." SFAS No. 119 requires financial statement disclosure of certain derivative financial instruments, defined as futures, forwards, swaps, option contracts, or other financial instruments with similar characteristics. In the opinion of management, the disclosure requirements of SFAS No. 119 will have no material effect on ASB's consolidated financial condition or results of operations, as ASB does not invest in derivative financial instruments, as defined. As a result, the applicability of SFAS No. 119 ----- 15 17 relates solely to disclosure requirements pertaining to fixed-rate and adjustable-rate loan commitments. The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants has issued Statement of Position ("SOP 93-6") on Employers' Accounting for Employee Stock Ownership Plans (an "ESOP"). SOP 93-6, among other things, changes the measure of compensation expense recorded by employers from the cost of ESOP shares to the fair value of ESOP shares. To the extent that fair value of ASB's ESOP shares differs from the cost of such shares, compensation expense must be recorded in ASB's financial statements for the fair value of ESOP shares allocated to participants for a reporting period. SOP 93-6 was adopted by ASB during fiscal 1995, without a material adverse effect on consolidated financial condition or results of operations. In May 1995, the FASB promulgated SFAS No. 122, "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that ASB recognize as separate assets rights to service mortgage loans for others, regardless of how those servicing rights were acquired. An institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained would allocate some of the cost of the loans to the mortgage servicing rights. SFAS No. 122 also requires that an enterprise allocate the cost of purchasing or originating the mortgage loans between the mortgage servicing rights and the loans when mortgage loans are securitized, if it is practicable to estimate the fair value of mortgage servicing rights. Additionally, SFAS No. 122 requires that capitalized mortgage servicing rights and capitalized excess servicing receivables be assessed for impairment. Impairment would be measured based on fair value. SFAS No. 122 was applied prospectively to ASB's fiscal year beginning July 1, 1996, to transactions in which an entity acquires mortgage servicing rights and to impairment evaluations of all capitalized mortgage servicing rights and capitalized excess servicing receivables whenever acquired. Retroactive application is prohibited. On July 1, 1996, management adopted SFAS No. 122 without effect on ASB's consolidated financial position or results of operations. In October 1994, the FASB issued SFAS No. 123 entitled "Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair value based method of accounting for stock-based compensation paid to employees. SFAS No. 123 recognizes the fair value of an award of stock or stock options on the grant date and is effective for transactions occurring after December 1995. Management has determined that ASB will continue to account for stock-based compensation pursuant to Accounting Principles Board Opinion No. 25, and, therefore, adoption of SFAS No. 123 will not have a material effect on ASB's consolidated financial condition or results of operations. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of Financial Assets, Servicing Rights, and Extinguishment of Liabilities", that provides accounting guidance on transfers of financial assets, servicing of financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an approach to accounting for transfers of financial assets that provides a means of dealing with more complex transactions in which the seller disposes of only a partial interest in the assets, retains rights or obligations, makes use of special purpose entities in the transaction, or otherwise has continuing involvement with the transferred assets. The new accounting method, the financial components approach, provides that the carrying amount of the financial assets transferred be allocated to components of the transaction based on their relative fair values. SFAS No. 125 provides criteria for determining whether control of assets has been relinquished and whether a sale has occurred. If the transfer does not qualify as a sale, it is accounted for as a secured borrowing. Transactions subject to the provisions of SFAS No. 125 include, among others, transfers involving repurchase agreements, securitizations of financial assets, loan participations, factoring arrangements, and transfers of receivables with recourse. ----- 16 18 An entity that undertakes an obligation to service financial assets recognizes either a servicing asset or liability for the servicing contract (unless related to a securitizations of assets, and all the securitized assets are retained and classified as held-to-maturity). A servicing asset or liability that is purchased or assumed is initially recognized at its fair value. Servicing assets and liabilities are amortized in proportion to and over the period of estimated net servicing income or net servicing loss and are subject to subsequent assessments for impairment based on fair value. SFAS No. 125 provides that a liability is removed from the balance sheet only if the debtor either pays the creditor and is relieved of its obligation for the liability or is legally released from being the primary obligor. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. Management does not believe that adoption of SFAS No. 125 will have a material adverse effect on ASB's consolidated financial position or results of operations. IMPACT OF INFLATION AND CHANGING PRICES - ------------------------------------------------------------------------------- The consolidated financial statements and notes thereto included herein have been prepared in accordance with generally accepted accounting principles, which require ASB to measure financial position and results of operations in terms of historical dollars without considering changes in the relative purchasing power of money over time because of inflation. In management's opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the rate of inflation. While interest rates are greatly influenced by changes in the inflation rate, they do not change at the same rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as on changes in monetary and fiscal policies. ----- 17 19 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND CONSOLIDATED FINANCIAL STATEMENTS =============================================================================== PAGE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 19 FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 20 CONSOLIDATED STATEMENTS OF EARNINGS 22 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 23 CONSOLIDATED STATEMENTS OF CASH FLOWS 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26 ----- 18 20 Report of Independent Certified Public Accountants -------------------------------------------------- Board of Directors ASB Financial Corp. and Subsidiary We have audited the accompanying consolidated statements of financial condition of ASB Financial Corp. and Subsidiary as of June 30, 1996 and 1995, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years ended June 30, 1996, 1995 and 1994. 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 generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of ASB Financial Corp. and Subsidiary as of June 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the years ended June 30, 1996, 1995 and 1994, in conformity with generally accepted accounting principles. As more fully discussed in Note A-2, the Corporation changed its method of accounting for certain investment and mortgage-backed securities as of July 1, 1994. Grant Thornton Cincinnati, Ohio July 12, 1996 (except for Note J, as to which the date is August 20, 1996) ----- 19 21 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, (In thousands, except share data) ASSETS 1996 1995 Cash and due from banks $ 411 $ 285 Interest-bearing deposits in other financial institutions 3,425 5,641 --------- --------- Cash and cash equivalents 3,836 5,926 Certificates of deposit in other financial institutions 6,702 9,301 Investment securities available for sale - at market 19,284 1,768 Investment securities - at amortized cost, approximate market value of $14,071 as of June 30, 1995 - 14,107 Mortgage-backed securities available for sale - at market 10,728 2,300 Mortgage-backed securities - at amortized cost, approximate market value of $7,788 as of June 30, 1995 - 7,835 Loans receivable - net 68,455 62,153 Office premises and equipment - at depreciated cost 940 1,001 Real estate acquired through foreclosure - net 663 525 Federal Home Loan Bank stock - at cost 667 611 Accrued interest receivable on loans 120 66 Accrued interest receivable on mortgage-backed securities 110 100 Accrued interest receivable on investments and interest-bearing deposits 479 434 Prepaid expenses and other assets 586 441 Prepaid federal income taxes - 33 Deferred federal income taxes 352 260 ---------- ---------- Total assets $112,922 $106,861 ======= =======
----- 20 22
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995 Deposits $ 83,395 $ 78,888 Advances from the Federal Home Loan Bank 2,413 442 Advances by borrowers for taxes and insurance 162 273 Accrued interest payable 115 155 Other liabilities 1,219 1,045 Accrued federal income taxes 5 - --------- -------- Total liabilities 87,309 80,803 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; 1,713,960 shares issued and outstanding at June 30, 1996 and 1995 - - Additional paid-in capital 16,496 16,437 Retained earnings, restricted 11,173 10,619 Shares acquired by stock benefit plans (2,180) (1,270) Unrealized gains on securities designated as available for sale, net of related tax effects 124 272 -------- -------- Total shareholders' equity 25,613 26,058 -------- -------- Total liabilities and shareholders' equity $112,922 $106,861 ======= =======
The accompanying notes are an integral part of these statements. ----- 21 23 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF EARNINGS For the year ended June 30, (In thousands, except share data)
