-----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, Mr2hhdTp5weSRtxk2YmrP0rSHVOLzze3m1OE2iJ82LR49EFn6UVRX2DziAd22M1O ihCeFpbqrIDE9y8/b7DAYw== 0000950152-99-007875.txt : 19991227 0000950152-99-007875.hdr.sgml : 19991227 ACCESSION NUMBER: 0000950152-99-007875 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 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: SEC FILE NUMBER: 000-25906 FILM NUMBER: 99718410 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 [ 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, 1999 ------------- 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: (740) 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, 1999 were $8.9 million. Based upon the average of the bid and asked prices quoted by the Nasdaq National Market, the aggregate market value of the voting stock held by non-affiliates of the issuer on September 22, 1999, was approximately $3.4 million. 1,660,858 of the issuer's common shares were issued and outstanding on September 27, 1999. DOCUMENTS INCORPORATED BY REFERENCE Part II of Form 10-KSB - Portions of the Annual Report to Shareholders for the fiscal year ended June 30, 1999. Part III of Form 10-KSB - Portions of the Proxy Statement for 1999 Annual Meeting of Shareholders. 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"). 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 state and political subdivisions, and other investments permitted by applicable law. Funds for lending and other investment activities are obtained primarily from savings deposits, which are insured up to applicable limits by the 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 residential real estate 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, ------------------------------------------------------------------------- 1999 1998 1997 ------------------- -------------------- --------------------- 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 $60,810 70.4% $55,707 70.6% $50,481 66.3% Multifamily 3,404 3.9 5,184 6.6 7,721 10.1 Nonresidential and land 8,504 9.9 5,712 7.2 5,520 7.3 Construction 2,162 2.5 1,425 1.8 926 1.2 Home equity 4,971 5.8 4,485 5.7 3,464 4.6 Commercial 2,485 2.9 1,929 2.4 2,824 3.7 ------- ----- ------- ----- ------- ------ Total real estate loans 82,336 95.4 74,442 94.3 70,936 93.2 Consumer and other loans: Passbook 615 .7 744 .9 556 .7 Home improvement 1,103 1.3 1,286 1.6 1,462 1.9 Automobile 1,689 1.9 1,772 2.3 2,087 2.8 Other 586 .7 707 .9 1,091 1.4 ------- ----- ------- ----- -------- ------- Total consumer and other loans 3,993 4.6 4,509 5.7 5,196 6.8 ------ ---- ------ ---- -------- ------- Total loans 86,329 100.0% 78,951 100.0% 76,132 100.0% ===== ===== ===== Less: Loans in process 2,966 1,452 978 Net deferred loan origination fees and unearned discounts 200 190 198 Allowance for loan losses 733 759 820 -------- -------- ------- Total loans net $82,430 $76,550 $74,136 ======== ======= =======
LOAN MATURITY. The following table sets forth the contractual maturity of American's total loans at June 30, 1999, before consideration of net items:
Due during the fiscal One- to Consumer year ending June 30, four-family (1) Multifamily (1) Nonresidential (1) (2) and other (3) Total - -------------------- --------------- --------------- ---------------------- ------------- ----- (In thousands) 2000 $ 2,177 $ 330 $ 770 $ 1,384 $ 4,661 2001 2,249 340 794 1,428 4,811 2002 2,297 353 815 1,458 4,923 2003-2004 4,695 711 1,660 2,976 10,042 2005-2009 11,963 1,844 4,325 4,203 22,335 2010-2014 12,083 188 140 - 12,411 2015 and thereafter 27,146 - - - 27,146 ------- ------ ------ ------- ------- Total $62,610 $3,766 $8,504 $11,449 $86,329 ======= ====== ====== ======= =======
- ----------------------------- (1) Includes construction loans. (2) Includes land development loans. (3) Includes commercial and home equity 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 homes, 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, 1999, American's one- to four-family residential real estate loan portfolio, including certain construction loans secured by one- to four-family residences, was approximately $62.6 million, or 72.5% 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 95%. The principal amount of any loan which exceeds an 85% 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 30 years, however, 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 U.S. Treasury securities rates or the Previously Occupied Homes index published by the Federal Home Loan Bank (the "FHLB"). The maximum allowable adjustment at each adjustment date is 2% with a maximum adjustment of 6% over the term of the loan. The initial rate on a three-year ARM is typically higher than the initial rate on a one-year ARM to compensate for the reduced interest rate sensitivity. Adjustable-rate loans decrease American's interest rate risk but involve other risks, primarily credit risk. As interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. American also offers home equity loans for current mortgage customers on one- to four-family residences with LTV's of up to 100%. At June 30, 1999, American's home equity loans totaled $5.0 million, or 5.8% of total loans. 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 70% 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, 1999, loans secured by multifamily properties totaled approximately $3.4 million, or 3.9% of total loans. LOANS SECURED BY NONRESIDENTIAL REAL ESTATE AND LAND. At June 30, 1999, approximately $8.5 million, or 9.9% of American's total loans, were secured by nonresidential real estate and land. The majority of such loans have adjustable rates and terms of up to 15 years. Among the properties securing nonresidential real estate loans are office buildings, retail properties, warehouses, and a hotel located in American's primary market area. Also included in American's nonresidential -4- 5 real estate loan portfolio are $5.6 in participation interests which have been purchased in loans originated by other financial institutions. American has one land loan with a principal balance of $410,000 secured by developed land which has been subdivided for single-family home construction in Scioto County. Loans for the construction of nonresidential real estate are occasionally made by American. At June 30, 1999, American had outstanding nonresidential real estate construction loans with an aggregate balance of $804,000. 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 and fixed rates for terms of up to 30 years. During the first year, while the residence is being constructed, the borrower is required to pay interest only. Construction loans generally involve greater underwriting and default risks than do loans secured by mortgages on existing properties. Loan funds are advanced upon the security of the project under construction, which is more difficult to value before the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, it is relatively difficult to evaluate accurately the LTV and the total loan funds required to complete a project. In the event a default on a construction loan occurs and foreclosure follows, American would have to take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project. At June 30, 1999, construction loans, in the aggregate, totaled $2.2 million, or 2.5% of American's total loans. Approximately 90% of American's construction loans are secured by property in Scioto County. COMMERCIAL REAL ESTATE LOANS. At June 30, 1999, approximately $2.5 million, or 2.9% of American's total loans were secured by commercial real estate. American originates commercial loans for a maximum term of 15 years and which are secured by real estate with a LTV of up to 75%. These extensions of credit are typically secured by office buildings, retail stores and other commercial properties. CONSUMER AND OTHER LOANS. American makes various types of consumer loans, including loans made to depositors on the security of their deposit accounts, automobile loans, home improvement loans and other secured loans, including a loan to an automobile dealer leasing group, and unsecured personal loans. Consumer loans, other than loans on deposits, are made at fixed rates of interest only and for varying terms based on the type of loan. At June 30, 1999, American had approximately $4.0 million, or 4.6% of total loans, invested in consumer and other loans. Home improvement loans include loans insured by the Federal Housing Administration. Home improvement loans typically have a five-year term and 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. 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 -5- 6 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 Directors Smith, Jenkins, Burke and Schoettle. Any loan for more than $150,000 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 does not conform to the secondary market standards of the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association ("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 brokers. 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 originated by American. 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, --------------------------- 1999 1998 1997 ------- ------- ------- (In thousands) Loans originated: Adjustable-rate: One- to four-family real estate $ 3,104 $ 1,499 $ 1,385 Multifamily real estate 750 55 352 Nonresidential real estate 3,512 528 2,298 Commercial 2,381 -- -- ------- ------- ------- Total adjustable-rate 9,747 2,082 4,035 Fixed-rate: One- to four-family real estate 17,517 15,022 9,886 Nonresidential real estate 1,644 446 -- Consumer 4,296 7,563 8,582 ------- ------- ------- Total fixed-rate 23,457 23,031 18,468 Loans purchased 778 2,183 773 ------- ------- ------- Total loans originated and purchased 33,982 27,296 23,276 Reductions: Principal repayments 28,170 24,815 17,697 Transfers from loans to real estate owned and repossessed assets -- 157 -- ------- ------- ------- Total reductions 28,170 24,972 17,697 Increase in other items, net (1) 68 90 102 ------- ------- ------- Net increase $ 5,880 $ 2,414 $ 5,681 ======= ======= =======
- ------- (1) Consists of loans in process, unearned discounts and deferred loan origination fees and allowance for loan losses. FEDERAL LENDING LIMIT. OTS regulations impose a lending limit on the aggregate amount that a savings association can lend to any one borrower to an amount equal to 15% of the association's total capital for risk-based capital purposes plus any loan reserves not already included in total capital (the "Lending Limit Capital"). A savings association may loan to one borrower an additional amount not to exceed 10% of the association's Lending Limit Capital, if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable capital." In applying this limit, the regulations require that loans to certain related or affiliated borrowers be aggregated. An exception to this limit permits loans of any type to one borrower of up to $500,000. In addition, the OTS, under certain circumstances, may permit exceptions to the lending limit on a case-by-case basis. Based on the 15% limit, American was able to lend approximately $2.0 million to one borrower at June 30, 1999. The largest loan American had outstanding to one borrower at June 30, 1999, was $944,000. Such loan was secured by automobile titles, assignments of leases and a guarantee of the leasing company and was current at June 30, 1999. LOAN ORIGINATION AND OTHER FEES. American realizes loan origination fees 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 are sent and telephone calls are made to the borrower. Each loan 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 collateral 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, 1999 ------------------------------------------------------------------------------------------------------------- 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 28 $1,282 1.5% -- $-- --% 13 $ 259 .3% 41 $1,541 1.8% 60-89 days 8 247 .3 -- -- -- 9 85 .1 17 332 .4 90 days and over 10 287 .3 -- -- -- 10 92 .1 20 379 .4 ------ ------ ---- --- --- --- ------ ------ ---- ------ ------ --- Total delinquent loans 46 $1,816 2.1% -- $-- --% 32 $ 436 .5% 78 $2,252 2.6% ====== ====== ==== === === === ====== ====== ==== ====== ====== ===
At June 30, 1998 ------------------------------------------------------------------------------------------------------------- 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 40 $1,117 1.4% -- $ -- --% 13 $ 60 .1% 53 $1,177 1.5% 60-89 days 7 276 .4 -- -- -- 4 24 -- 11 .4 90 days and over 8 168 .2 -- -- -- 12 72 .1 20 240 .3 ------ ------ ---- --- --- --- ------ ------ ---- ------ ------ --- Total delinquent loans 55 $1,561 2.0% -- $ -- --% 29 $156 .2% 84 $1,717 2.2% ====== ====== ==== === === === ====== ======= ==== ====== ====== ===
At June 30, 1997 ------------------------------------------------------------------------------------------------------------- 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 39 $1,199 1.6% -- $-- --% 10 $ 41 .1% 49 $1,240 1.7% 60-89 days 17 830 1.1 -- -- -- 8 32 -- 25 862 1.1 90 days and over 6 1,052 1.4 -- -- -- 10 93 .1 16 1,145 1.5 ------ ------ ---- --- --- --- ------ ------- ---- ------ ------ --- Total delinquent loans 62 $3,081 4.1% -- $-- --% 28 $ 166 .2% 90 $3,247 4.3% ====== ====== ==== === === === ====== ======= ==== ====== ====== ===
- ------------------------------------ (1) Percentages correlate 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, -------------------------- 1999 1998 1997 ------ ------ ------ Non-accrual loans: One- to four-family $ 261 $ 168 $ 87 Multifamily -- -- 862 Consumer -- -- 42 ------ ------ ------ Total 261 168 991 Accruing loans delinquent 90 days or more: 118 72 154 ------ ------ ------ Total nonperforming loans 379 240 1,145 Real estate acquired through foreclosure: One- to four-family -- 157 -- ------ ------ ------ Total nonperforming assets $ 379 $ 397 $1,145 ====== ====== ====== Allowance for loan losses $ 733 $ 759 $ 820 ====== ====== ====== Nonperforming assets as a percent of total assets (1) .31% .34% 1.02% Allowance for loan losses as a percent of nonperforming loans 193.40% 316.25% 71.62% Allowance for loan losses as a percent of nonperforming assets 193.40% 191.18% 71.62%
- ------ (1) The applicable asset totals are $123.2 million, $116.4 million and $112.5 million for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. For the year ended June 30, 1999, gross interest income which would have been recorded had non-accrual loans been current in accordance with their original terms was $5,000 and no interest was 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 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. -10- 11 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, ------------------------ 1999 1998 1997 ------ ------ ------ Classified assets Substandard $ 321 $ 993 $ 949 Doubtful -- -- -- Loss -- 8 42 ------ ------ ------ Total classified assets $ 321 $1,001 $ 991 ====== ====== ======
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 of Directors, reviews on a monthly basis the allowance for loan losses as it relates to a number of relevant factors including, but not limited to, trends in the level of delinquent and nonperforming assets and classified loans, current and anticipated economic conditions in American's primary lending area, such as unemployment data and the consumer price index, past loss experience and losses arising from specific problem assets. To a lesser extent, management also considers loan concentrations to single borrowers and changes in the composition of the loan portfolio. While management believes that it uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in 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, --------------------------- 1999 1998 1997 ----- ----- ----- (Dollars in thousands) Balance at beginning of period $ 759 $ 820 $ 884 Charge-offs: Residential real estate loans (1) (14) (47) (22) Nonresidential real estate loans -- -- (64) Consumer loans (11) (9) (6) ----- ----- ----- Total charge-offs (25) (56) (92) Recoveries -- -- -- ----- ----- ----- Net charge-offs (25) (56) (92) ----- ----- ----- Provision for (recoveries of) losses on loans (1) (5) 28 ----- ----- ----- Balance at end of period $ 733 $ 759 $ 820 ===== ===== ===== Ratio of net charge-offs to average loans outstanding during the period .03% .07% .13%
- ----- (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, ------------------------------------------------------------------------------------ 1999 1998 1997 ----------------------- ------------------------- ------------------------- 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 $ 13 95.4% $47 94.3% $216 93.2% Consumer loans 3 4.6 11 5.7 42 6.8 Unallocated 717 - 701 - 562 - ---- ----- ---- ----- ---- ----- Total $733 100.0% $759 100.0% $820 100.0% ==== ===== ==== ===== ==== =====
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, ----------------------------------------------------------------------- 1999 1998 1997 --------------------- --------------------- -------------------- 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) $ 3,781 16.3% $15,399 56.5% $ 7,732 29.3% Investments designated as available for sale: U.S. Government agency obligations 18,133 78.3 10,766 39.5 17,960 68.0 Corporate equity securities 137 .6 128 .5 - - FHLMC stock 1,102 4.8 941 3.5 700 2.7 ------- ----- ------- ----- ------- ----- Total investments designated as available for sale 19,372 83.7 11,835 43.5 18,660 70.7 ------- ----- ------- ----- ------- ----- Total investments $23,153 100.0% $27,234 100.0% $26,392 100.0% ======= ===== ======= ===== ======= =====
- ----------------------------- (1) Includes interest-bearing deposits and certificates of deposit. (2) At June 30, 1999, 1998 and 1997, the market value of American's investment securities, held to maturity, totaled $3.8 million, $15.4 million and $7.7 million, respectively. 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, 1999:
Less than 1 Year 1-5 Years 5-10 Years 10-20 Years Total ------------------ ------------------ ------------------- ------------------- ------------------ Weighted Weighted Weighted Weighted Amortized average Amortized average Amortized average Amortized average Amortized Market cost yield cost yield cost yield cost yield cost value --------- ------- --------- ------- --------- ------- --------- ------- --------- ------ (Dollars in thousands) Investments designated as held to maturity: Certificates of deposit in other financial institutions $198 7.0% $ 95 6.7% $ -- -% $ -- -% $ 293 $ 293 Investments designated as -- available for sale: U.S. Government agency obligations -- -- 1,000 6.0 13,283 6.4 4,481 6.9 18,764 18,133 Corporate equity securities -- -- -- -- -- -- -- -- 169 137 FHLMC stock -- -- -- -- -- -- -- -- 19 1,102 ------ --- ------ --- ------- --- ------ --- -------- ------- Total $ 198 7.0% $1,095 6.1% $13,283 6.4% $4,481 6.9% $ 19,245 $19,665 ====== === ====== === ======= === ====== === ======== =======
In addition to the foregoing investment securities, American has been an active purchaser of mortgage-backed securities. At June 30, 1999, mortgage-backed securities totaled $10.2 million, or 8.3 % 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"), the FHLMC or the FNMA. In addition, American does invest in collateralized mortgage obligations ("CMOs"). -13- 14 American generally purchases mortgage-backed securities at or near par in order to avoid prepayment risk. The following table sets forth details of American's investment in mortgage-backed securities, of which all are designated as available for sale, at the dates indicated.