1996 1995 1994 Interest income Loans $ 5,498 $ 4,865 $ 4,989 Mortgage-backed securities 750 532 554 Investment securities 1,426 577 572 Interest-bearing deposits and other 499 1,038 522 ------- ------- ------- Total interest income 8,173 7,012 6,637 Interest expense Deposits 4,267 3,870 3,287 Borrowings 43 23 20 ------- ------- ------- Total interest expense 4,310 3,893 3,307 ------- ------- ------- Net interest income 3,863 3,119 3,330 Provision for losses on loans -- 10 749 ------- ------- ------- Net interest income after provision for losses on loans 3,863 3,109 2,581 Other income Gain on sale of real estate acquired through foreclosure -- -- 95 Net proceeds from insurance on life of officer -- -- 211 Other operating 195 143 145 ------- ------- ------- Total other income 195 143 451 General, administrative and other expense Employee compensation and benefits 1,229 855 1,165 Occupancy and equipment 120 121 124 Federal deposit insurance premiums 188 190 185 Franchise taxes 209 134 108 Data processing 169 140 149 Other operating 458 286 313 ------- ------- ------- Total general, administrative and other expense 2,373 1,726 2,044 ------- ------- ------- Earnings before income taxes 1,685 1,526 988 Federal income taxes Current 661 587 391 Deferred (13) 127 (462) ------- ------- ------- Total federal income taxes 574 518 199 ------- ------- ------- NET EARNINGS $ 1,111 $ 1,008 $ 789 ======= ======= ======= EARNINGS PER SHARE $ .69 N/A N/A ======= ======= =======
The accompanying notes are an integral part of these statements. ----- 22 24 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended June 30, 1996, 1995 and 1994 (In thousands, except share data)
UNREALIZED GAINS SHARES GAINS(LOSSES)ON ADDITIONAL ACQUIRED SECURITIES COMMON PAID-IN RETAINED BY EMPLOYEE DESIGNATED AS STOCK CAPITAL EARNINGS BENEFIT PLANS AVAILABLE FOR SALE TOTAL Balance at July 1, 1993 $-- $ -- $ 8,951 $ -- $- $ 8,951 Net earnings for the year ended June 30, 1994 -- -- 789 -- -- 789 ---- -------- -------- -------- -------- -------- Balance at June 30, 1994 -- -- 9,740 -- -- 9,740 Designation of securities as available for sale upon adoption of SFAS No. 115 -- -- -- -- 224 224 Net proceeds from issuance of common stock -- 16,437 -- (1,270) -- 15,167 Net earnings for the year ended June 30, 1995 -- -- 1,008 -- -- 1,008 Dividends of $.075 per common share -- -- (129) -- -- (129) Unrealized gains on securities designated as available for sale, net of related tax effects -- -- -- -- 48 48 ---- -------- -------- -------- -------- -------- Balance at June 30, 1995 -- 16,437 10,619 (1,270) 272 26,058 Purchase of shares for Management Recognition Plan -- -- -- (1,062) -- (1,062) Amortization of expense related to stock benefit plans -- 59 -- 152 -- 211 Net earnings for the year ended June 30, 1996 -- -- 1,111 -- -- 1,111 Dividends of $.325 per common share -- -- (557) -- -- (557) Unrealized losses on securities designated as available for sale, net of related tax effects -- -- -- -- (148) (148) ---- -------- -------- -------- -------- -------- Balance at June 30, 1996 $-- $ 16,496 $ 11,173 $ (2,180) $ 124 $ 25,613 ==== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements. ----- 23 25 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended June 30, (In thousands)
1996 1995 1994 Cash flows from operating activities: Net earnings for the year $ 1,111 $ 1,008 $ 789 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Amortization of discounts and premiums on loans, investments and mortgage-backed securities - net 76 88 91 Amortization of deferred loan origination fees (52) (86) (59) Amortization of expense related to stock benefit plans 211 -- -- Depreciation and amortization 79 64 72 Provision for losses on loans -- 10 749 Gain on sale of real estate acquired through foreclosure -- -- (95) Federal Home Loan Bank stock dividends (44) (40) (30) Increase (decrease) in cash due to changes in: Accrued interest receivable on loans (54) 22 21 Accrued interest receivable on mortgage-backed securities (10) (4) (42) Accrued interest receivable on investments and interest-bearing deposits (45) (183) (50) Prepaid expenses and other assets (145) 115 (215) Accrued interest payable (40) 96 (7) Other liabilities 174 150 795 Federal income taxes Current 38 46 (99) Deferred (13) 127 (462) -------- -------- -------- Net cash provided by operating activities 1,286 1,413 1,458 Cash flows provided by (used in) investing activities: Proceeds from maturity of investment securities 9,121 300 1,250 Purchase of investment securities designated as available for sale (12,237) (1,004) -- Purchase of investment securities designated as held-to-maturity -- (5,786) (3,855) Purchase of mortgage-backed securities designated as available for sale (3,544) (2,312) -- Purchase of mortgage-backed securities designated as held-to-maturity -- (2,128) (3,780) Principal repayments on mortgage-backed securities 2,848 2,447 2,681 Purchase of loans (1,711) (3,279) (1,844) Loan principal repayments 18,715 13,716 18,925 Loan disbursements (23,885) (13,734) (16,530) Purchase of office premises and equipment (18) (171) (73) Proceeds from sale of real estate acquired through foreclosure -- -- 656 Redemption of Federal Home Loan Bank stock -- 68 -- Purchase of Federal Home Loan Bank stock (12) -- -- Increase (decrease) in certificates of deposit in other financial institutions - net 2,599 (977) (1,154) -------- -------- -------- Net cash used in investing activities (8,124) (12,860) (3,724) -------- -------- -------- Net cash used in operating and investing activities (subtotal carried forward) (6,838) (11,447) (2,266) -------- -------- --------
----- 24 26 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the year ended June 30,
1996 1995 1994 Net cash used in operating and investing activities (subtotal brought forward) $ (6,838) $(11,447) $(2,266) Cash flows provided by financing activities: Net increase (decrease) in deposit accounts 4,507 (3,626) 1,110 Net proceeds from the issuance of common stock - 16,437 - Shares acquired by the stock benefit plans (1,062) (1,270) - Proceeds from Federal Home Loan Bank advances 2,000 - - Repayment of Federal Home Loan Bank advances (29) (27) (26) Advances by borrowers for taxes and insurance (111) 19 (47) Dividends on common shares (557) (129) - -------- --------- ----- Net cash provided by financing activities 4,748 11,404 1,037 ------- ------- ------ Net decrease in cash and cash equivalents (2,090) (43) (1,229) Cash and cash equivalents at beginning of year 5,926 5,969 7,198 ------- -------- ------ Cash and cash equivalents at end of year $ 3,836 $ 5,926 $ 5,969 ======= ======== ====== Supplemental disclosure of cash flow information: Cash paid during the year for: Federal income taxes $ 552 $ 343 $ 665 ======== ========= ======= Interest on deposits and borrowings $ 4,350 $ 3,797 $ 3,314 ======= ======== ====== Supplemental disclosure of noncash investing activities: Transfers from loans to real estate acquired through foreclosure $ 138 $ 525 $ - ======== ========= ====== Transfers of investments and mortgage-backed securities to an available for sale classification $22,486 $ 350 $ - ====== ========= ====== Unrealized gain on securities designated as available for sale, net of related tax effects $ 148 $ 272 $ - ======== ========= =====
The accompanying notes are an integral part of these statements. ----- 25 27 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1996, 1995 and 1994 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES During fiscal 1994, the Board of Directors of American Savings Bank, fsb (the Savings Bank) adopted a plan of conversion (the Plan) whereby the Savings Bank would convert to the stock form of ownership (the Conversion), followed by the issuance of all of the Savings Bank's outstanding stock to a newly formed holding company, ASB Financial Corp. (the Corporation), and the issuance of common shares of the Corporation to subscribing members of the Savings Bank. The conversion to the stock form of ownership was completed on May 10, 1995, and resulted in the Corporation's sale of 1,713,960 common shares. Condensed financial statements of the Corporation as of and for the periods ended June 30, 1996 and 1995 are presented in Note L. Future references are made to either the Corporation or the Savings Bank as applicable. The Corporation is a savings and loan holding company whose activities are primarily limited to holding the stock of 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 amount 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 environmental factors, such as governmental monetary policy, that are outside of management's control. The consolidated financial information presented herein has been prepared in accordance with generally accepted accounting principles (GAAP) and general accounting practices within the financial services industry. In preparing consolidated financial statements in accordance with 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. 1. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of the Corporation and the Savings Bank. All significant intercompany balances and transactions have been eliminated. ----- 26 28 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2. Investment Securities and Mortgage-Backed Securities ---------------------------------------------------- Prior to July 1, 1994, investment securities and mortgage-backed securities were carried at cost, adjusted for amortization of premiums and accretion of discounts. The investments and mortgage-backed securities were carried at cost, as it was management's intent and the Savings Bank had the ability to hold the securities until maturity. Investment securities and mortgage-backed securities held for indefinite periods of time, or which management utilized as part of its asset/liability management strategy, or that would be sold in response to changes in interest rates, prepayment risk, or the perceived need to increase regulatory capital were classified as held for sale at the point of purchase and carried at the lower of cost or market. In May 1993, the Financial Accounting Standards Board (the FASB) issued 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 to be 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. The Savings Bank adopted SFAS No. 115 for the fiscal year beginning July 1, 1994. The initial effect of adoption was to increase retained earnings by approximately $224,000 on the date of adoption, representing the unrealized market value appreciation on securities designated as available for sale, net of applicable tax effects. In November 1995, the FASB issued a Special Report on Implementation of SFAS No. 115 (the Special Report), which provided for the reclassification of securities between the held-to-maturity, available for sale and trading portfolios during a forty-five day period, without calling into question management's prior intent with respect to such securities. Management elected to restructure the Corporation's securities portfolio pursuant to the Special Report, and transferred approximately $22.5 million of investment and mortgage-backed securities from the held-to-maturity portfolio to an available for sale portfolio. At June 30, 1996, the Corporation's shareholders' equity reflected a net unrealized gain of $124,000 in securities designated as available for sale. Realized gains and losses on sales of securities are recognized using the specific identification method. ----- 27 29 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3. 