At June 30, 1999 At June 30, 1998 ------------------------------------------------- ---------------------------------------------- Gross Gross Gross Gross Amortized unrealized unrealized Estimated Amortized unrealized unrealized Estimated cost gains losses fair cost gains losses fair value --------- ---------- ---------- --------- --------- ---------- ---------- --------- (In thousands) Available for sale: FHLMC participation certificates $ 1,266 $18 $12 $1,272 $2,007 $ 41 $ 4 $2,044 FNMA participation certificates 1,035 8 35 1,008 850 26 9 867 GNMA participation certificates 3,301 35 43 3,293 4,919 86 3 5,002 Collateralized mortgage obligations 4,649 13 3 4,659 1,014 4 7 1,011 --------- ---- ---- -------- ------ ------ ----- ------ Total mortgage-backed securities $10,251 $74 $93 $10,232 $8,790 $157 $ 23 $8,924 ======= === === ======= ====== ==== ==== ====== At June 30, 1997 ------------------------------------------- Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value --------- ---------- ---------- --------- Available for sale: FHLMC participation certificates $3,067 $34 $34 $3,067 FNMA participation certificates 1,637 23 21 1,639 GNMA participation certificates 3,817 61 24 3,854 Collateralized mortgage obligations - - - - --------- -------- ------ --------- Total mortgage-backed securities $8,521 $118 $79 $8,560 ====== ==== === ======
-14- 15 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. The following table sets forth the dollar amount of deposits in the various types of accounts offered by American at the dates indicated:
1999 1998 1997 --------------------- ------------------ --------------------- Percent Percent Percent of total of total of total Amount deposits Amount deposits Amount deposits --------- ------ ------- ---- -------- ----- (Dollars in thousands) Transaction accounts: Passbook accounts $ 7,862 7.8% $7,440 8.0% $ 7,379 8.2% Demand, NOW and Super NOW accounts 6,680 6.6 5,867 6.3 4,435 4.9 Money market deposit accounts 11,785 11.7 7,999 8.5 7,785 8.7 --------- ------ ------- ---- -------- ----- Total transaction 26,327 26.1 21,306 22.8 19,599 21.8 accounts Certificates of deposit: 3.00 - 3.99% 278 .3 - - - - 4.00 - 4.99% 5,146 5.8 421 .5 402 .4 5.00 - 5.99% 57,094 67.8 45,033 48.2 52,404 58.4 6.00 - 6.99% 12,018 - 26,630 28.5 17,265 19.2 7.00 - 7.99% 31 - 31 - 30 .1 8.00 - 8.99% 60 - 56 - 52 .1 -------- ----- ------- ----- ------- ----- Total certificates of deposit 74,627 73.9 72,171 77.2 70,153 78.2 -------- ----- ------- ----- ------- ----- Total deposits $100,954 100.0% $93,477 100.0% $89,752 100.0% ======== ===== ======= ===== ======= =====
-15- 16 The following table sets forth the remaining maturities of American's certificates of deposit at the dates indicated:
June 30, ---------------------------------------------------------- 1999 1998 1997 ------- ------- ------- (In thousands) Less than one year $46,943 $51,581 $42,468 One to two years 23,448 18,247 22,606 Two to three years 3,870 1,928 4,095 Over three years 366 415 984 ------- ------- ------- $74,627 $72,171 $70,153 ======= ======= =======
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, 1999:
At June 30, 1999 ---------------- Certificates of deposit with balances of $100,000 (In thousands) or more maturing in quarter ending (1): September 30, 1999 $ 4,526 December 31, 1999 3,175 March 31, 2000 1,495 June 30, 2000 1,440 After June 30, 2000 5,056 ------- Total certificates of deposit with balances of $100,000 or more $15,692 =======
- ----------------------------- (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, ------------------------------------- 1999 1998 1997 --------- --------- --------- (Dollars in thousands) Beginning balance $ 93,477 $ 89,752 $ 83,395 Deposits 197,010 120,166 118,033 Withdrawals (193,307) (119,802) (114,836) Interest credited 3,774 3,361 3,160 --------- --------- --------- Ending balance $ 100,954 $ 93,477 $ 89,752 ========= ========= ========= Net increase $ 7,477 $ 3,725 $ 6,357 ========= ========= ========= Percent increase 8.00% 4.15% 7.62% ========= ========= =========
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 maturities. The FHLB may prescribe the acceptable uses for these advances, as well as limitations on the size of the advances and repayment provisions. In addition to American's advances from the FHLB, ASB has borrowed money at June 30, 1998 and 1997, totaling $2.5 million and $500,000 at respective interest rates of 8.50% and 8.88%, which matured in 1999. -16- 17 The following table sets forth certain information as to American's FHLB advances and ASB's other borrowings at the dates indicated:
At June 30, ---------------------------------- 1999 1998 1997 --------- --------- --------- (Dollars in thousands) FHLB advances $ 5,823 $ 4,354 $ 2,884 Weighted average interest rate of FHLB advances 5.06% 5.16% 5.65% Other borrowed money $ -- $ 2,500 $ 500 Weighted average interest rate of other borrowed money --% 8.50% 8.88%
The following table sets forth the maximum balance and average balance of FHLB advances and other borrowings during the periods indicated:
Year ended June 30, -------------------------- 1999 1998 1997 ------ ------ ------ (Dollars in thousands) FHLB advances: Maximum balance $5,841 $4,354 $2,889 Average balance 5,454 3,130 2,489 Weighted average interest rate 5.10% 5.90% 5.65% Other borrowed money: Maximum balance $2,500 $2,500 $ 500 Average balance 438 378 333 Weighted average interest rate 8.44% 8.84% 8.88%
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. SUBSIDIARY ACTIVITIES American has one wholly-owned subsidiary, A.S.L. Services, Inc. ("ASL"), which owns stock in American's data processing service provider. At June 30, 1999, the stock held by the service corporation had a book value of $15,000. Additionally, ASL maintains an $18,000 investment in the Money Concepts Financial Planning Center, bringing the total assets of ASL to approximately $33,000 at June 30, 1999. PERSONNEL As of June 30, 1999, American had 21 full-time employees and 5 part-time employees. American believes that relations with its employees are excellent. American offers health, disability and life benefits and has established the ASB -17- 18 Financial Corp. Employee Stock Ownership Plan. None of the employees of American are represented by a collective bargaining unit. YEAR 2000 As with most providers of financial services, American's operations are heavily dependent on information technology systems. American has addressed the potential problems associated with the possibility that the computers that control or operate American's information technology system and infrastructure may not be programmed to read four-digit date codes and, upon arrival of the year 2000, may recognize the two-digit code "00" as the year 1900, causing systems to fail to function or to generate erroneous data. American's primary data processing applications, which are handled by a third-party service bureau, Intrieve, Inc., have been identified as mission critical. Intrieve has implemented a fully Year 2000 compliant processing system that has been fully tested as of January 1, 1999. Additionally, American's systems were tested in November 1998 with satisfactory results. Management has also reviewed American's ancillary equipment and implemented the appropriate remedial measures without material cost. American has developed a contingency plan in case Intrieve actually fails at Year 2000 critical dates. American deems the likelihood of failure of the service provider's efforts to renovate Year 2000 changes to the on-line core account processing system to be remote. The contingency plan, therefore, primarily addresses action to deal with the possibility that the service provider's system would be down for several days or weeks upon arrival of year 2000. American can conduct and record transactions manually until the service provider is operational. American estimates its expenses related to the Year 2000 to be less than $10,000. In addition to possible expense related to its own systems, American could incur losses if loan payments are delayed due to year 2000 problems affecting any major borrowers in American's primary market area. Because American's loan portfolio is highly diversified with regard to individual borrowers and types of businesses and American's primary market area is not significantly dependent upon one employer or industry, American does not expect any significant or prolonged difficulties that will affect net earnings or cash flow. REGULATION REGULATION GENERAL ASB is a savings and loan holding company within the meaning of the Home Owners Loan Act, as amended (the "HOLA"). Consequently, ASB is subject to regulation, examination and oversight by the OTS and must submit periodic reports to the OTS concerning its activities and financial condition. In addition, as a corporation organized under Ohio law, ASB is subject to provisions of the Ohio Revised Code applicable to corporations generally. As a savings association organized under the laws of the United States, American is subject to regulatory oversight by the OTS. Because American's deposits are insured by the FDIC, American is also subject to examination and regulation by the FDIC. American must file periodic reports with the OTS concerning its activities and financial condition. Examinations are conducted periodically by the OTS to determine whether American is in compliance with various regulatory requirements and is operating in a safe and sound manner. American is a member of the FHLB of Cincinnati. Congress is considering legislation to eliminate the federal savings and loan charter and the separate federal regulation of savings and loan associations. Pursuant to such legislation, Congress may eliminate the OTS and American may be regulated under federal law as a bank or be required to change its charter. Such change in regulation or charter would likely change the range of activities in which American may engage and would probably subject American to more -18- 19 regulation by the FDIC. In addition, ASB might become subject to a different set of holding company regulations limiting the activities in which ASB may engage and subjecting ASB to additional regulatory requirements, including separate capital requirements. At this time, ASB cannot predict when or whether Congress may actually pass legislation regarding ASB's and American's regulatory requirements or charter. Although such legislation, if enacted, may change the activities in which ASB or American are authorized to engage, it is not anticipated that the current activities of either ASB or American will be materially affected by those activity limits. 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 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. ASB has not opted 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, with certain exceptions, acquisitions of voting securities which would result in the acquiring shareholder owning 20%, 33-1/3% or 50% of the outstanding voting securities of an Ohio corporation (a "Control Share Acquisition") must be approved in advance by the holders of at least a majority of the outstanding voting shares of such corporation represented at a meeting at which a quorum is present and a majority of the portion of the outstanding voting shares represented at such a meeting excluding the voting shares owned by the acquiring shareholder, by certain other persons who acquire or transfer voting shares after public announcement of the acquisition or by certain officers of the corporation or directors of the corporation who are employees of the corporation. The Control Share Acquisition Statute was intended, in part, to protect shareholders of Ohio corporations from coercive tender offers. TAKEOVER BID STATUTE. Ohio law provides that an offeror may not make a tender offer or request or invitation for tenders that would result in the offeror beneficially owning more than ten percent of any class of the target company's equity securities unless such offeror files certain information with the Ohio Division of Securities (the "Securities Division") and provides such information to the target company and the offerees within Ohio. The Securities Division may suspend the continuation of the control bid if the Securities Division determines that the offeror's filed information does not provide full disclosure to the offerees of all material information concerning the control bid. The statute also provides that an offeror may not acquire any equity security of a target company within two years of the offeror's previous acquisition of any equity security of the same target company pursuant to a control bid unless the Ohio offerees may sell such security to the offeror on substantially the same terms as provided by the previous control bid. The statute does not apply to a transaction if either the offeror or the target company is a savings and loan holding company and the proposed transaction requires federal regulatory approval. -19- 20 OFFICE OF THRIFT SUPERVISION GENERAL. The OTS is an office of the Department of the Treasury and is responsible for the regulation and supervision of all federally-chartered savings associations and all other savings associations the deposits of which are insured by the FDIC in the Savings Association Insurance Fund ("SAIF"). The OTS issues regulations governing the operation of savings associations, regularly examines such associations and imposes assessments on savings associations based on their asset size to cover the costs of general supervision and examination. The OTS also may initiate enforcement actions against savings associations and certain persons affiliated with them for violations of laws or regulations or for engaging in unsafe or unsound practices. 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 disclosures, 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 reinvestment regulations evaluate how well and to what extent an institution lends and invests in its designated service area, with particular emphasis on low- to moderate-income communities and borrowers in that area. REGULATORY CAPITAL REQUIREMENTS. American is required by OTS regulations to meet certain minimum capital requirements. The tangible capital requirement requires savings associations to maintain "tangible capital" of not less than 1.5% of their adjusted total assets. Tangible capital is defined in OTS regulations as core capital minus any intangible assets. "Core capital" is comprised of common stockholders' equity (including retained earnings), noncumulative preferred stock and related surplus, minority interests in consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual associations. Effective April 1, 1999, OTS regulations require savings associations with the highest examination rating to maintain core capital of at least 3% of their total assets. Those associations that do not have the highest examination rating and exceed an acceptable level of risk will be required to maintain core capital of at least 4%. Depending on the association's examination rating and overall risk, OTS may require a higher core capital ratio. OTS regulations require that savings associations maintain "risk-based capital" in an amount not less than 8% of their risk-weighted assets. Risk-based capital is defined as core capital plus certain additional items of capital, which in the case of American includes a general loan loss allowance of $733,000 at June 30, 1999. The OTS has adopted an interest rate risk component to the risk-based capital requirement, though the implementation of that component has been delayed. Pursuant to the interest rate risk component, a savings association will have to measure the effect of an immediate 200 basis point change in interest rates on the value of its portfolio as determined under the methodology of the OTS. If the measured interest rate risk is above the level deemed normal under the regulation, the association will be required to deduct one-half of such excess exposure from its total capital when determining its risk-based capital. In general, an association with less than $300 million in assets and a risk-based capital ratio in excess of 12% will not be subject to the interest rate risk component. Pending implementation of the interest rate risk component, the OTS has the authority to impose a higher individualized capital requirement on any savings association it deems to have excess interest rate risk. The OTS also may adjust the risk-based capital requirement on an individualized basis to take into account risks due to concentrations of credit and non-traditional activities. The OTS has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled savings associations. At each successively lower defined capital category, an association is subject to more restrictive and more numerous mandatory or discretionary regulatory actions or limits, and the OTS has less flexibility in determining how to resolve the problems of the institution. In addition, the OTS generally can downgrade an association's capital category, notwithstanding its capital level, if, after notice and opportunity for hearing, the association is deemed to be engaging in an unsafe or unsound practice because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. All undercapitalized associations must submit a capital restoration plan to the OTS within 45 days after becoming undercapitalized. Such associations 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 -20- 21 level, except under limited circumstances. American's capital at June 30, 1999, met the standards for the highest category, a "well-capitalized" institution. Federal law prohibits a savings association from making a capital distribution to anyone or paying management fees to any person having control of the association if, after such distribution or payment, the association would be undercapitalized. In addition, each company controlling an undercapitalized association must guarantee that the association will comply with its capital plan until the association has been adequately capitalized on an average during each of four preceding calendar quarters and must provide adequate assurances of performance. The aggregate liability pursuant to such guarantee is limited to the lesser of (a) an amount equal to 5% of the association's total assets at the time the institution became undercapitalized and (b) the amount that is necessary to bring the association into compliance with all capital standards applicable to such association at the time the association fails to comply with its capital restoration plan. LIQUIDITY. OTS regulations require that a savings association maintain a minimum daily balance of liquid assets (cash, certain time deposits, bankers' acceptances and specified United States government, state or federal agency obligations). During fiscal 1999, certain maturity requirements were removed, which, in American's case, resulted in a greater eligible liquidity amount and percentage at June 30, 1999, than at prior year ends. At December 31, 1998, such minimum requirement was an amount equal to a monthly average of not less than 4% of its net withdrawable savings deposits plus borrowings payable in one year or less. Monetary penalties may be imposed upon associations failing to meet the liquidity requirement. The eligible liquidity of American at June 30, 1999, was approximately $23.2 million, or 21.4% and exceeded the 4.0% percentage liquidity requirement by approximately $18.9 million. QUALIFIED THRIFT LENDER TEST. Savings associations must meet one of two possible tests in order to be a qualified thrift lender ("QTL"). The first test requires a savings association to maintain a specified level of investments in assets that are designated as qualifying thrift investments ("QTIs"), which are generally related to domestic residential real estate and manufactured housing and include credit card, student and small business loans and stock issued by any FHLB, the FHLMC or the FNMA. Under this test, 65% of an institution's "portfolio assets" (total assets less goodwill and other intangibles, property used to conduct business and 20% of liquid assets) must consist of QTI on a monthly average basis in nine out of every 12 months. The second test permits a savings association to qualify as a QTL by meeting the definition of "domestic building and loan association" under the Internal Revenue Code of 1986, as amended (the "Code"). In order for an institution to meet the definition of a "domestic building and loan association" under the Code, at least 60% of such institution's assets must consist of specified types of property, including cash loans secured by residential real estate or deposits, educational loans and certain governmental obligations. The OTS may grant exceptions to the QTL tests under certain circumstances. If a savings association fails to meet one of the QTL tests, the association and its holding company become subject to certain operating and regulatory restrictions. A savings association that fails to meet one of the QTL tests will not be eligible for new FHLB advances. At June 30, 1999, American qualified as a QTL. LENDING LIMIT. OTS regulations generally limit the aggregate amount that a savings association can lend to one borrower to an amount equal to 15% of the association's Lending Limit Capital. A savings association may lend to one borrower an additional amount not to exceed 10% of the association's Lending Limit Capital, if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." Certain types of loans are not subject to the lending limit. A general exception to the 15% limit provides that an association may lend to one borrower up to $500,000, for any purpose. In applying the limit on loans to one borrower, the regulations require that loans to certain related borrowers be aggregated. At June 30, 1999, American was in compliance with this lending limit. TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers, directors and principal shareholders and their related interests must conform to the lending limit on loans to one borrower, and the total of such loans to executive officers, directors, principal shareholders and their related interests cannot exceed the association's Lending Limit Capital (or 200% of Lending Limit Capital for qualifying institutions with less than $100 million in deposits). Most loans to directors, executive officers and principal shareholders must be approved in advance by a majority of the "disinterested" members of the board of directors of the association, with any "interested" director not participating. All loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or as offered to all employees in a company-wide benefit program, and loans to executive officers are subject to additional limitations. American was in compliance with such restrictions at June 30, 1999. -21- 22 All transactions between savings associations and their affiliates must comply with Sections 23A and 23B of the Federal Reserve Act (the "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, purchasing of assets, issuance of a guarantee and other similar types of transactions. In addition to the limits in Sections 23A and 23B, a savings association may not make any loan or other extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for a bank holding company and may not purchase or invest in securities of any affiliate except shares of a subsidiary. American was in compliance with these requirements and restrictions at June 30, 1999. LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various restrictions or requirements on the ability of associations to make capital distributions, including dividend payments. An association which has converted from mutual to stock form is prohibited from declaring or paying any dividends or from repurchasing any of its stock if, as a result, the net worth of the association would be reduced below the amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion. OTS regulations also establish a three-tier system limiting capital distributions according to ratings of associations based on their capital level and supervisory condition. Tier 1 consists of associations that, before and after the proposed distribution, meet their fully phased-in capital requirements. Associations in this category may make capital distributions during any calendar year up to the greater of (i) 100% of 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, and (ii) the amount authorized for a Tier 2 association. A Tier 1 association deemed to be in need of more than normal supervision by the OTS may be downgraded to a Tier 2 or 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. Tier 2 consists of associations that, before and after the proposed distribution, meet their current minimum, but not fully phased-in, capital requirements. Associations in this category may make capital distributions of up to 75% of net income over the most recent four quarters. Tier 3 associations do not meet current minimum capital requirements and must obtain OTS approval of any capital distribution. Tier 2 associations that propose to make a capital distribution in excess of the noted safe harbor level must also obtain OTS approval. Tier 2 associations proposing to make a capital distribution within the safe harbor provisions and Tier 1 associations proposing to make any capital distribution need only submit written notice to the OTS 30 days prior to such distribution. As a subsidiary of ASB, American is required to give the OTS 30 days' notice prior to declaring any dividend on its stock. The OTS may object to the distribution during such 30-day period based on safety and soundness concerns. American paid dividends to ASB totaling $3.5 million during fiscal 1999. HOLDING COMPANY REGULATION. ASB is a savings and loan holding company within the meaning of the HOLA. As such, ASB has registered with the OTS and is subject to OTS regulations, examination, supervision and reporting requirements. 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 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 ASB. Except with the prior approval of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such holding company's stock may also acquire control of any savings institution, other than a subsidiary institution, or any other savings and loan holding company. As a unitary savings and loan holding company, ASB generally has no restrictions on its activities. Such companies are the only financial institution holding companies which may engage in any commercial, securities and insurance activities without restriction. Congress is considering legislation which may limit ASB's ability to engage in these activities. It cannot -22- 23 be predicted whether and in what form these proposals might become law. However, such limits would not impact ASB's current activities, which consist solely of holding stock of American. 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 ASB 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, 1999, American met both those tests. If ASB acquired 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 was an emergency thrift acquisition and each subsidiary savings association met 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 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. FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF ASB AND AMERICAN. In addition to the Ohio law limitations on the merger with, and acquisition of, ASB, federal limitations generally require regulatory approval of acquisitions at specified levels. Under pertinent federal law and regulations, no person, directly or indirectly, or acting in concert with others, may acquire control of American or ASB without 60 days' prior notice to the OTS. "Control" is generally defined as having more than 25% ownership or voting power; however, ownership or voting power of more than 10% may be deemed "control" if certain factors are in place. If the acquisition of control is by a company, the acquiror must obtain approval, rather than give notice, of the acquisition as a savings and loan holding company. In addition, any merger of American must be approved by the OTS as well as the Superintendent. Further, any merger of ASB in which ASB is not the resulting company must also be approved by both the OTS and the Superintendent. FEDERAL DEPOSIT INSURANCE CORPORATION DEPOSIT INSURANCE AND ASSESSMENTS. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and savings and loan associations and safeguards the safety and soundness of the banking and savings and loan industries. The FDIC administers two separate insurance funds, the Bank Insurance Fund ("BIF") for commercial banks and state savings banks and the SAIF for savings associations. American is a member of the SAIF and its deposit accounts are insured by the FDIC up to the prescribed limits. The FDIC has examination authority over all insured depository institutions, including American, and has authority to initiate enforcement actions against 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. The FDIC is required to maintain designated levels of reserves in the SAIF and in the BIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary based on the risk the institution poses to its deposit insurance fund. The risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. -23- 24 Prior to September 1996, the SAIF's ratio of reserves to insured deposits was significantly below the level required by law, while the BIF's ratio was above the required level. As a result, institutions with SAIF-insured deposits were paying higher deposit insurance assessments than institutions with BIF-insured deposits. Federal legislation providing for the recapitalization of the SAIF became effective in September 1996 and included a special assessment of $.657 per $100 of SAIF-insured deposits held at March 31, 1995. American had approximately $83.8 million in deposits at March 31, 1995, and paid a special assessment of $551,000. FEDERAL RESERVE REQUIREMENTS FRB regulations require savings associations to maintain reserves of 3% of net transaction accounts (primarily NOW accounts) up to $46.5 million (subject to an exemption of up to $4.9 million), and of 10% of net transaction accounts in excess of $46.5 million. At June 30, 1999, American was in compliance with the reserve requirements. FEDERAL HOME LOAN BANKS The Federal Home Loan Banks 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 the FHLB of Cincinnati in an amount equal to the greater of 1.0% of the aggregate outstanding principal amount of American's residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or 5% of its advances from the FHLB of Cincinnati. American was in compliance with this requirement with an investment in stock of the FHLB of Cincinnati of $778,000 at June 30, 1999. FHLB advances to member institutions who meet the QTL Test are generally limited to the lower of (i) 25% of the member's assets or (ii) 20 times the member's investment in FHLB stock. At June 30, 1999, American's maximum limit on advances was approximately 30.6 million. The granting of advances is also subject to the FHLB's collateral and credit underwriting guidelines. Upon the origination or renewal of a loan or advance, the FHLB 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 FHLB, if such collateral has a readily ascertainable value and the FHLB can perfect its security interest in the collateral. The FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances. 