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. 4. 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. 5. Allowance for Losses on Loans ----------------------------- 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 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). In June 1993, the FASB adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". SFAS No. 114 was effective as to the Corporation in fiscal 1996, 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. ----- 28 30 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 5. Allowance for Losses on Loans (continued) ----------------------------------------- The Savings Bank adopted SFAS No. 114, as subsequently amended, on July 1, 1995, without material effect on consolidated financial condition or results of operations. 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 impaired multi-family and nonresidential loans, 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, collateral dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment under SFAS No. 114 at that time. At June 30, 1996, the Savings Bank had no loans that would be defined as impaired under SFAS No. 114. 6. 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. 7. 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. Real estate loss provisions are recorded if the properties' 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. ----- 29 31 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 8. Federal Income Taxes -------------------- The Corporation accounts for federal income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 established financial accounting and reporting standards for the effects of income taxes that result from the Corporation's activities within the current and previous years. It requires an asset and liability approach for financial accounting and reporting 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 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. 9. Salary Continuation Agreement ----------------------------- The Savings Bank has entered into salary continuation agreements with certain key members of management. These agreements provide for payments of up to fifteen years of compensation under certain circumstances. Compensation expense under the salary continuation plan totaled $8,000, $18,000 and $593,000 for the years ended June 30, 1996, 1995 and 1994. The significant difference in the amount of the fiscal 1994 expense relates to the fact that such agreements contained contingencies that significantly restricted the Savings Bank's responsibility to pay benefits under the agreements. In recognition of the potential inequities caused by such payment constraints, the Savings Bank is revising the agreements to remove the contractual contingencies. In addition, one of the Savings Bank's employees became partially vested under the initial agreement during fiscal 1994. ----- 30 32 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 10. Retirement Plans and Stock Option Plans --------------------------------------- In conjunction with the Conversion, the Corporation implemented an Employee Stock Ownership Plan (ESOP). The ESOP 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 $296,000 and $38,000 for the years ended June 30, 1996 and 1995, respectively. The Corporation also has a Management Recognition Plan (MRP). Subsequent to the offering of common shares by the Corporation, the MRP purchased 68,558 shares of the common stock in the open market. One-half of the shares available under the plan were granted to the Corporation's directors and executive officers. Common stock granted under the MRP vests ratably over a five year period, commencing in October 1995. A provision of $64,000 related to the MRP was charged to operations in fiscal 1996. Also, the Board of Directors adopted the ASB Financial Corp. 1995 Stock Option and Incentive Plan (the Stock Option Plan) that provided for the issuance of 171,396 shares of authorized, but unissued shares of common stock at fair market value at the date of grant. In November 1995, the Corporation granted options to purchase 145,684 shares at the fair value of $13.875 per share. The Stock Option Plan provides for one-fifth of the shares granted to be exercisable on each of the first five anniversaries of the date of the Plan, commencing in November 1995. As of June 30, 1996, none of the stock options granted were eligible for exercise. 11. Earnings Per Share ------------------ Primary earnings per share for fiscal 1996 is based upon the weighted-average shares outstanding during the period plus those stock options that are dilutive, less shares in the ESOP that are unallocated and not committed to be released. Weighted-average common shares deemed outstanding during fiscal 1996 totaled 1,602,200 shares. The provisions of Accounting Principles Board Opinion No. 15 "Earnings Per Share" are not applicable to the fiscal years ended June 30, 1995 and 1994, as the Corporation completed its conversion from mutual to stock form in April 1995. 12. Investment in Subsidiary ------------------------ The Savings Bank has a wholly-owned subsidiary, A.S.L. Services, Inc., which was incorporated for the sole purpose of owning stock in the Savings Bank's data processor. The subsidiary's assets at June 30, 1996 and 1995 are limited to a $15,000 investment in such stock. As a result, the subsidiary has not been consolidated based on materiality. ----- 31 33 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 13. 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, 1996: CASH AND CASH EQUIVALENTS: The carrying amounts presented in the consolidated statement of financial condition for cash and cash equivalents are deemed to approximate fair value. CERTIFICATES OF DEPOSIT IN OTHER FINANCIAL INSTITUTIONS: The carrying amounts presented in the consolidated statement of financial condition 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. FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in the consolidated statement of financial condition is deemed to approximate fair value. ----- 32 34 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 13. Fair Value of Financial Instruments (continued) ----------------------------------------------- DEPOSITS: The fair value of NOW accounts, passbook accounts, money market demand and escrow deposits is 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 FEDERAL HOME LOAN BANK: The fair value of these advances is estimated using the rates currently offered for similar advances of 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, 1996, the difference between the stated and fair value 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, 1996, are as follows:
CARRYING FAIR VALUE VALUE (In thousands) Financial assets Cash and cash equivalents $ 3,836 $ 3,836 Certificates of deposit in other financial institutions 6,702 6,702 Investment securities 19,284 19,284 Mortgage-backed securities 10,728 10,728 Loans receivable 68,455 67,977 Stock in Federal Home Loan Bank 667 667 ---------- ---------- $109,672 $109,194 ======= ======= Financial liabilities Deposits $ 83,395 $ 80,751 Advances from the Federal Home Loan Bank 2,413 2,406 Escrow deposits 162 162 ---------- ---------- $ 85,970 $ 83,319 ======== ========
14. 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. ----- 33 35 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 15. Reclassifications ----------------- Certain prior year amounts have been reclassified to conform to the 1996 consolidated financial statement presentation. NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES Amortized cost and approximate market values of investment securities at June 30, 1996 and 1995 (including those designated as held-to-maturity) are summarized as follows:
1996 GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE AVAILABLE FOR SALE: U.S. Government agency obligations $19,084 $ 14 $327 $18,771 FHLMC stock 24 489 - 513 --------- --- -- -------- $19,108 $503 $327 $19,284 ====== === === ====== 1995 GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE HELD TO MATURITY: U.S. Government agency obligations $14,107 $ 47 $ 83 $14,071 ====== ==== ==== ====== AVAILABLE FOR SALE: U.S. Government agency obligations $1,354 $ 9 $ 6 $1,357 FHLMC stock 24 387 - 411 ------- --- -- ------ $1,378 $396 $ 6 $1,768 ===== === ===== =====
----- 34 36 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued) The amortized cost and market value of U.S. Government agency obligations by contractual term to maturity at June 30 are shown below:
1996 1995 AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE (In thousands) Due in three years or less $ 2,320 $ 2,303 $ 5,126 $ 5,122 Due after three years through five years 3,238 3,232 4,146 4,121 Due after five years 13,526 13,236 6,189 6,185 ------ ------ ------- ------- $19,084 $18,771 $15,461 $15,428 ====== ====== ====== ======
The amortized cost, gross unrealized gains, gross unrealized losses and market values of mortgage-backed securities at June 30, 1996 and 1995 (including those designated as held-to-maturity) are summarized as follows:
1996 GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE AVAILABLE FOR SALE: (In thousands) Federal Home Loan Mortgage Corporation participation certificates $ 4,119 $ 38 $ 57 $ 4,100 Government National Mortgage Association participation certificates 4,463 81 54 4,490 Federal National Mortgage Association participation certificates 2,135 30 27 2,138 ------- ---- ---- ------- Total mortgage-backed securities $10,717 $149 $138 $10,728 ====== === === ======
----- 35 37 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
1995 GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE HELD TO MATURITY: (In thousands) Federal Home Loan Mortgage Corporation participation certificates $ 4,227 $ 27 $114 $ 4,140 Government National Mortgage Association participation certificates 2,089 36 15 2,110 Federal National Mortgage Association participation certificates 1,519 21 2 1,538 ------- ---- ----- ------- Total mortgage-backed securities held-to-maturity 7,835 84 131 7,788 AVAILABLE FOR SALE: Government National Mortgage Association participation certificates 2,276 24 - 2,300 ------- ---- -- ------- Total mortgage-backed securities $10,111 $108 $131 $10,088 ====== === === ======
The amortized cost of mortgage-backed securities, by contractual terms to maturity, are shown below. Based on materiality, contractual maturities of mortgage-backed securities designated as available for sale have been combined with those designated as held-to-maturity. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties.