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 the FHLB must be made only to provide funds for residential housing finance. TAXATION FEDERAL TAXATION ASB and American are each subject to the federal tax laws and regulations which apply to corporations generally. In addition to the regular income tax, ASB and American may be subject to an alternative minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on "alternative minimum taxable income" (which is the sum of a corporation's regular taxable income, with certain adjustments, and tax preference items), less any available exemption. 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. However, the Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain "small corporations" for tax years beginning after December 31, 1997. A corporation initially qualifies as a small corporation if it had average gross receipts of $5,000,000 or less for the three tax years ending -24- 25 with its first tax year beginning after December 31, 1996. Once a corporation is recognized as a small corporation, it will continue to be exempt from the alternative minimum tax for as long as its average gross receipts for the prior three-year period does not exceed $7,500,000. In determining if a corporation meets this requirement, the first year that it achieved small corporation status is not taken into consideration. American's average gross receipts for the three tax years ending on June 30, 1999, is $8.8 million, and, as a result, American does not qualify as a small corporation exempt from the alternative minimum tax. Prior to the enactment of the Small Business Jobs Protection Act (the "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 one of two reserve methods of Section 593 of the Code. The reserve methods under Section 593 of the Code permitted a thrift institution annually to 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 1995, 1994, and 1993, American used the percentage of taxable income method. The Act eliminated the percentage of taxable income 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. A thrift institution required to change its method of computing reserves for bad debt will treat such change as a change in the method of accounting, initiated by the taxpayer and having been made with the consent of the Secretary of the Treasury. Section 481(a) of the Code requires certain amounts to be recaptured with respect to such change. Generally, the amounts to be recaptured will be determined solely with respect to the "applicable excess 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 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that is treated as a small bank, like American, the amount of the institution's applicable excess reserves generally is the excess of (i) the balances of its reserve for losses on qualifying real property loans and its reserve for losses on nonqualifying loans as of the close of its last taxable year beginning before January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would have been at the close of its last year beginning before January 1, 1996, had the thrift always used the experience method. 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. 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. The balance of the pre-1988 reserves is subject to the provisions of Section 593(e), as modified by the Act, which require recapture in the case of certain excessive distributions to shareholders. The pre-1988 reserves may not be utilized for payment of cash dividends or other distributions to a shareholder (including distributions in dissolution or liquidation) or for -25- 26 any other purpose (except to absorb bad debt losses). Distribution of a cash dividend by a thrift institution to a shareholder is treated as made: first, out of the institution's post-1951 accumulated earnings and profits; second, out of the pre-1988 reserves; and third, out of such other accounts as may be proper. To the extent a distribution by American to ASB is deemed paid out of its pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and the gross income of American for tax purposes would be increased by the amount which, when reduced by the income tax, if any, attributable to the inclusion of such amount in its gross income, equals the amount deemed paid out of the pre-1988 reserves. As of June 30, 1999, the pre-1988 reserves of American for tax purposes totaled approximately $1.9 million. American believes it had approximately $2.7 million of accumulated earnings and profits for tax purposes as of June 30, 1999, which would be available for dividend distributions, provided regulatory restrictions applicable to the payment of dividends are met. No representation can be made as to whether American will have current or accumulated earnings and profits in subsequent years. The tax returns of American have been audited or closed without audit through fiscal year 1995. 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. For tax years beginning after December 31, 1998, the rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 or (ii) .400% times taxable net worth. A special litter tax is also applicable to all corporations, 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 the taxable book net worth of American determined in accordance with generally accepted accounting principles. For tax year 1999, however, the franchise tax on financial institutions will be 1.4% of the taxable book net worth and for tax year 2000 and years thereafter the tax will be 1.3% of the taxable book net worth. As a "financial institution," American is not subject to any tax based upon net income or net profits imposed by the State of Ohio. 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, 1999, the net book value of the main office property was $540,000, and American's office premises and equipment had a total net book value of $1.0 million. For additional information regarding American's office premises and equipment, see Notes A and E of Notes to Consolidated Financial Statements. American also owns two parcels of real estate in downtown Portsmouth, Ohio, with a book value of approximately $300,000. The properties were purchased in November 1994 and April 1997. American is currently constructing a drive-through and ATM facility on the properties. 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. -26- 27 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, 1999 (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 21, 1999, 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 1999 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. 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) -27- 28 10.1 ASB Financial Corp. 1995 Stock Option and Incentive Plan (incorporated by reference) 10.2 American Savings Bank, fsb Management Recognition and Retention Plan and Trust Agreement (incorporated by reference) 13 Annual Report (the following parts of which are incorporated herein by reference: "Market Price of ASB Common Shares and Related Shareholder Matters;" "Management's Discussion and Analysis of Financial Condition and Results of Operations;" and Consolidated Financial Statements.) 20 Proxy Statement 21 Subsidiaries of ASB Financial Corp. (incorporated by reference) 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. -28- 29 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/ Robert M. Smith ----------------------------------- Robert M. Smith President and Director (Principal Executive Officer and Principal Financial Officer) Date: September 24, 1999 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/ Lee O. Fitch ------------------------------------- ----------------------------------- Gerald R. Jenkins Lee O. Fitch Director and Chairman of the Board Director Date: September 24, 1999 Date: September 24, 1999 By /s/ William J. Burke By /s/ Louis M. Schoettle ------------------------------------- ----------------------------------- William J. Burke Louis M. Schoettle Director Director Date: September 24, 1999 Date: September 24, 1999 -29- 30 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 "1995 Form 10-KSB") with the Securities and Exchange Commission (the "SEC"), Exhibit 3.3 3.4 Code of Regulations of ASB Financial Corp. Incorporated by reference to the Form 10-KSB, Exhibit 3.5 10.1 ASB Financial Corp. 1995 Stock Option and Incentive Plan Incorporated by reference to the Form 10-KSB for the fiscal year ended June 30, 1996 filed with the SEC on September 30, 1996, (the "1996 Form 10-KSB") Exhibit 10.1 10.2 American Savings Bank, fsb Recognition and Retention Plan Incorporated by reference to the 1996 and Trust Agreement Form 10-KSB, Exhibit 10.2 13 1999 Annual Report to Shareholders 20 Proxy Statement for 1999 Annual Meeting 21 Subsidiaries of ASB Financial Corp. Incorporated by reference to the 1995 Form 10-KSB, Exhibit 21 27 Financial Data Schedule
-30- EX-13 2 EXHIBIT 13 1 Exhibit 13 ASB FINANCIAL CORP. 1999 ANNUAL REPORT TO SHAREHOLDERS 2 Dear Fellow Shareholder: As we rapidly approach the twenty-first century, I am pleased to report on yet another year of solid earnings and asset growth for ASB Financial. Net earnings for the fiscal year ended June 30, 1999 totaled $1.1 million, or $.67 per diluted share, which represents as increase of $4,000 compared to net earnings reported for fiscal 1998. Your Corporation reported stable earnings despite the payment of a $2.00 special dividend in June 1998, which reduced interest-earning assets by $3.3 million heading into fiscal 1999. The reduction in net interest income of $112,000 as a result of this special dividend was offset by an increase in other income and a decrease in general and administrative expenses. Total assets amounted to $123.2 million at June 30, 1999, an increase of $6.8 million, or 5.8%, over June 30, 1998. The loan portfolio grew during fiscal 1999 by $5.9 million, or 7.7%, and deposit growth totaled $7.5 million, representing an 8.0% increase during the year. Your Corporation will continue to focus on the strategic objectives of continuing asset growth, maintaining a community focus, and providing personalized service for our valued customers. We believe that projects such as the new and expanded drive-up walk-up facility at 907 Chillicothe Street and the additional delivery channels we have provided our customers through ATM machines at Speedeemart of Wheelersburg and Country Store Foods at South Webster and Lucasville-Minford Roads, will provide the potential for similar growth in the future. Your Corporation's focus in fiscal 2000 will be to enhance earnings through additional fee income, particularly from the increase in sales of alternative financial products and services, as well as to continue our efforts to increase our net interest margin through the origination of business and commercial lending products. We are determined to improve our critical operating ratios such as return on equity, return on assets and earnings per share. The Board and management of your Corporation believe that small cap stocks in general, and ASB Financial in particular, have undeservedly lagged the overall market. ASB Financial has outperformed most of its financial institution competitors without a commensurate increase in our share price. Therefore, since dividends are another source of rewarding our shareholders, your Corporation declared and paid a $1.00 special dividend on August 31, 1999. As always, we remain committed to maximizing the return on your investment and thank you for your continued support of ASB Financial. Sincerely, Robert M. Smith President 3 BUSINESS OF ASB FINANCIAL CORP. ================================================================================ ASB Financial Corp. ("ASB" or the "Corporation"), a unitary savings and loan holding company incorporated under the laws of the State of Ohio, owns all of the issued and outstanding common shares of American Savings Bank, fsb ("American" or the "Savings Bank"), a savings bank chartered under the laws of the United States. ASB was formed in 1995 in connection with the conversion of American from a mutual savings association to a stock savings association (the "Conversion") which was completed in May 1995. 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 located outside of American's primary market area. In addition to real estate lending, American invests in mortgage-backed securities, U.S. Government and agency obligations and other investments 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 from borrowings from the Federal Home Loan Bank (the "FHLB") of Cincinnati. ASB is subject to regulation, supervision and examination by the Office of Thrift Supervision of the United States Department of the Treasury (the "OTS"). American is subject to regulation, supervision and examination by the OTS and the FDIC. American is also a member of the FHLB of Cincinnati. ASB's office is located at 503 Chillicothe Street, Portsmouth, Ohio 45662. The telephone number is (740) 354-3177. MARKET PRICE OF ASB'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS ================================================================================ There were 1,746,924 common shares of ASB outstanding on September 10, 1999, held of record by approximately 836 shareholders. Price information for 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 trading prices for the common shares of ASB, as quoted by Nasdaq, together with dividends declared per share, for each quarter of fiscal 1999 and 1998. Cash dividends Quarter Ended High Trade Low Trade declared - ------------- ---------- --------- -------- FISCAL 1998 September 30, 1997 $13.38 $11.75 $ .10 December 31, 1997 $13.50 $13.00 $ .10 March 31, 1998 $14.63 $13.25 $ .10 June 30, 1998 $16.75 $12.63 $2.10 FISCAL 1999 September 30, 1998 $13.38 $10.88 $ .10 December 31, 1998 $12.75 $ 9.81 $ .10 March 31, 1999 $12.38 $10.88 $ .10 June 30, 1999 $12.75 $10.38 $ .10 The income of ASB consists of interest and dividends 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 table sets forth certain information concerning the consolidated financial condition, earnings and other data regarding ASB at the dates and for the periods indicated.
SELECTED CONSOLIDATED FINANCIAL At June 30, CONDITION DATA: ---------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands) Total amount of: Assets $123,248 $116,437 $112,469 $112,922 $106,861 Cash and cash equivalents (1) 7,566 13,890 3,850 3,836 5,926 Certificates of deposit in other financial institutions 293 2,004 4,258 6,702 9,301 Investment securities available for sale - at market 19,372 11,835 18,660 19,284 1,768 Investment securities held to maturity - at amortized cost -- -- -- -- 14,107 Mortgage-backed securities available for sale - at market 10,232 8,924 8,560 10,728 2,300 Mortgage-backed securities held to maturity - at amortized cost -- -- -- -- 7,835 Loans receivable - net 82,430 76,550 74,136 68,455 62,153 Real estate acquired through foreclosure - net -- 157 -- 663 525 Deposits 100,954 93,477 89,752 83,395 78,888 Advances from the FHLB 5,823 4,354 2,884 2,413 442 Shareholders' equity, restricted (2) 15,040 14,490 17,701 25,613 26,058
- ------------------------ (1) Consists of cash and due from banks and interest-bearing deposits in other financial institutions. (2) At June 30, 1999, 1998, 1997 and 1996, includes $265,000, $714,000, $412,000 and $124,000, 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. 4 6
SELECTED CONSOLIDATED OPERATING Year ended June 30, DATA: ------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands, except per share data) Interest income $ 8,580 $ 8,541 $ 8,393 $ 8,173 $ 7,012 Interest expense 5,112 4,961 4,686 4,310 3,893 ------- ------- ------- ------- ------- Net interest income 3,468 3,580 3,707 3,863 3,119 Provision for (recoveries of) losses on loans (1) (5) 28 -- 10 ------- ------- ------- ------- ------- Net interest income after provision for (recoveries of) losses on loans 3,469 3,585 3,679 3,863 3,109 Other income 330 281 364 195 143 General, administrative and other expense 2,286 2,345 3,054 2,373 1,726 ------- ------- ------- ------- ------- Earnings before income taxes 1,513 1,521 989 1,685 1,526 Federal income taxes 433 445 322 574 518 ------- ------- ------- ------- ------- Net earnings $ 1,080 $ 1,076 $ 667 $ 1,111 $ 1,008 ======= ======= ======= ======= ======= Earnings per share Basic $ .68 $ .68 $ .42 $ .69 N/A ======= ======= ======= ======= ======= Diluted $ .67 $ .67 $ .41 $ .69 N/A ======= ======= ======= ======= =======
Year ended June 30, ---------------------------------------------- SELECTED FINANCIAL RATIOS: 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Return on average assets .90% .95% .59% 1.01% 1.00% Average interest rate spread during period 2.54 2.46 2.41 2.55 2.83 Net interest margin 3.04 3.25 3.39 3.69 3.29 Return on average equity 7.22 6.38 3.15 4.30 9.38 Equity to total assets at end of period 12.20 12.44 15.74 22.68 24.38 Average interest-earning assets to average interest-bearing liabilities 111.02 117.41 122.77 127.55 111.19 Net interest income to general, administrative and other expense 151.71 152.67 121.38 162.79 180.71 General, administrative and other expense to average total assets 1.91 2.08 2.70 2.16 1.72 Nonperforming assets to total assets .31 .34 1.02 1.61 2.30 Loan loss allowance to nonperforming loans 193.40 316.25 71.62 76.34 46.29 Dividend payout ratio 58.82 352.94 1,285.71 47.10 N/A
5 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ GENERAL - -------------------------------------------------------------------------------- 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. The following discussion and analysis of the consolidated financial condition and results of operations of ASB and American should be read in conjunction with and with reference to the consolidated financial statements, and the notes thereto, presented in this Annual Report. CHANGES IN FINANCIAL CONDITION FROM JUNE 30, 1998 TO JUNE 30, 1999 - -------------------------------------------------------------------------------- ASB's total assets amounted to $123.2 million at June 30, 1999, an increase of $6.8 million, or 5.8%, over 1998 levels. The increase in total assets was funded primarily from a $7.5 million increase in deposits and a $1.5 million increase in FHLB advances, which were partially offset by repayments of other borrowed money totaling $2.5 million. Cash, interest-bearing deposits and certificates of deposit totaled $7.9 million at June 30, 1999, a decrease of $8.0 million, or 50.6%, from 1998 levels. Investment securities totaled $19.4 million at June 30, 1999, an increase of $7.5 million, or 63.7%, from the balance at June 30, 1998. During fiscal 1998, management purchased $19.3 million of investment securities, primarily intermediate- and long-term U.S. Government agency securities. Such purchases were partially offset by maturities and sales totaling $11.3 million. Mortgage-backed securities increased by $1.3 million, or 14.7%, as purchases totaling $5.6 million exceeded principal repayments of $3.2 million and proceeds from sales of $838,000. Loans receivable increased by $5.9 million, or 7.7%, to a total of $82.4 million at June 30, 1999, compared to $76.6 million at June 30, 1998. Loan disbursements of $33.2 million and purchases of $778,000 exceeded principal repayments of $28.2 million during fiscal 1999. Loan origination volume during fiscal 1999 exceeded the volume of disbursements in fiscal 1998 by $8.1 million, or 32.2%. Growth in loans secured by residential real estate totaled $4.1 million, or 6.5%, while the nonresidential portfolio increased by $2.8 million, or 48.9%. At June 30, 1999, American's allowance for loan losses totaled $733,000, representing .85% of total loans and 193.4% of nonperforming loans. At June 30, 1998, the allowance for loan losses totaled $759,000, or .96% of total loans and 316.3% of nonperforming loans. Nonperforming loans amounted to $379,000 and $240,000 at June 30, 1999 and 1998, respectively, and represented .3% and .2% of total assets at those respective dates. Although management believes that its allowance for loan losses at June 30, 1999, was adequate based on the available facts and circumstances, 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. 6 8 Deposits increased by $7.5 million, or 8.0%, during fiscal 1999 to a total of $101.0 million at June 30, 1999. The increase resulted primarily from management's continuing efforts to maintain growth in deposits through marketing and pricing strategies. Borrowings decreased by $1.0 million, or 15.0%, during fiscal 1999, compared to 1998, as other borrowed money totaling $2.5 million was repaid during fiscal 1999, while advances from the FHLB increased by $1.5 million. Proceeds from advances and growth in deposits were generally used to fund new loan originations. Shareholders' equity totaled $15.0 million at June 30, 1999, an increase of $550,000, or 3.8%, from June 30, 1998 levels. The increase resulted primarily from net earnings of $1.1 million, which were partially offset by dividends of $463,000. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1999 AND 1998 - -------------------------------------------------------------------------------- GENERAL. Net earnings amounted to $1.1 million for the fiscal year ended June 30, 1999, an increase of $4,000, or .4%, over fiscal 1998. The increase in earnings resulted primarily from a $49,000 increase in other income, a $59,000 decrease in general, administrative and other expense and a $12,000 decrease in the provision for federal income taxes, which were partially offset by a $112,000 decrease in net interest income. NET INTEREST INCOME. Total interest income amounted to $8.6 million for the fiscal year ended June 30, 1999, an increase of $39,000, or .5%, over fiscal 1998. Interest income on loans totaled $6.4 million in fiscal 1999, an increase of $31,000, or .5%. This increase was due primarily to a $500,000, or .6%, increase in the weighted-average balance of loans outstanding in 1999. Interest income on mortgage-backed securities increased by $115,000, or 19.4%, as a result of a $2.5 million, or 31.0%, increase in the weighted-average balance outstanding, which was partially offset by a 65 basis point decline in yield. Interest income on investment securities and interest-bearing deposits decreased by $107,000, or 6.8%, due primarily to a 73 basis point decrease in the weighted-average yield from year to year, which was partially offset by a $1.0 million increase in the weighted-average balance outstanding year to year. Interest expense totaled $5.1 million for the fiscal year ended June 30, 1999, an increase of $151,000, or 3.1%, over the $5.0 million total recorded in fiscal 1998. Interest expense on deposits increased by $71,000, or 1.5%, due primarily to a $6.7 million, or 7.4%, increase in the weighted-average balance outstanding year to year, which was partially offset by a 29 basis point decrease in the weighted-average yield from year to year. Interest expense on borrowings increased by $80,000, or 34.0%, due primarily to a $2.3 million increase in the weighted-average balance outstanding, which was offset by a 132 basis point decrease in the average cost of borrowings, to 5.38% in fiscal 1999. As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $112,000, or 3.1%, to a total of $3.5 million for the fiscal year ended June 30, 1999, compared to $3.6 million in fiscal 1998. The interest rate spread increased by eight basis points to 2.54% in fiscal 1999 from 2.46% in fiscal 1998, while the net interest margin decreased to 3.04% in 1999 from 3.25% in 1998. 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 7 9 relate to American's market area, and other factors related to the collectibility of American's loan portfolio. As a result of such analysis, management determined that the allowance for loan losses was adequate and elected to record no provision for losses on loans for the fiscal years ended June 30, 1999 and 1998. 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. The foregoing statement is a "forward-looking" statement within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Factors that could affect the adequacy of the loan loss allowance include, but are not limited to, the following: (1) changes in the national and local economy which may negatively impact the ability of borrowers to repay their loans and which may cause the value of real estate and other properties that secure outstanding loans to decline; (2) unforeseen adverse changes in circumstances with respect to certain large loan borrowers; (3) decrease in the value of collateral securing consumer loans to amounts equal to less than the outstanding balances of the consumer loans; and (4) determinations by various regulatory agencies that the Savings Bank must recognize additions to its loan loss allowance based on such regulators' judgment of information available to them at the time of their examinations. OTHER INCOME. Other income totaled $330,000 for the fiscal year ended June 30, 1999, an increase of $49,000, or 17.4%, over the $281,000 recorded in fiscal 1998. The increase resulted primarily from an increase of $39,000 in gain on sale of investment securities year to year, coupled with an increase of $13,000 in other operating income. GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other expense totaled $2.3 million for the fiscal year ended June 30, 1999, a decrease of $59,000, or 2.5%, from the total recorded in fiscal 1998. The decrease resulted primarily from a $44,000, or 3.5%, decrease in employee compensation and benefits, coupled with a $43,000, or 17.6% decline in franchise taxes and a $14,000, or 2.9%, decrease in other operating expense, which were partially offset by a $48,000, or 24.5%, increase in data processing costs. The decrease in employee compensation and benefits was due primarily to a decline in staffing levels year to year, coupled with an increase in deferred loan origination costs resulting from the increase in loan volume in fiscal 1999. The decrease in franchise taxes resulted from ASB's decrease in equity capital due to its dividend distributions in fiscal 1998 and 1997, coupled with a decrease in franchise tax rates. The increase in data processing was due primarily to American's overall growth year to year. FEDERAL INCOME TAXES. The provision for federal income taxes totaled $433,000 for the fiscal year ended June 30, 1999, a decrease of $12,000, or 2.7%, from the $445,000 recorded in fiscal 1998. The decrease was due primarily to a $8,000, or .5%, decrease in pretax earnings year to year, coupled with tax credits realized from American's investment in a low income housing project. ASB's effective tax rates were 28.6% and 29.3% for the fiscal years ended June 30, 1999 and 1998, respectively. 8 10 COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 - -------------------------------------------------------------------------------- GENERAL. Net earnings amounted to $1.1 million for the fiscal year ended June 30, 1998, an increase of $409,000, or 61.3%, over the $667,000 in net earnings recorded in fiscal 1997. The increase in net earnings resulted primarily from the absence of a $551,000 charge recorded in fiscal 1997 as a result of the one-time Savings Association Insurance Fund ("SAIF") recapitalization assessment, coupled with a $158,000 decrease in general, administrative and other expense, which were partially offset by a $127,000 decrease in net interest income, an $83,000 decrease in other income and a $123,000 increase in the provision for federal income taxes. NET INTEREST INCOME. Total interest income amounted to $8.5 million for the fiscal year ended June 30, 1998, an increase of $148,000, or 1.8%, over fiscal 1997. Interest income on loans totaled $6.4 million in fiscal 1998, an increase of $481,000, or 8.2%. This increase was due primarily to a $7.6 million, or 10.7%, increase in the weighted-average balance of loans outstanding, which was partially offset by a decrease in yield of 18 basis points to 8.07% in 1998. Interest income on mortgage-backed securities decreased by $86,000, or 12.6%, as a result of a $1.4 million decrease in the weighted-average balance outstanding in fiscal 1998. Interest income on investment securities and interest-bearing deposits decreased by $247,000, or 13.5%, due primarily to a $5.5 million decrease in the weighted-average balance outstanding year to year. Interest expense totaled $5.0 million for the fiscal year ended June 30, 1998, an increase of $275,000, or 5.9%, over the $4.7 million total recorded in fiscal 1997. Interest expense on deposits increased by $207,000, or 4.6%, due primarily to a $4.0 million, or 4.7%, increase in the weighted-average balance outstanding year to year. Interest expense on borrowings increased by $68,000, or 40.7%, due primarily to a $686,000 increase in the weighted-average balance outstanding and a 78 basis point increase in the average cost of borrowings, to 6.70%, in fiscal 1998. As a result of the foregoing changes in interest income and interest expense, net interest income decreased by $127,000, or 3.4%, to a total of $3.6 million for the fiscal year ended June 30, 1998, compared to $3.7 million in fiscal 1997. The interest rate spread increased by five basis points to 2.46% in fiscal 1998 from 2.41% in fiscal 1997, while the net interest margin decreased to 3.25% in 1998 from 3.39% in 1997. PROVISION FOR LOSSES ON LOANS. As a result of an analysis of American's 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, management determined that the allowance for loan losses was adequate and elected to record no provision for losses on loans for the fiscal year ended June 30, 1998, while realizing a $5,000 recovery on loan losses, as compared to a $28,000 provision for losses on loans recorded during the fiscal year ended June 30, 1997. OTHER INCOME. Other income totaled $281,000 for the fiscal year ended June 30, 1998, a decrease of $83,000, or 22.8%, from the $364,000 recorded in fiscal 1997. The decrease resulted primarily from a decrease of $82,000 in gain on sale of investment securities. 9 11 GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other expense totaled $2.3 million for the fiscal year ended June 30, 1998, a decrease of $709,000, or 23.2%, from the $3.1 million total recorded in fiscal 1997. The decrease resulted primarily from a $551,000 charge recorded during fiscal 1997 in connection with the SAIF recapitalization, coupled with a $109,000, or 8.0%, decrease in employee compensation and benefits, a $57,000, or 50.0% decline in federal deposit insurance premiums (after consideration of the special assessment) and a $21,000, or 4.2%, decrease in other operating expense, which were partially offset by an $18,000, or 7.9%, increase in franchise taxes and a $17,000, or 9.5%, increase in data processing costs. The decrease in employee compensation and benefits was due primarily to a decline in staffing levels year to year, coupled with an increase in deferred loan origination costs resulting from the increase in loan volume in fiscal 1998. The decrease in federal deposit insurance premiums was due to a decline in premium rates following the recapitalization assessment. The decrease in other operating expenses was due primarily to nonrecurring professional fees recorded in fiscal 1997 related to the return of capital distribution, which was partially offset by expenses recognized related to American's investment in a low-income housing development. These expenses were more than offset by federal income tax credits. The increase in franchise taxes resulted from ASB's increase in equity capital. The increase in data processing was due to American's overall growth year to year. FEDERAL INCOME TAXES. The provision for federal income taxes totaled $445,000 for the fiscal year ended June 30, 1998, an increase of $123,000, or 38.2%, over the $322,000 recorded in fiscal 1997. The increase was due primarily to a $532,000, or 53.8%, increase in pretax earnings year to year, which was partially offset by tax credits realized from American's investment in a low income housing project. ASB's effective tax rates were 29.3% and 32.6% for the fiscal years ended June 30, 1998 and 1997, respectively. 10 12 AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA - -------------------------------------------------------------------------------- The following table sets forth certain information relating to ASB's average balance sheet and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average monthly balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented. Average balances are derived from average monthly balances, which include nonaccruing loans in the loan portfolio, net of the allowance for loan losses.