JUNE 30, 1996 1995 Due within three years $ 1,756 $ 2,103 Due in three to five years 1,115 455 Due in five to ten years 1,980 668 Due in ten to twenty years 2,041 1,986 Due after twenty years 3,825 4,899 ------- ------- $10,717 $10,111 ====== ======
----- 36 38 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE C - LOANS RECEIVABLE The composition of the loan portfolio at June 30 is as follows:
1996 1995 (In thousands) Residential real estate One- to four-family $48,302 $45,929 Multi-family 8,265 8,272 Construction 2,318 1,064 Nonresidential real estate and land 3,401 4,048 Consumer and other 8,780 4,991 ------- ------- 71,066 64,304 Less: Undisbursed portion of loans in process 1,529 1,065 Deferred loan origination fees 198 193 Allowance for loan losses 884 893 -------- -------- $68,455 $62,153 ====== ======
The Savings Bank's lending efforts have historically focused on one- to four-family and multi-family residential real estate loans, which comprise approximately $56.3 million, or 82%, of the total loan portfolio at June 30, 1996, and $53.1 million, or 85%, of the total loan portfolio at June 30, 1995. 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 is of the belief 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 has made loans to some of its directors, officers and employees. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. The aggregate dollar amount of loans outstanding to directors, officers and employees totaled approximately $353,000 and $263,000 at June 30, 1996 and 1995. ----- 37 39 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE D - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is summarized as follows for the years ended June 30:
1996 1995 1994 (In thousands) Balance at beginning of year $893 $1,115 $ 457 Provision for loan losses - 10 749 Charge-offs of loans (9) (264) (251) Recoveries - 32 160 -- ------- ------ Balance at end of year $884 $ 893 $1,115 === ====== =====
As of June 30, 1996, 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 and nonaccrual loans for which interest has been reduced totaled approximately $1.2 million, $1.9 million and $2.9 million at June 30, 1996, 1995 and 1994, respectively. During the years ended June 30, 1996, 1995 and 1994, interest income of approximately $4,000, $38,000 and $81,000, respectively, would have been recognized had nonperforming and nonaccrual loans been performing in accordance with contractual terms. NOTE E - OFFICE PREMISES AND EQUIPMENT Office premises and equipment at June 30 are comprised of the following:
1996 1995 (In thousands) Land and improvements $ 325 $ 288 Office buildings and improvements 1,143 1,152 Furniture, fixtures and equipment 421 431 ------ ------ 1,889 1,871 Less accumulated depreciation and amortization 949 870 ------ ------ $ 940 $1,001 ====== =====
----- 38 40 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE F - DEPOSITS Deposits consist of the following major classifications at June 30:
DEPOSIT TYPE AND WEIGHTED- AVERAGE INTEREST RATE 1996 1995 (In thousands) NOW accounts 1996 - 2.36% $ 3,448 1995 - 2.39% $ 2,471 Passbook 1996 - 2.94% 7,225 1995 - 2.94% 7,278 Money market deposit accounts 1996 - 3.49% 9,001 1995 - 3.49% 8,319 ------- ------- Total demand, transaction and passbook deposits 19,674 18,068 Certificates of deposit Original maturities of: Less than 12 months 1996 - 5.10% 7,517 1995 - 5.82% 9,630 12 months to 24 months 1996 - 5.88% 21,371 1995 - 5.69% 17,700 30 months to 36 months 1996 - 5.95% 16,006 1995 - 5.66% 17,385 More than 36 months 1996 - 5.69% 2,448 1995 - 6.00% 2,525 Individual retirement accounts 1996 - 6.43% 13,384 1995 - 6.16% 12,094 Jumbo accounts 1996 - 5.52% 2,995 1995 - 5.57% 1,486 ------- ------- Total certificates of deposit 63,721 60,820 ------- ------- Total deposit accounts $83,395 $78,888 ======= =======
----- 39 41 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE F - DEPOSITS (continued) Interest expense on deposits for the year ended June 30 is summarized as follows:
1996 1995 1994 (In thousands) Passbook $ 212 $ 295 $ 247 NOW and money market deposit accounts 421 467 577 Certificates of deposit 3,634 3,108 2,463 ----- ----- ----- $4,267 $3,870 $3,287 ===== ===== =====
Maturities of outstanding certificates of deposit at June 30 are summarized as follows:
1996 1995 (In thousands) Less than one year $44,345 $32,815 One to three years 15,813 24,932 Over three years 3,563 3,073 ------- ------- $63,721 $60,820 ======= =======
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank, collateralized at June 30, 1996 by pledges of certain residential mortgage loans totaling $3.6 million, and the Savings Bank's investment in Federal Home Loan Bank stock, are summarized as follows:
MATURING YEAR ENDING INTEREST RATE JUNE 30, 1996 1995 (In thousands) 5.25% 1997 $1,000 $- 5.40% 1997 1,000 - 3.16% 2008 413 442 ------ --- $2,413 $442 ===== === Weighted-average interest rate 4.95% 3.16% ==== ====
----- 40 42 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE H - FEDERAL INCOME TAXES Federal income taxes differ from the amounts computed at the statutory corporate tax rate as follows:
JUNE 30, 1996 1995 1994 (In thousands) Federal income taxes computed at statutory rate $ 573 $ 519 $ 336 Increase (decrease) in taxes resulting from: Proceeds from life insurance not subject to tax -- -- (136) Other 1 (1) (1) ----- ----- ----- Federal income tax provision per consolidated statements of earnings $ 574 $ 518 $ 199 ===== ===== =====
The composition of the Corporation's net deferred tax asset at June 30 is as follows:
1996 1995 (In thousands) Taxes (payable) refundable on temporary differences at estimated corporate tax rate: Deferred tax assets: General loan loss allowance $ 301 $ 337 Deferred loan origination fees -- 25 Deferred compensation 471 416 Employee stock benefit plans 41 -- ----- ----- Total deferred tax assets 813 778 Deferred tax liabilities: Percentage of earnings bad debt deduction (265) (262) Book/tax depreciation (25) (21) Federal Home Loan Bank stock dividends (108) (93) Unrealized gain on securities designated as available for sale (63) (142) ----- ----- Total deferred tax liabilities (461) (518) ----- ----- Net deferred tax asset $ 352 $ 260 ===== =====
----- 41 43 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE H - FEDERAL INCOME TAXES (continued) The Savings Bank is 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 qualify 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, 1996 include approximately $2.7 million for which federal income taxes have not been provided. The approximate amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $660,000 at June 30, 1996. See Note J for additional information regarding subsequent period developments related to the percentage of earnings bad debt deduction. 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 their 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 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, 1996, the Savings Bank had outstanding commitments of approximately $138,000 to originate loans. In addition, the Savings Bank was obligated under unused lines of credit totaling $1.3 million. In the opinion of management all loan commitments equaled or exceeded prevalent market interest rates as of June 30, 1996, and will be funded from normal cash flow from operations. ----- 42 44 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE J - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL The Savings Bank is subject to minimum regulatory capital requirements promulgated by the Office of Thrift Supervision (OTS). Such minimum capital standards generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described 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 such as capitalized mortgage servicing rights) equal to 3.0% of adjusted total assets. A recent OTS proposal, if adopted in present form, would increase the core capital requirement to a range of 4% - 5% of adjusted total assets for substantially all savings institutions. Management anticipates no material change to the Savings Bank's present excess regulatory capital position as a result of this change in the regulatory capital requirement. 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-weighted factor of 50%. As of June 30, 1996, the Savings Bank's regulatory capital exceeded all minimum regulatory capital requirements as shown in the following table: REGULATORY CAPITAL
TANGIBLE CORE RISK-BASED CAPITAL PERCENT CAPITAL PERCENT CAPITAL PERCENT (In thousands) Capital under generally accepted accounting principles $17,578 $17,578 $17,578 Unrealized gains on securities designated as available for sale (176) (176) (176) Additional capital items General valuation allowances - limited - - 598 ------- ------- -------- Regulatory capital computed 17,402 16.3 17,402 16.3 18,000 37.6 Minimum capital requirement 1,604 1.5 3,209 3.0 3,833 8.0 ------- ----- ------- ----- ------- ----- Regulatory capital - excess $15,798 14.8 $14,193 13.3 $14,617 29.6 ====== ==== ====== ==== ====== ====
----- 43 45 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE J - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued) The deposit accounts of the Savings Bank and of other savings associations are insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The reserves of the SAIF are below the level required by law, because a significant portion of the assessments paid into the fund are used to pay the cost of prior thrift failures. The deposit accounts of commercial banks are insured by the FDIC in the Bank Insurance Fund ("BIF"), except to the extent such banks have acquired SAIF deposits. The reserves of the BIF met the level required by law in May 1995. As a result of the respective reserve levels of the funds, deposit insurance assessments paid by healthy savings associations exceeded those paid by healthy commercial banks by approximately $.19 per $100 in deposits in fiscal 1996. In fiscal 1997, no BIF assessments will be required for healthy commercial banks except for a $2,000 minimum fee. A continuation of this premium disparity could have a negative competitive impact on the Savings Bank and other institutions with SAIF deposits. Congress is considering legislation to recapitalize the SAIF and eliminate the significant premium disparity. Currently, that recapitalization plan provides for a special assessment ranging from approximately $.69 to $.85 per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to the level required by law. In addition, the cost of prior thrift failures would be shared by both the SAIF and the BIF. This would likely increase BIF assessments by $.02 to $.025 per $100 in deposits. SAIF assessments would initially be set at the same level as BIF assessments and could never be reduced below the level for BIF assessments. These projected assessment levels may change if commercial banks holding SAIF deposits are provided some relief from the special assessment or are allowed to transfer SAIF deposits to the BIF. A component of the recapitalization plan provides for the merger of the SAIF and BIF on January 1, 1998. However, the SAIF recapitalization legislation currently provides for an elimination of the thrift charter or of the separate federal regulation of thrifts prior to the merger of the deposit insurance funds. As a result, the Savings Bank would be regulated as a bank under federal laws which would subject it to the more restrictive activity limits imposed on national banks. Under separate legislation recently enacted into law, the Savings Bank is required to recapture as taxable income approximately $780,000 of its bad debt reserve, which represents the post-1987 additions to the reserve, and will be unable to utilize the percentage of earnings method to compute its reserve in the future. The Savings Bank has provided deferred taxes for this amount and will be permitted by such legislation to amortize the recapture of its bad debt reserve over six years. The Savings Bank had $83.9 million in deposits at March 31, 1995. If the special assessment level is finalized at the upper range of $.85 per $100 in deposits, the Savings Bank will pay an assessment of $713,000. This assessment will be tax deductible, but it will reduce earnings and capital for the quarter in which it is recorded. ----- 44 46 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE J - SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (continued) No assurances can be given that the SAIF recapitalization plan will be enacted into law or in what form it may be enacted. In addition, the Savings Bank can give no assurances that the disparity between BIF and SAIF assessments will be eliminated. NOTE K - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM During fiscal 1994, the Savings Bank's Board of Directors adopted a plan of conversion and reorganization (the Plan) whereby the Savings Bank would convert to the stock form of ownership, followed by the issuance of all of the Savings Bank's outstanding stock to a newly formed holding company, ASB Financial Corp. Pursuant to the Plan, the Savings Bank offered for sale up to 1.7 million common shares to its depositors and members of the community. The stock offering was completed on May 10, 1995, culminating in the sale of 1,713,960 common shares and the receipt of $15.2 million of net equity capital. At the completion of the conversion to stock form, the Savings Bank established a liquidation account in an amount equal to retained earnings contained in the final offering circular. The liquidation account will be maintained for the benefit of eligible savings account holders who maintain deposit accounts in the Savings Bank after conversion. In the event of a complete liquidation (and only in such event), each eligible savings account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted balance of deposit accounts held, before any liquidation distribution may be made with respect to common stock. Except for the repurchase of stock and payment of dividends by the Savings Bank, the existence of the liquidation account will not restrict the use or application of such retained earnings. The Savings Bank may not declare, pay a cash dividend on, or repurchase any of its common stock, if the effect thereof would cause retained earnings to be reduced below either the amount required for the liquidation account or the regulatory capital requirements for SAIF insured institutions. ----- 45 47 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE L - CONDENSED FINANCIAL STATEMENTS OF ASB FINANCIAL CORP. The following condensed financial statements summarize the financial position of ASB Financial Corp. as of June 30, 1996 and 1995, and the results of its operations for the fiscal year ended June 30, 1996, and the two month period ended June 30, 1995. ASB FINANCIAL CORP. STATEMENTS OF FINANCIAL CONDITION June 30, (In thousands)
ASSETS 1996 1995 Interest-bearing deposits in American Savings Bank $ 1,075 $ 1,193 Interest-bearing deposits in other financial institutions 2,500 4,500 Investment securities 3,420 1,500 Loan receivable from ESOP 1,118 1,270 Investment in American Savings Bank, fsb 17,578 17,637 Prepaid expenses and other 93 87 --------- --------- Total assets $25,784 $26,187 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Dividends payable $ 171 $ 129 Shareholders' equity Common stock and additional paid-in capital 24,843 25,694 Retained earnings 646 92 Unrealized gain on securities designated as available for sale, net 124 272 -------- -------- Total shareholders' equity 25,613 26,058 ------ ------ Total liabilities and shareholders' equity $25,784 $26,187 ====== ======
ASB FINANCIAL CORP. STATEMENTS OF EARNINGS Period ended June 30, (In thousands)
1996 1995 Revenue Interest income $ 455 $ 87 Equity in earnings of American Savings Bank 887 134 ------ --- Total revenue 1,342 221 General and administrative expenses (122) - ------ - Earnings before income taxes 1,220 221 Federal income taxes (109) - ------ - NET EARNINGS $1,111 $221 ===== ===
----- 46 48 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1996, 1995 and 1994 NOTE L - CONDENSED FINANCIAL STATEMENTS OF ASB FINANCIAL CORP. (continued) ASB FINANCIAL CORP. STATEMENTS OF CASH FLOWS Period ended June 30, (In thousands)
1996 1995 Cash provided by (used in) operating activities: Net earnings for the period $1,111 $ 221 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities Undistributed earnings of consolidated subsidiary (887) (134) Increase (decrease) in cash due to changes in: Prepaid expenses and other assets 20 (87) Other liabilities 43 129 ------- -------- Net cash provided by operating activities 287 129 Cash flows provided by (used in) investing activities: Proceeds from repayment of loan 152 - Proceeds from maturities of investment securities 1,500 - Purchase of investment securities (3,500) (1,500) Purchase of common shares of American Savings Bank - (6,704) Issuance of loan to ESOP - (1,270) ----- ------- Net cash used in investing activities (1,848) (9,474) Cash flows provided by (used in) financing activities: Proceeds from issuance of common shares - 15,167 Payment of dividends on common stock (557) (129) ------ -------- Net cash provided by (used in) financing activities (557) 15,038 ------ ------ Net increase (decrease) in cash and cash equivalents (2,118) 5,693 Cash and cash equivalents at beginning of year 5,693 - ----- ------ Cash and cash equivalents at end of year $3,575 $ 5,693 ===== =======