Year ended June 30, ------------------------------------------------------------------------------------------------ 1999 1998 1997 ------------------------------ ------------------------------- ------------------------------ 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 $ 79,368 $ 6,394 8.06% $ 78,868 $6,363 8.07% $ 71,260 $5,882 8.25% Mortgage-backed securities 10,633 709 6.67 8,118 594 7.32 9,487 680 7.17 Investment securities and other interest-earning assets 24,226 1,477 6.10 23,177 1,584 6.83 28,664 1,831 6.39 -------- ------- ------ -------- ------ ------ -------- ------ ------ Total interest-earning assets 114,227 8,580 7.51 110,163 8,541 7.75 109,411 8,393 7.67 Non-interest-earning assets 5,710 2,824 3,662 -------- --------- -------- Total assets $119,937 $112,987 $113,073 ======== ======== ======== Interest-bearing liabilities: Deposits $ 97,032 4,797 4.94 $ 90,317 4,726 5.23 $ 86,296 4,519 5.24 Borrowings 5,857 315 5.38 3,508 235 6.70 2,822 167 5.92 -------- ------- ------ -------- ------ ------ -------- ------ ------ Total interest-bearing liabilities 102,889 5,112 4.97 93,825 4,961 5.29 89,118 4,686 5.26 -------- ------- ------ ------ ------ ------ ------ Non-interest-bearing liabilities 2,088 2,289 2,752 -------- -------- -------- Total liabilities 104,977 96,114 91,870 Shareholders' equity 14,960 16,873 21,203 -------- -------- -------- Total liabilities and shareholders' equity $119,937 $112,987 $113,073 ======== ======== ======== Net interest income $ 3,468 $3,580 $3,707 ======= ====== ====== Interest rate spread 2.54% 2.46% 2.41% ====== ====== ====== Net interest margin (net interest income as a percent of average interest-earning assets) 3.04% 3.25% 3.39% ====== ====== ====== Average interest-earning assets to average interest- bearing liabilities 111.02% 117.41% 122.77% ====== ====== ======
- ----------------------------------- 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, -------------------------------------------------- 1999 vs. 1998 1998 vs. 1997 ----------------- ---------------------- Increase Increase (decrease) (decrease) due to due to ----------------- ---------------------- Volume Rate Total Volume Rate Total ------ ---- ----- ------ ---- ----- (In thousands) Interest-earning assets: Loans receivable $ 40 $ (9) $ 31 $ 612 $(131) $ 481 Mortgage-backed securities 174 (59) 115 (100) 14 (86) Investment securities and interest - bearing assets 67 (174) (107) (368) 121 (247) ----- ----- ----- ----- ----- ----- Total interest-earning assets 281 (242) 39 144 4 148 ----- ----- ----- ----- ----- ----- Interest-bearing liabilities: Deposits 341 (270) 71 213 (6) 207 Borrowings 117 (37) 80 44 24 68 ----- ----- ----- ----- ----- ----- Total interest-bearing liabilities 458 (307) 151 257 18 275 ----- ----- ----- ----- ----- ----- Increase (decrease) in net interest income $(177) $ 65 $(112) $(113) $ (14) $(127) ===== ===== ===== ===== ===== =====
ASSET AND LIABILITY MANAGEMENT - -------------------------------------------------------------------------------- American, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. As a part of its effort to monitor its interest rate risk, American reviews the reports of the OTS which set forth the application of the "net portfolio value" ("NPV") methodology adopted by the OTS as part of its 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 more 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. See "Liquidity and Capital Resources." 12 14 At June 30, 1999, 2% of the present value of American's assets was approximately $2.5 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 $2.5 million at June 30, 1999, American would have been required to deduct $12,000 (50% of the $24,000 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, 1999, would still have exceeded the regulatory requirement by approximately $10.9 million. The following table presents, at June 30, 1999 and 1998, 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 June 30, 1999 At June 30, 1998 ------------------ ---------------- 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)% $(3,945) (26)% $(4,335) (25)% +200 (30) (2,489) (16) (2,706) (16) +100 (20) (1,109) (7) (1,189) (7) 0 0 0 0 0 0 -100 20 560 4 743 4 -200 30 837 5 1,249 7 -300 40 1,345 9 1,973 11
In the event that interest rates should 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 are summarized below on a consolidated basis for the years ended June 30, 1999, 1998, and 1997: Year ended June 30, ------------------------------ 1999 1998 1997 ---- ---- ---- (In thousands) Net cash from operating activities $ 1,323 $ 1,145 $ 1,113 Net cash from investing activities (13,629) 6,618 723 Net cash from financing activities 5,982 2,277 (1,822) -------- -------- -------- Net change in cash and cash equivalents (6,324) 10,040 14 Cash and cash equivalents at the beginning of the year 13,890 3,850 3,836 -------- -------- -------- Cash and cash equivalents at the end of the year $ 7,566 $ 13,890 $ 3,850 ======== ======== ======== 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 a savings association 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 4% 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, 1999, was approximately $23.2 million, or 21.4%, and exceeded the then applicable 4.0% liquidity requirement by approximately $18.9 million, or 17.4%. At June 30, 1999, American had outstanding commitments of approximately $1.2 million to originate loans and $1.3 million to purchase loans. Additionally, American was obligated under unused lines and letters of credit totaling $4.1 million. In the opinion of management, all loan commitments had interest rates which equaled or exceeded market interest rates as of June 30, 1999, 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, 1999, 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, 1999, and the minimum requirement amounts. Tangible and core capital are reflected as a percentage of adjusted total assets. Risk-based (or total) capital, which consists of core and supplementary capital, is reflected as a percentage of risk-weighted assets. 14 16
AS OF JUNE 30, 1999 REGULATORY CURRENT CAPITAL REQUIREMENT ----------------- --------------------------------------------------------------- AMOUNT PERCENT AMOUNT PERCENT (Dollars in thousands) Tangible capital $12,769 10.4% greater than or equal to $1,833 greater than or equal to 1.5% Core capital $12,769 10.4% greater than or equal to $3,666 greater than or equal to 3.0% Risk-based capital $13,502 21.3% greater than or equal to $5,069 greater than or equal to 8.0%
EXCESS OF REGULATORY CAPITAL OVER CURRENT REQUIREMENT ------------------------------------------------------------------ AMOUNT PERCENT Tangible capital greater than or equal to $10,936 greater than or equal to 8.9% Core capital greater than or equal to $ 9,103 greater than or equal to 7.4% Risk-based capital greater than or equal to $ 8,433 greater than or equal to 13.3%
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------------------------------------------------------- In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. It does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Management adopted SFAS No. 130 effective July 1, 1998, as required, without material impact on ASB's financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 significantly changed the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about reportable segments in interim financial reports issued to shareholders. It also established standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 uses a "management approach" to disclose financial and descriptive information about the way that management organizes the segments within the enterprise for making operating decisions and assessing performance. For many enterprises, the management approach will likely result in more segments being reported. In addition, SFAS No. 131 requires significantly more information to be disclosed for each reportable segment than is presently being reported in annual financial statements and also requires that selected information be reported in interim financial statements. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. Management adopted SFAS No. 131 effective July 1, 1998, as required, without material impact on ASB's financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires entities to recognize all derivatives in their financial 15 17 statements as either assets or liabilities measured at fair value. SFAS No. 133 also specifies new methods of accounting for hedging transactions, prescribes the items and transactions that may be hedged, and specifies detailed criteria to be met to qualify for hedge accounting. The definition of a derivative financial instrument is complex, but in general, it is an instrument with one or more underlyings, such as an interest rate or foreign exchange rate, that is applied to a notional amount, such as an amount of currency, to determine the settlement amount(s). It generally requires no significant initial investment and can be settled net or by delivery of an asset that is readily convertible to cash. SFAS No. 133 applies to derivatives embedded in other contracts, unless the underlying of the embedded derivative is clearly and closely related to the host contract. SFAS No. 133, as amended by SFAS no. 137, is effective for fiscal years beginning after June 15, 2000. On adoption, entities are permitted to transfer held-to-maturity debt securities to the available-for-sale or trading category without calling into question their intent to hold other debt securities to maturity in the future. SFAS No. 133 is not expected to have a material impact on ASB's financial statements. YEAR 2000 COMPLIANCE MATTERS - -------------------------------------------------------------------------------- As with most providers of financial services, American's operations are heavily dependent on information technology systems. American has addressed the potential problems associated with the possibility that the computers that control or operate American's information technology system and infrastructure may not be programmed to read four-digit date codes and, upon arrival of the year 2000, may recognize the two-digit code "00" as the year 1900, causing systems to fail to function or to generate erroneous data. American's primary data processing applications, which are handled by a third-party service bureau, Intrieve, Inc., have been identified as mission critical. Intrieve has advised American that it has implemented a fully Year 2000 compliant processing system that has been fully tested as of January 1, 1999. Additionally, American's systems were tested in November 1998 with satisfactory results. Management has also reviewed American's ancillary equipment and implemented the appropriate remedial measures without material cost. American has developed a contingency plan in case Intrieve actually fails at Year 2000 critical dates. American deems the likelihood of failure of the service provider's efforts to renovate Year 2000 changes to the on-line core account processing system to be remote. The contingency plan, therefore, primarily addresses action to deal with the possibility that the service provider's system would be down for several days or weeks upon arrival of Year 2000. American can conduct and record transactions manually until the service provider is operational. American estimates its expenses related to the Year 2000 to be less than $10,000. In addition to possible expense related to its own systems, American could incur losses if loan payments are delayed due to year 2000 problems affecting any major borrowers in American's primary market area. Because American's loan portfolio is highly diversified with regard to individual borrowers and types of businesses and American's primary market area is not significantly dependent upon one employer or industry, American does not expect any significant or prolonged difficulties that will affect net earnings or cash flow. 16 18 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ PAGE REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 18 FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 19 CONSOLIDATED STATEMENTS OF EARNINGS 20 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 21 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 22 CONSOLIDATED STATEMENTS OF CASH FLOWS 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25 17 19 Report of Independent Certified Public Accountants -------------------------------------------------- Board of Directors ASB Financial Corp. We have audited the accompanying consolidated statements of financial condition of ASB Financial Corp. as of June 30, 1999 and 1998, and the related consolidated statements of earnings, comprehensive income, shareholders' equity, and cash flows for each of the three years ended June 30, 1999, 1998 and 1997. 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. as of June 30, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the years ended June 30, 1999, 1998 and 1997, in conformity with generally accepted accounting principles. Cincinnati, Ohio July 21, 1999 18 20 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, (In thousands, except share data)
ASSETS 1999 1998 Cash and due from banks $ 4,078 $ 495 Interest-bearing deposits in other financial institutions 3,488 13,395 --------- --------- Cash and cash equivalents 7,566 13,890 Certificates of deposit in other financial institutions 293 2,004 Investment securities available for sale - at market 19,372 11,835 Mortgage-backed securities available for sale - at market 10,232 8,924 Loans receivable - net 82,430 76,550 Office premises and equipment - at depreciated cost 1,047 932 Real estate acquired through foreclosure - net -- 157 Federal Home Loan Bank stock - at cost 778 725 Accrued interest receivable on loans 78 125 Accrued interest receivable on mortgage-backed securities 66 70 Accrued interest receivable on investments and interest-bearing deposits 290 308 Prepaid expenses and other assets 714 665 Prepaid federal income taxes 200 222 Deferred federal income tax assets 182 30 --------- --------- Total assets $ 123,248 $ 116,437 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ 100,954 $ 93,477 Advances from the Federal Home Loan Bank 5,823 4,354 Other borrowed money -- 2,500 Advances by borrowers for taxes and insurance 168 169 Accrued interest payable 93 118 Other liabilities 1,170 1,329 --------- --------- Total liabilities 108,208 101,947 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; 1,740,854 shares issued -- -- Additional paid-in capital 8,427 8,304 Retained earnings, restricted 8,909 8,292 Shares acquired by stock benefit plans (1,418) (1,677) Unrealized gains on securities designated as available for sale, net of related tax effects 265 714 Less 86,066 shares of treasury stock - at cost (1,143) (1,143) --------- --------- Total shareholders' equity 15,040 14,490 --------- --------- Total liabilities and shareholders' equity $ 123,248 $ 116,437 ========= =========