----- 47 49 ASB FINANCIAL CORP. DIRECTORS AND OFFICERS ================================================================================ Gerald R. Jenkins Director and President President and Managing Officer American Savings Bank, fsb Robert M. Smith Director and Vice President Executive Vice President and Chief Financial Officer American Savings Bank, fsb William J. Burke Director Director and Chief Executive Officer OSCO Industries, Inc. Lee O. Fitch Director Shareholder and Director Miller, Searl & Fitch, L.P.A. Victor W. Morgan Director Morgan Brothers, Inc. Retired Louis M. Schoettle, M.D. Director Physician Retired M. Kathryn Scott Secretary Secretary American Savings Bank, fsb Carlisa R. Baker Treasurer Treasurer American Savings Bank, fsb AMERICAN SAVINGS BANK, FSB DIRECTORS AND OFFICERS =============================================================================== Gerald R. Jenkins Director and President Robert M. Smith Director and Executive Vice President William J. Burke Director Lee O. Fitch Director and Attorney Victor W. Morgan Director Louis M. Schoettle, M.D. Director Jack A. Stephenson Vice President M. Kathryn Scott Secretary Carlisa R. Baker Treasurer ----- 48 50 SHAREHOLDER SERVICES =============================================================================== The Fifth Third Bank serves as transfer agent and dividend disbursing agent for ASB's shares. Communications regarding change of address, transfer of shares, lost certificates and dividends should be sent to: The Fifth Third Bank Stock Transfer Department Mail Drop 1090F5 38 Fountain Square Plaza Cincinnati, Ohio 45263 (513) 579-5320 (800) 837-2755 ANNUAL MEETING =============================================================================== The Annual Meeting of Shareholders of ASB Financial Corp. will be held on October 23, 1996, at 11:00 a.m., Eastern Time, at Holiday Inn, U.S. Route 23 North, Portsmouth, Ohio. Shareholders are cordially invited to attend. ANNUAL REPORT ON FORM 10-KSB =============================================================================== A copy of ASB's Annual Report on Form 10-KSB, 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: Gerald R. Jenkins, President ----- 49 EX-20 5 EXHIBIT 20 1 Exhibit 20 ASB FINANCIAL CORP. 503 CHILLICOTHE STREET PORTSMOUTH, OHIO 45662 (614) 354-3177 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS Notice is hereby given that the 1996 Annual Meeting of Shareholders of ASB Financial Corp. ("ASB") will be held at the Holiday Inn, U.S. Route 23 North, Portsmouth, Ohio 45662, on October 23, 1996 at 11:00 a.m., local time (the "Annual Meeting"), for the following purposes, all of which are more completely set forth in the accompanying Proxy Statement: 1. To elect three directors of ASB for terms expiring in 1998; 2. To ratify the selection of Grant Thornton LLP as the auditors of ASB for the current fiscal year; and 3. To transact such other business as may properly come before the Annual Meeting or any adjournments thereof. Only shareholders of ASB of record at the close of business on September 6, 1996, will be entitled to receive notice of and to vote at the Annual Meeting and at any adjournments thereof. Whether or not you expect to attend the Annual Meeting, we urge you to consider the accompanying Proxy Statement carefully and to SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF A QUORUM MAY BE ASSURED. The giving of a Proxy does not affect your right to vote in person in the event you attend the Annual Meeting. By Order of the Board of Directors Portsmouth, Ohio Gerald R. Jenkins, President September 20, 1996 2 ASB FINANCIAL CORP. 503 CHILLICOTHE STREET PORTSMOUTH, OHIO 45662 (614) 354-3177 PROXY STATEMENT PROXIES The enclosed Proxy is being solicited by the Board of Directors of ASB Financial Corp. ("ASB") for use at the 1996 Annual Meeting of Shareholders of ASB to be held at the Holiday Inn, U.S. Route 23 North, Portsmouth, Ohio 45662, on October 23, 1996, at 11:00 a.m., local time, and at any adjournments thereof (the "Annual Meeting"). Without affecting any vote previously taken, the Proxy may be revoked by a shareholder executing a later dated proxy which is received by ASB before the Proxy is exercised or by giving notice of revocation to ASB in writing or in open meeting before the Proxy is exercised. Attendance at the Annual Meeting will not, of itself, revoke a Proxy. Each properly executed Proxy received prior to the Annual Meeting and not revoked will be voted as specified thereon or, in the absence of specific instructions to the contrary, will be voted: FOR the reelection of Messrs. Victor W. Morgan and Robert M. Smith and Dr. Louis M. Schoettle as directors of ASB for terms expiring in 1998; and FOR the ratification of the selection of Grant Thornton LLP ("Grant Thornton") as the auditors of ASB for the current fiscal year. Proxies may be solicited by the directors, officers and other employees of ASB and American Savings Bank, fsb ("American"), in person or by telephone, telegraph or mail only for use at the Annual Meeting. Such Proxies will not be used for any other meeting. The cost of soliciting Proxies will be borne by ASB. Only shareholders of record as of the close of business on September 6, 1996 (the "Voting Record Date"), are entitled to vote at the Annual Meeting. Each such shareholder will be entitled to cast one vote for each share owned. ASB's records disclose that, as of the Voting Record Date, there were 1,713,960 votes entitled to be cast at the Annual Meeting. This Proxy Statement is first being mailed to shareholders of ASB on or about September 20, 1996. VOTE REQUIRED ELECTION OF DIRECTORS Under Ohio law and ASB's Code of Regulations (the "Regulations"), the three nominees receiving the greatest number of votes will be elected as directors. Shares as to which the authority to vote is withheld are not counted toward the election of directors or toward the election of the individual nominees specified on the Proxy. If the accompanying Proxy is signed and dated by the shareholder but no vote is specified thereon, the shares held by such shareholder will be voted FOR the reelection of the three nominees. RATIFICATION OF SELECTION OF AUDITORS The affirmative vote of the holders of a majority of the shares represented in person or by proxy at the Annual Meeting is necessary to ratify the selection of Grant Thornton as the auditors of ASB for the current fiscal year. The effect of an abstention is the same as a vote against ratification. If the accompanying Proxy is signed and dated by the shareholder but no vote is specified thereon, the shares held by such shareholder will be voted FOR the ratification of the selection of Grant Thornton as auditors. -1- 3 VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information with respect to the only person known to ASB to own beneficially more than five percent of the outstanding common shares of ASB as of August 31, 1996:
Amount and Nature of Percent of Name and Address Beneficial Ownership Shares Outstanding - ---------------- -------------------- ------------------ First Bankers Trust, N.A. 126,960 (1) 7.41% 1201 Broadway Quincy, Illinois 62301 - --------------------------- (1) Consists of the shares held by First Bankers Trust, N.A. as the Trustee for the ASB Financial Corp. Employee Stock Ownership Plan (the "ESOP").
The following table sets forth certain information with respect to the number of common shares of ASB beneficially owned by each director of ASB and by all directors and executive officers of ASB as a group as of August 31, 1996:
Amount and Nature of Beneficial Ownership ------------------------------------------ Sole Voting and Shared Voting and Percent of Name and Address(1) Investment Power Investment Power Shares Outstanding - ------------------- ---------------- ---------------- ------------------ William J. Burke 14,408 16,361 1.80% Lee O. Fitch 89,569(2) 7,265 5.65 Gerald R. Jenkins 12,708 18,719 1.83 Victor W. Morgan 15,372 15,269 1.79 Louis M. Schoettle, M.D. - 32,215 1.88 Robert M. Smith 6,879 14,944 1.27 All directors and executive officers of ASB as a group (9 persons) 141,314 118,899 15.12% - ----------------------------- (1) Each of the persons listed in this table may be contacted at the address of ASB. (2) This number includes 68,588 shares held by the American Savings Bank, fsb Management Recognition Plan and Trust Agreement (the "MRP"), with respect to which Mr. Fitch has sole voting power as Trustee of the MRP.
-2- 4 BOARD OF DIRECTORS ELECTION OF DIRECTORS The Regulations provide for a Board of Directors consisting of six persons. Each of the directors of ASB is also a director of American. In accordance with Section 2.03 of the Regulations, nominees for election as directors may be proposed only by the directors or by a shareholder entitled to vote for directors if such shareholder has submitted a written nomination to the Secretary of ASB by the later of the August 15th immediately preceding the annual meeting of shareholders or the sixtieth day before the first anniversary of the most recent annual meeting of shareholders held for the election of directors. Each such written nomination must state the name, age, business or residence address of the nominee, the principal occupation or employment of the nominee, the number of common shares of ASB owned either beneficially or of record by each such nominee and the length of time such shares have been so owned. The Board of Directors proposes the reelection of the following persons to terms which will expire in 1998:
Director Director of ASB of American Name Age(1) Position(s) Held Since (2) Since ---- ------ ---------------- --------- ---------- Victor W. Morgan 69 Director 1995 1978 Louis M. Schoettle, M.D. 70 Director 1995 1975 Robert M. Smith 50 Director and Vice President 1995 1985 - ----------------------------- (1) As of September 15, 1996. (2) Each nominee became a director of ASB in connection with the conversion of American from mutual to stock form (the "Conversion") and the formation of ASB as the holding company for American.
If any nominee is unable to stand for election, any Proxies granting authority to vote for such nominee will be voted for such substitute as the Board of Directors recommends. The following directors will continue to serve after the Annual Meeting for the terms indicated:
Director Director of of ASB American Name Age(1) Position(s) Held Since (2) Since Term Expires - ---- ------ ---------------- --------- ---------- ------------ William J. Burke 55 Director 1995 1977 1997 Lee O. Fitch 80 Director 1995 1979 1997 Gerald R. Jenkins 61 Director and President 1995 1968 1997 - ----------------------------- (1) As of September 15, 1996. (2) Each director became a director of ASB in connection with the Conversion.
MR. BURKE is a director, the chief executive officer and the marketing manager of OSCO Industries, Inc., a manufacturing company which has its principal place of business in Portsmouth, Ohio. He has been employed by OSCO Industries, Inc., since 1977. -3- 5 MR. FITCH is a shareholder and director of the law firm of Miller, Searl and Fitch, L.P.A. He has practiced law with Miller, Searl and Fitch since 1950. MR. JENKINS, the President and Chief Executive Officer of ASB and American, has been employed by American since 1967. Prior to becoming President in 1983, he held various positions at American including Secretary and Vice President. MR. MORGAN retired in 1990 after over 40 years with Morgan Brothers, Inc., a retail jewelry business in Portsmouth. At the time of his retirement, he was President of Morgan Brothers, Inc. DR. SCHOETTLE is a physician. He retired from active practice in 1994 after over 35 years of practicing medicine in Portsmouth. Dr. Schoettle also owns and operates a 1,100 acre farm. MR. SMITH has been employed by American since 1966 and is currently the Executive Vice President and chief financial officer of American, positions he has held since 1988. He also currently serves ASB as Vice President. Prior positions held by Mr. Smith with American include Secretary and Treasurer. MEETINGS OF DIRECTORS The Board of Directors of ASB met 10 times for regularly scheduled and special meetings. Each director attended at least 75% of the aggregate of such meetings and all committee meetings of which such director was a member. Each director of ASB is also a director of American. The Board of Directors of American met 13 times for regularly scheduled and special meetings during the fiscal year ended June 30, 1996. Each director attended at least 75% of the aggregate of such meetings and all meetings of committees of the Board of Directors of which such director was a member. COMMITTEES OF DIRECTORS The Board of Directors of ASB has an Audit Committee and a Stock Option Committee. The Board of Directors of ASB does not have a Nominating Committee. The Audit Committee recommends audit firms to the full Board of Directors and reviews and approves the annual independent audit report. The members of the Audit Committee are Messrs. Burke and Morgan and Dr. Schoettle. The Audit Committee met once during the fiscal year ended June 30, 1996. The Stock Option Committee is responsible for administering the Stock Option Plan, including interpreting the Stock Option Plan and awarding options pursuant to its terms. Its members are Messrs. Burke, Fitch and Morgan. The Stock Option Committee met once during the fiscal year ended June 30, 1996. The Board of Directors of American has an Executive Committee, an Audit Committee, a Finance Committee and a MRP Committee. The members of the Executive Committee are Messrs. Burke, Fitch, Jenkins and Smith. The Executive Committee serves as a loan approval committee and is authorized to act on behalf of the Board of Directors between regular meetings of the Board of Directors. The Executive Committee met ten times during the fiscal year ended June 30, 1996. The Audit Committee is responsible for reviewing the annual independent audit report of ASB. The members of the Audit Committee are Messrs. Burke and Morgan and Dr. Schoettle. The Audit Committee met once during the 1996 fiscal year. The Finance Committee is comprised of Messrs. Fitch, Jenkins and Morgan. The function of the Finance Committee is to determine compensation for American's executive officers and to make recommendations to the Board of Directors regarding employee compensation matters. The Finance Committee met once during the fiscal year ended June 30, 1996. -4- 6 The MRP Committee administers the MRP. Such committee consists of Messrs. Burke, Fitch and Morgan. The MRP Committee met once during the 1996 fiscal year. EXECUTIVE OFFICERS In addition to Mr. Jenkins, the President of both ASB and American, and Mr. Smith, the Vice President of ASB and the Executive Vice President of American, the following persons are executive officers of ASB and American and hold the designated positions:
Name Age(1) Position(s) Held - ---- ------- ---------------- Carlisa R. Baker 34 Treasurer of American and ASB M. Kathryn Scott 45 Secretary of American and ASB Jack A. Stephenson 44 Vice President/Lending of American - ---------------------------------- (1) As of September 15, 1996.
MS. BAKER has been employed by American since 1979. In 1993, she was promoted to her present position as Treasurer. In that capacity, she is responsible for American's accounting department. Ms. Baker has served as the Treasurer of ASB since November 1995. MS. SCOTT has been employed by American since 1984. She is responsible for American's deposit activities. She has also served as American's corporate Secretary since 1993 and ASB's corporate Secretary since January 1995. MR. STEPHENSON has been employed by American since 1987. Since 1988 he has served as American's Vice President responsible for lending activities. COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS EXECUTIVE COMPENSATION The following table sets forth the compensation paid to Gerald R. Jenkins, the President of ASB and American, for the fiscal years ended June 30, 1996, 1995 and 1994. No other executive officer of ASB earned salary and bonus in excess of $100,000 during such periods.