The accompanying notes are an integral part of these statements. 19 21 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF EARNINGS For the year ended June 30, (In thousands, except share data)
1999 1998 1997 Interest income Loans $ 6,394 $ 6,363 $ 5,882 Mortgage-backed securities 709 594 680 Investment securities 1,405 1,390 1,494 Interest-bearing deposits and other 72 194 337 ------- ------- ------- Total interest income 8,580 8,541 8,393 Interest expense Deposits 4,797 4,726 4,519 Borrowings 315 235 167 ------- ------- ------- Total interest expense 5,112 4,961 4,686 ------- ------- ------- Net interest income 3,468 3,580 3,707 Provision for (recoveries of) losses on loans (1) (5) 28 ------- ------- ------- Net interest income after provision for (recoveries of) losses on loans 3,469 3,585 3,679 Other income Gain on sale of investment securities 61 22 104 Other operating 272 259 260 Loss on sale of real estate acquired through foreclosure (3) -- -- ------- ------- ------- Total other income 330 281 364 General, administrative and other expense Employee compensation and benefits 1,207 1,251 1,360 Occupancy and equipment 111 116 122 Federal deposit insurance premiums 56 57 665 Franchise taxes 202 245 227 Data processing 244 196 179 Other operating 466 480 501 ------- ------- ------- Total general, administrative and other expense 2,286 2,345 3,054 ------- ------- ------- Earnings before income taxes 1,513 1,521 989 Federal income taxes Current 355 438 309 Deferred 78 7 13 ------- ------- ------- Total federal income taxes 433 445 322 ------- ------- ------- NET EARNINGS $ 1,080 $ 1,076 $ 667 ======= ======= ======= EARNINGS PER SHARE Basic $ .68 $ .68 $ .42 ======= ======= ======= Diluted $ .67 $ .67 $ .41 ======= ======= =======
The accompanying notes are an integral part of these statements. 20 22 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended June 30, (In thousands)
1999 1998 1997 Net earnings $ 1,080 $ 1,076 $ 667 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities during the period, net of tax of $210, $163 and $184 in 1999, 1998 and 1997, respectively (409) 317 357 Reclassification adjustment for realized gains included in earnings, net of tax of $21, $7 and $75 in 1999, 1998 and 1997, respectively (40) (15) (69) ------- ------- ------- Comprehensive income $ 631 $ 1,378 $ 955 ======= ======= ======= Accumulated comprehensive income $ 265 $ 714 $ 412 ======= ======= =======
The accompanying notes are an integral part of these statements. 21 23 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended June 30, 1999, 1998 and 1997 (In thousands, except share data)
SHARES UNREALIZED GAINS ACQUIRED (LOSSES) ON ADDITIONAL BY STOCK SECURITIES COMMON PAID-IN RETAINED BENEFIT DESIGNATED AS STOCK CAPITAL EARNINGS PLANS AVAILABLE FOR SALE Balance at July 1, 1996 $ - $ 16,496 $ 11,173 $ (2,180) $ 124 Amortization of expense related to stock benefit plans - 31 - 259 - Issuance of shares under stock option plan - 103 - - - Net earnings for the year ended June 30, 1997 - - 667 - - Capital distributions of $5.40 per share - (8,607) (653) - - Unrealized gains on securities designated as available for sale, net of related tax effects - - - - 288 ---- -------- -------- -------- -------- Balance at June 30, 1997 - 8,023 11,187 (1,921) 412 Amortization of expense related to stock benefit plans - 85 - 244 - Issuance of shares under stock option plan - 196 - - - Net earnings for the year ended June 30, 1998 - - 1,076 - - Cash dividends of $2.40 per share - - (3,971) - - Purchase of treasury shares - at cost - - - - - Unrealized gains on securities designated as available for sale, net of related tax effects - - - - 302 ---- -------- -------- -------- -------- Balance at June 30, 1998 - 8,304 8,292 (1,677) 714 Amortization of expense related to stock benefit plans - 123 - 259 - Net earnings for the year ended June 30, 1999 - - 1,080 - - Cash dividends of $.40 per share - - (463) - - Unrealized losses on securities designated as available for sale, net of related tax effects - - - - (449) ---- -------- -------- -------- -------- Balance at June 30, 1999 $ - $ 8,427 $ 8,909 $ (1,418) $ 265 ==== ======== ======== ======== ========
TREASURY STOCK TOTAL Balance at July 1, 1996 $ - $ 25,613 Amortization of expense related to stock benefit plans - 290 Issuance of shares under stock option plan - 103 Net earnings for the year ended June 30, 1997 - 667 Capital distributions of $5.40 per share - (9,260) Unrealized gains on securities designated as available for sale, net of related tax effects - 288 -------- -------- Balance at June 30, 1997 - 17,701 Amortization of expense related to stock benefit plans - 329 Issuance of shares under stock option plan - 196 Net earnings for the year ended June 30, 1998 - 1,076 Cash dividends of $2.40 per share - (3,971) Purchase of treasury shares - at cost (1,143) (1,143) Unrealized gains on securities designated as available for sale, net of related tax effects - 302 -------- -------- Balance at June 30, 1998 (1,143) 14,490 Amortization of expense related to stock benefit plans - 382 Net earnings for the year ended June 30, 1999 - 1,080 Cash dividends of $.40 per share - (463) Unrealized losses on securities designated as available for sale, net of related tax effects - (449) -------- -------- Balance at June 30, 1999 $ (1,143) $ 15,040 ======== ========
The accompanying notes are an integral part of these statements. 22 24 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended June 30, (In thousands)
1999 1998 1997 Cash flows from operating activities: Net earnings for the year $ 1,080 $ 1,076 $ 667 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 38 33 30 Amortization of deferred loan origination fees (67) (85) (64) Amortization of expense related to stock benefit plans 382 329 290 Depreciation and amortization 66 73 78 Provision for losses (recoveries) on loans (1) (5) 28 Gain on sale of investment securities (61) (22) (104) Loss on sale of real estate acquired through foreclosure 3 - - Federal Home Loan Bank stock dividends (53) (50) (48) Increase (decrease) in cash due to changes in: Accrued interest receivable on loans 47 (30) 25 Accrued interest receivable on mortgage-backed securities 4 8 31 Accrued interest receivable on investments and interest-bearing deposits 18 48 123 Prepaid expenses and other assets (49) (61) (18) Accrued interest payable (25) 6 (3) Other liabilities (159) (22) 132 Federal income taxes Current 22 (160) (67) Deferred 78 7 13 -------- -------- -------- Net cash provided by operating activities 1,323 1,145 1,113 Cash flows provided by (used in) investing activities: Proceeds from maturity of investment securities 11,264 13,970 4,650 Proceeds from sale of investment securities 60 1,007 3,576 Purchase of investment securities (19,259) (7,768) (7,057) Purchase of mortgage-backed securities (5,625) (3,327) - Proceeds from sale of mortgage-backed securities 838 119 - Principal repayments on mortgage-backed securities 3,221 2,905 2,133 Purchase of loans (778) (2,183) (773) Loan principal repayments 28,170 24,815 17,697 Loan disbursements (33,204) (25,113) (22,503) Purchase of office premises and equipment (181) (61) (91) Proceeds from sale of office premises and equipment - - 9 Proceeds from sale of real estate acquired through foreclosure 154 - 598 Redemption of Federal Home Loan Bank stock - - 40 Decrease in certificates of deposit in other financial institutions - net 1,711 2,254 2,444 -------- -------- -------- Net cash provided by (used in) investing activities (13,629) 6,618 723 -------- -------- -------- Net cash provided by (used in) operating and investing activities (subtotal carried forward) (12,306) 7,763 1,836 -------- -------- --------
23 25 ASB FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the year ended June 30, (In thousands)
1999 1998 1997 Net cash provided by (used in) operating and investing activities (subtotal brought forward) $(12,306) $ 7,763 $ 1,836 Cash flows provided by (used in) financing activities: Net increase in deposit accounts 7,477 3,725 6,357 Proceeds from Federal Home Loan Bank advances 2,000 4,000 2,500 Proceeds from other borrowed money - 2,500 3,500 Repayment of Federal Home Loan Bank advances (531) (2,530) (2,029) Repayment of other borrowed money (2,500) (500) (3,000) Advances by borrowers for taxes and insurance (1) - 7 Proceeds from issuance of shares under stock option plan - 196 103 Purchase of treasury stock - (1,143) - Capital distributions and dividends paid on common stock (463) (3,971) (9,260) -------- -------- -------- Net cash provided by (used in) financing activities 5,982 2,277 (1,822) -------- -------- -------- Net increase (decrease) in cash and cash equivalents (6,324) 10,040 14 Cash and cash equivalents at beginning of year 13,890 3,850 3,836 -------- -------- -------- Cash and cash equivalents at end of year $ 7,566 $ 13,890 $ 3,850 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Federal income taxes $ 377 $ 618 $ 383 ======== ======== ======== Interest on deposits and borrowings $ 5,137 $ 4,955 $ 4,689 ======== ======== ======== Supplemental disclosure of noncash investing activities: Transfers from loans to real estate acquired through foreclosure $ - $ 157 $ - ======== ======== ======== Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ (449) $ 302 $ 288 ======== ======== ========
The accompanying notes are an integral part of these statements. 24 26 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ASB Financial Corp. (the "Corporation") is a savings and loan holding company whose activities are primarily limited to holding the stock of American Savings Bank, fsb (the "Savings Bank"). The Savings Bank conducts a general banking business in southeastern Ohio which consists of attracting deposits from the general public and primarily applying those funds to the origination of loans for residential, consumer and nonresidential purposes. The Savings Bank's profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative 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, and its subsidiary A.S.L. Services, Inc. All significant intercompany balances and transactions have been eliminated. 2. Investment Securities and Mortgage-Backed Securities ---------------------------------------------------- The Corporation accounts for investment and mortgage-backed securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities". SFAS No. 115 requires that investments in debt and equity securities be categorized as held-to-maturity, trading, or available for sale. Securities classified as held-to-maturity are carried at cost only if the Corporation has the positive intent and ability to hold these securities to maturity. Trading securities and securities designated as available for sale are carried at fair value with resulting unrealized gains or losses recorded to operations or shareholders' equity, respectively. 25 27 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2. Investment Securities and Mortgage-Backed Securities (continued) ---------------------------------------------------- At June 30, 1999 and 1998, the Corporation's shareholders' equity reflected a net unrealized gain on securities designated as available for sale of $265,000 and $714,000, respectively. Realized gains and losses on sales of securities are recognized using the specific identification method. 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. 26 28 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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). The Savings Bank accounts for impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which requires that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or, as an alternative, at the loan's observable market price or fair value of the collateral. The Savings Bank's current procedures for evaluating impaired loans result in carrying such loans at the lower of cost or fair value. A loan is defined under SFAS No. 114 as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In applying the provisions of SFAS No. 114, the Savings Bank considers its investment in one- to four-family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. With respect to the Savings Bank's investment in 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, 1999 and 1998, the Savings Bank's investment in impaired loans, as defined, totaled approximately $459,000 and $464,000, respectively. The Savings Bank maintained an allowance for credit losses related to such impaired loans of $46,000 at those respective dates. 27 29 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. 8. Federal Income Taxes -------------------- The Corporation accounts for federal income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes." Pursuant to the provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will result in taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years earnings, offset against taxable temporary differences reversing in future periods, or 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. 28 30 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. Recognition of compensation expense related to these salary continuation agreements totaled $19,000, $10,000 and $33,000 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. 10. Benefit Plans ------------- The Corporation has an Employee Stock Ownership Plan ("ESOP") which provides retirement benefits for substantially all employees who have completed one year of service and have attained the age of 21. The Corporation accounts for the ESOP in accordance with Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee Stock Ownership Plans". SOP 93-6 requires that compensation expense recorded by employers equal the fair value of ESOP shares allocated to participants during a given fiscal year. Expense related to the ESOP totaled approximately $172,000, $274,000 and $296,000 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. The Corporation also has a Management Recognition Plan ("MRP") which provides for the issuance and grant of 68,558 shares to members of the board of directors and management. During fiscal 1996, the MRP purchased 68,558 shares of the Corporation's common stock in the open market. At June 30, 1999, 48,302 shares had been awarded. Common stock awarded under the MRP vests ratably over a five year period, commencing with the date of the award. Expense recognized under the MRP plan totaled approximately $167,000, $153,000 and $137,000 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. 