Summary Compensation Table -------------------------- Annual Compensation Long Term Compensation All Other Compensation(1) ------------------------------------------------------------------------------------------------------------------- Awards ---------------------------------------- Name and Principal Year Salary ($) Bonus ($) Restricted Securities Position Stock Awards Underlying ($) Options/SARs (#) ------------------------------------------------------------------------------------------------------------------- Gerald R. Jenkins 1996 $94,400 $ 9,210 - 42,849 (2) $15,900 President 1995 $89,900 $13,200 - - $13,200 1994 $87,700 $13,200 - - $17,455 -------------------------- (Footnotes on next page)
-5- 7 (1) Does not include amounts attributable to miscellaneous benefits received by Mr. Jenkins, the cost of which was less than 10% of Mr. Jenkins' annual salary and bonus. The amounts reported consist of directors fees and a contribution to the account of Mr. Jenkins under American's Simplified Employee Pension Plan. (2) Represents the number of common shares of ASB underlying options granted to Mr. Jenkins pursuant to the Stock Option Plan. American maintains a non-qualified retirement plan (the "Salary Plan") for the benefit of its five executive officers. The Plan provides for continued monthly compensation to an employee, or his or her beneficiary, for 180 months following the employee's retirement from American at age 65, provided the employee has completed 15 consecutive years of service to American. The Salary Plan provides for a reduced benefit if the employee retires after age 55 and before age 65. If the employee's employment is terminated prior to the employee attaining age 55 for any reason other than total disability or death, the employee is not entitled to receive any benefits under the Salary Plan. The benefit payable to Mr. Jenkins under the Salary Plan, assuming his retirement at age 65, is $5,000 per month for 180 months. STOCK OPTION PLAN At the 1995 Annual Meeting of Shareholders of ASB, the Shareholders approved the Stock Option Plan. Pursuant to the Stock Option Plan, 171,396 common shares were reserved for issuance by ASB upon the exercise of options to be granted to certain directors, officers and employees of American and ASB from time to time under the Stock Option Plan. Options to purchase 145,684 common shares of ASB were awarded pursuant to the Stock Option Plan during the 1996 fiscal year. The Stock Option Committee may grant options under the Stock Option Plan at such times as they deem most beneficial to American and ASB on the basis of the individual participant's responsibility, tenure and future potential to American and ASB. Options granted to the officers and employees under the Stock Option Plan may be "incentive stock options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Options granted under the Stock Option Plan to directors who are not employees of ASB or American will not qualify under the Code and thus will not be incentive stock options ("Non-Qualified Stock Options"). The option exercise price of each option granted under the Stock Option Plan will be determined by the Committee at the time of option grant, with the exception that the exercise price for an option must not be less than 100% of the fair market value of the shares on the date of the grant. In addition, the exercise price of an ISO may not be less than 110% of the fair market value of the shares on the date of the grant if the recipient owns more than 10% of ASB's outstanding common shares. The Committee shall fix the term of each option, except that an ISO shall not be exercisable after the expiration of ten years from the date it is granted; provided, however, that if a recipient of an ISO owns a number of shares representing more than 10% of the ASB shares outstanding at the time the ISO is granted, the term of the ISO shall not exceed five years. One-fifth of such stock options awarded under the Stock Option Plan will become exercisable on each of the first five anniversaries of the date of the award. If the fair market value of shares awarded pursuant to ISOs exercisable for the first time by a participant under the Stock Option Plan during any calendar year exceeds $100,000, however, the ISOs will be considered Non-Qualified Stock Options to the extent of such excess. An option recipient cannot transfer or assign an option other than by will or in accordance with the laws of descent and distribution. Termination for cause, as defined in the Stock Option Plan, will result in the annulment of any outstanding exercisable options and any options which have not yet become exercisable shall terminate upon the resignation, removal or retirement of a director of ASB or American, or upon the termination of employment of an officer or employee of ASB or American, except in the case of death or disability. -6- 8 The following table sets forth information regarding all grants of options to purchase common shares of ASB made to Mr. Jenkins during the 1996 fiscal year: Option/SAR Grants In Last Fiscal Year
Individual Grants - ---------------------------------------------------------------------------------------------------------------- Number of Securities % of Total Underlying Options/SARs Granted Options/SARs to Employees in Exercise or Base Expiration Name Granted (#) 1996 Fiscal Year Price ($/Share) Date - ---- ------------ --------------------- ----------------- --------- Gerald R. Jenkins 42,849 (1) 38.5% $13.875 November 15, 2005 - ---------------------------- (1) The option was granted on November 15, 1995, and is first exercisable with respect to one-fifth of the shares subject to the option on each anniversary of the date of grant of the option commencing November 15, 1996. The option is intended to quality as an ISO to the extent permitted by applicable regulations.
The following table sets forth information regarding the number and value of unexercised options held by Mr. Jenkins at June 30, 1996:
Aggregated Option/SAR Exercises in Last Fiscal Year and 6/30/96 Option /SAR Values ---------------------------------------------------------------------------------- Number of Securities Underlying Unexercised Value of Unexercised In-the-Money Options/SARs at 6/30/96 (#) Options/SARs at 6/30/96 ($)(1) Name Shares Acquired on Value Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable - ----------------------- --------------------- -------------- -------------------------------- ------------------------------------- Gerald R. Jenkins -0- N/A -0-/42,849 -0-/$16,068 - ----------------------------- (1) An option is "in-the-money" if the fair market value of the underlying stock exceeds the exercise price of the option. For purposes of this table, the value of the option was determined by multiplying the number of unexercised options by the difference between the $13.875 exercise price and the fair market value of ASB's common shares, which was $14.25 on June 28, 1996, based on the closing bid price reported by the Nasdaq National Market.
MANAGEMENT RECOGNITION PLAN At the 1995 Annual Meeting of the Shareholders of ASB, the shareholders approved the MRP. With funds contributed by American, the MRP purchased 68,558 common shares, 31,535 of which were awarded to directors and executive officers of ASB and American during the 1996 fiscal year. The MRP is administered the MRP Committee. The MRP Committee determines which directors and employees of American will be awarded shares under the MRP and the number of shares awarded; provided, however, that the aggregate number of shares covered by awards to any one director or employee shall not exceed 25% of the shares held pursuant to the MRP and directors who are not employees of American may not receive more than 5% of such shares individually or 30% in the aggregate. -7- 9 Unless the MRP Committee specifies a longer time period at the time of an award of shares, one-fifth of such shares will be earned and non-forfeitable on each of the first five anniversaries of the date of the award. Until shares awarded are earned by the participant, such shares will be forfeited in the event that the participant cases to be either a director or an employee of American, except that in the event of the death or disability of a participant, the participant's shares will be deemed to be earned and nonforfeitable. The shares will be distributed as soon as practicable after they are earned. A participant may direct the voting of all shares awarded to him or her prior to such shares being earned and will be entitled to the benefit of any dividends or other distributions paid on such shares. However, a participant will not be allowed, for five years from the effective date of the Conversion, to direct the voting of common shares awarded, but not yet earned and distributed, if such participant would, if permitted to vote such awarded shares, be deemed to own in excess of ten percent (10%) of all issued and outstanding common shares of ASB. Shares that have been awarded, but not earned, may not be transferred. DIRECTOR COMPENSATION Each director currently receives a fee of $250 per month for service as a director of ASB and a fee of $1,200 per month for service as a director of American. In addition, each member of American's Audit Committee also receives $50 per committee meeting attended. During fiscal 1996, a total of $95,500 was paid in directors' fees. In December 1981 American instituted a deferred compensation benefit plan pursuant to which the directors could defer payment of their director's fees. Effective April 14, 1995, each of the six directors entered into agreements with American which restated such plan, transferred all amounts previously deferred to a trust, and provided that all future deferred amounts be contributed to the trust. The amounts deferred will be used to purchase stock of ASB at various times throughout the year. Dividends on ASB stock, to the extent permitted by law and regulations governing ASB's operations, shall be reinvested in ASB shares. One month after the director ceases to be an active director of American, American shall pay the director's deferred amount in a lump sum, or at the director's option, in equal monthly payments for a period of not less than five nor more than ten years. The deferred amount shall be paid in common stock of American unless American shall deem it prudent to convert the stock into cash. If a director dies while serving as a director of American, equal monthly payments for a period of ten years will be made to the director's beneficiary. Such death benefit payments will total the amount the director would have received if he had retired on the day of his death. SELECTION OF AUDITORS The Board of Directors has selected Grant Thornton as the auditors of ASB for the current fiscal year and recommends that the shareholders ratify the selection. Management expects that a representative of Grant Thornton will be present at the Annual Meeting, will have the opportunity to make a statement if he or she so desires and will be available to respond to appropriate questions. -8- 10 PROPOSALS OF SHAREHOLDERS AND OTHER MATTERS Any proposals of shareholders intended to be included in ASB's proxy statement for the 1997 Annual Meeting of Shareholders should be sent to ASB by certified mail and must be received by ASB not later than May 23, 1997. Management knows of no other business which may be brought before the Annual Meeting. It is the intention of the persons named in the enclosed Proxy to vote such Proxy in accordance with their best judgment on any other matters which may be brought before the Annual Meeting. IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO FILL IN, SIGN AND RETURN THE PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. By Order of the Board of Directors Gerald R. Jenkins, President September 20, 1996 -9- EX-27 6 EXHIBIT 27
9 1,000 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 411 10,127 0 0 30,012 0 0 68,455 884 112,922 83,395 0 1,219 2,413 0 0 0 25,613 112,922 5,498 2,675 0 8,173 4,267 4,310 3,863 0 0 2,373 1,685 1,685 0 0 1,111 .69 .69 7.81 296 862 0 0 893 9 0 884 884 0 562
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