11. Earnings Per Share and Dividends Per Share ------------------------------------------ Basic earnings per share for the fiscal years ended June 30, 1999, 1998 and 1997 is based upon the weighted-average shares outstanding during the year, less 62,795, 77,756 and 126,541 unallocated ESOP shares, respectively. Weighted-average common shares deemed outstanding totaled 1,584,451, 1,586,217 and 1,591,703 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. Diluted earnings per share is computed taking into consideration common shares outstanding and dilutive potential common shares to be issued under the Corporation's stock option plan. Weighted-average common shares deemed outstanding for purposes of computing diluted earnings per share totaled 1,611,751, 1,615,737 and 1,625,981 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. Incremental shares related to the assumed exercise of stock options included in the computation of diluted earnings per share totaled 27,300, 29,520 and 34,278 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. 29 31 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 11. Earnings Per Share and Dividends Per Share (continued) ------------------------------------------------------ During fiscal 1997, the Corporation declared dividends of $5.40 per common share. Of this amount, $5.00 per share was paid in December 1996 from funds retained by the Corporation in the conversion to stock form and was deemed by management to constitute a return of excess capital. Accordingly, the Corporation charged the return of capital distribution to additional paid-in-capital. Management determined that approximately $5.17 of the 1997 fiscal year distributions constituted a tax-free return of capital. 12. 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, 1999 and 1998: CASH AND CASH EQUIVALENTS: The financial statement carrying amounts for cash and cash equivalents are deemed to approximate fair value. CERTIFICATES OF DEPOSIT IN OTHER FINANCIAL INSTITUTIONS: The financial statement carrying amounts for certificates of deposit in other financial institutions are deemed to approximate fair value. INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and mortgage-backed securities, fair value is deemed to equal the quoted market price. LOANS RECEIVABLE: The loan portfolio has been segregated into categories with similar characteristics, such as one- to four-family residential, multi-family residential and nonresidential real estate. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality. For loans on deposit accounts and consumer and other loans, fair values were deemed to equal the historic carrying values. The historical carrying amount of accrued interest on loans is deemed to approximate fair value. 30 32 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 12. Fair Value of Financial Instruments (continued) ----------------------------------------------- FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value. DEPOSITS: The fair values of NOW accounts, passbook accounts, money market demand accounts and advances by borrowers are deemed to approximate the amount payable on demand. Fair values for fixed-rate certificates of deposit have been estimated using a discounted cash flow calculation using the interest rates currently offered for deposits of similar remaining maturities. ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWED MONEY: The fair value of these advances and borrowings are estimated using the rates currently offered for similar advances and borrowings 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, 1999 and 1998, the difference between the fair value and notional amount of loan commitments was not material. Based on the foregoing methods and assumptions, the carrying value and fair value of the Corporation's financial instruments at June 30 are as follows:
1999 1998 CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE (In thousands) Financial assets Cash and cash equivalents $ 7,566 $ 7,566 $ 13,890 $ 13,890 Certificates of deposit in other financial institutions 293 293 2,004 2,004 Investment securities 19,372 19,372 11,835 11,835 Mortgage-backed securities 10,232 10,232 8,924 8,924 Loans receivable 82,430 82,127 76,550 77,895 Federal Home Loan Bank stock 778 778 725 725 -------- -------- -------- -------- $120,671 $120,368 $113,928 $115,273 ======== ======== ======== ======== Financial liabilities Deposits $100,954 $101,403 $ 93,477 $ 93,605 Advances from the Federal Home Loan Bank 5,823 5,750 4,354 4,493 Other borrowed money - - 2,500 2,509 Escrow deposits 168 168 169 169 -------- -------- -------- -------- $106,945 $107,321 $100,500 $100,776 ======== ======== ======== ========
31 33 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 13. Comprehensive Income -------------------- The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as of July 1, 1998. The Statement established standards for reporting and presentation of comprehensive income and its components in a full set of general-purpose financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is presented with the same prominence as other financial statements. SFAS No. 130 requires that companies (i) classify items of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital. Financial statements for earlier periods have been restated for comparative purposes. Accumulated comprehensive income consists solely of the change in unrealized gains and losses on securities designated as available for sale in accordance with SFAS No. 115. 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. 15. Reclassifications ----------------- Certain prior year amounts have been reclassified to conform to the 1999 consolidated financial statement presentation. NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of investment securities designated as available for sale at June 30, 1999 and 1998 are summarized as follows:
1999 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE (In thousands) AVAILABLE FOR SALE: U.S. Government agency obligations $18,764 $ 33 $ 664 $18,133 FHLMC stock 19 1,083 - 1,102 Corporate equity securities 169 1 33 137 ------- ------- ------- ------- $18,952 $ 1,117 $ 697 $19,372 ======= ======= ======= =======
32 34 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
1998 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE (In thousands) AVAILABLE FOR SALE: U.S. Government agency obligations $10,729 $ 69 $ 32 $10,766 FHLMC stock 20 921 - 941 Corporate equity securities 140 - 12 128 ------- ------- ------- ------- $10,889 $ 990 $ 44 $11,835 ======= ======= ======= =======
The amortized cost and estimated fair value of U.S. Government agency obligations by contractual term to maturity at June 30 are shown below:
1999 1998 ESTIMATED ESTIMATED AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE (In thousands) Due in three years or less $ - $ - $ 1,995 $ 1,982 Due after three years through five years 1,000 983 - - Due after five years 17,764 17,150 8,734 8,784 ------- ------- ------- ------- $18,764 $18,133 $10,729 $10,766 ======= ======= ======= =======
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of mortgage-backed securities designated as available for sale at June 30, 1999 and 1998 are summarized as follows:
1999 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE AVAILABLE FOR SALE: (In thousands) Federal Home Loan Mortgage Corporation participation certificates $ 1,266 $ 18 $ 12 $ 1,272 Government National Mortgage Association participation certificates 3,301 35 43 3,293 Federal National Mortgage Association participation certificates 1,035 8 35 1,008 Collateralized mortgage obligations 4,649 13 3 4,659 ------- ------- ------- ------- Total mortgage-backed securities $10,251 $ 74 $ 93 $10,232 ======= ======= ======= =======
33 35 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
1998 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE AVAILABLE FOR SALE: (In thousands) Federal Home Loan Mortgage Corporation participation certificates $2,007 $ 41 $ 4 $2,044 Government National Mortgage Association participation certificates 4,919 86 3 5,002 Federal National Mortgage Association participation certificates 850 26 9 867 Collateralized mortgage obligations 1,014 4 7 1,011 ------ ------ ------ ------ Total mortgage-backed securities $8,790 $ 157 $ 23 $8,924 ====== ====== ====== ======
The amortized cost of mortgage-backed securities, by contractual terms to maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties. JUNE 30, 1999 1998 (In thousands) Due within three years $ 88 $ 460 Due in three to five years - 126 Due in five to ten years 701 480 Due in ten to twenty years 2,052 2,412 Due after twenty years 7,410 5,312 ------- ------- $10,251 $ 8,790 ======= ======= Proceeds from sales of investment and mortgage-backed securities amounted to $898,000 and $1.1 million during the years ended June 30, 1999 and 1998, respectively, and resulted in gross realized gains totaling $61,000 and $22,000, for those respective periods. 34 36 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE C - LOANS RECEIVABLE The composition of the loan portfolio at June 30 is as follows:
1999 1998 (In thousands) Residential real estate One- to four- family $60,810 $55,707 Multi-family 3,404 5,184 Construction 2,162 1,425 Nonresidential real estate and land 8,504 5,712 Consumer and other 11,449 10,923 ------- ------- 86,329 78,951 Less: Undisbursed portion of loans in process 2,966 1,452 Deferred loan origination fees 200 190 Allowance for loan losses 733 759 ------- ------- $82,430 $76,550 ======= =======
The Savings Bank's lending efforts have historically focused on one- to four-family and multi-family residential real estate loans, which comprise approximately $63.4 million, or 77%, of the total loan portfolio at June 30, 1999, and $60.9 million, or 80%, of the total loan portfolio at June 30, 1998. 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 were previously 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. However, recent regulations now permit officers and directors to receive the same terms through benefit or compensation plans that are widely available to other employees, as long as the director or officer is not given preferential treatment compared to other participating employees. The aggregate dollar amount of loans outstanding to directors and officers totaled approximately $514,000 and $340,000 at June 30, 1999 and 1998, respectively. 35 37 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE D - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is summarized as follows for the years ended June 30:
1999 1998 1997 (In thousands) Balance at beginning of year $ 759 $ 820 $ 884 Provision for (recoveries of) losses on loans (1) (5) 28 Charge-offs of loans (25) (56) (92) ----- ----- ----- Balance at end of year $ 733 $ 759 $ 820 ===== ===== =====
As of June 30, 1999, 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 totaled approximately $379,000, $240,000 and $1.1 million at June 30, 1999, 1998 and 1997, respectively. During the years ended June 30, 1999, 1998 and 1997, interest income of approximately $5,000, $6,000 and $9,000, respectively, would have been recognized had such 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:
1999 1998 (In thousands) Land and improvements $ 376 $ 376 Office buildings and improvements 1,358 1,205 Furniture, fixtures and equipment 479 451 ------ ------ 2,213 2,032 Less accumulated depreciation and amortization 1,166 1,100 ------ ------ $1,047 $ 932 ====== ======
36 38 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE F - DEPOSITS Deposits consist of the following major classifications at June 30: DEPOSIT TYPE AND WEIGHTED- AVERAGE INTEREST RATE 1999 1998 (In thousands) NOW accounts 1999 - 2.03% $ 6,680 1998 - 1.96% $ 5,867 Passbook 1999 - 2.94% 7,862 1998 - 2.94% 7,440 Money market deposit accounts 1999 - 3.85% 11,785 1998 - 3.60% 7,999 -------- -------- Total demand, transaction and passbook deposits 26,327 21,306 Certificates of deposit Original maturities of: Less than 12 months 1999 - 4.60% 6,182 1998 - 5.39% 6,893 12 months to 24 months 1999 - 5.37% 40,671 1998 - 5.88% 36,727 30 months to 36 months 1999 - 5.53% 6,324 1998 - 5.76% 8,535 More than 36 months 1999 - 6.05% 923 1998 - 6.13% 1,196 Individual retirement accounts 1999 - 5.57% 14,690 1998 - 6.08% 14,589 Jumbo accounts 1999 - 5.26% 5,837 1998 - 5.85% 4,231 -------- -------- Total certificates of deposit 74,627 72,171 -------- -------- Total deposit accounts $100,954 $ 93,477 ======== ======== At June 30, 1999 and 1998, the Corporation had certificate of deposit accounts with balances greater than $100,000 totaling $15.7 million and $8.1 million, respectively. 37 39 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE F - DEPOSITS (continued) Interest expense on deposits for the year ended June 30 is summarized as follows: 1999 1998 1997 (In thousands) Passbook $ 224 $ 212 $ 214 NOW and money market deposit accounts 489 376 402 Certificates of deposit 4,084 4,138 3,903 ------ ------ ------ $4,797 $4,726 $4,519 ====== ====== ====== Maturities of outstanding certificates of deposit at June 30 are summarized as follows: 1999 1998 (In thousands) Less than one year $46,943 $51,581 One to three years 27,318 20,175 Over three years 366 415 ------- ------- $74,627 $72,171 ======= ======= NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank, collateralized at June 30, 1999 by pledges of certain residential mortgage loans totaling $8.7 million and the Savings Bank's investment in Federal Home Loan Bank stock, are summarized as follows: MATURING YEAR ENDING JUNE 30, INTEREST RATE JUNE 30, 1999 1998 (Dollars in thousands) 5.70% 1999 $ - $ 500 6.15% 2000 500 500 4.40% 2004 1,000 - 3.16% - 5.17% 2008 3,323 3,354 4.80% 2009 1,000 - ----- ----- $5,823 $4,354 ====== ====== Weighted-average interest rate 5.06% 5.16% ====== ====== 38 40 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE H - OTHER BORROWED MONEY At June 30, 1998, other borrowed money consisted of a note payable to a financial institution bearing interest at a rate of 8.50% and was secured by the Corporation's investment in the common stock of the Savings Bank. The note was repaid during fiscal 1999. NOTE I - FEDERAL INCOME TAXES Federal income taxes differ from the amounts computed at the statutory corporate tax rate for the year ended June 30 as follows: 1999 1998 1997 (In thousands) Federal income taxes computed at statutory rate $ 514 $ 517 $ 336 Increase (decrease) in taxes resulting from Low income housing investment tax credits (79) (70) - Nontaxable interest income (2) (2) (9) Other - - (5) ----- ----- ----- Federal income tax provision per consolidated financial statements $ 433 $ 445 $ 322 ===== ===== ===== The composition of the Corporation's net deferred tax asset at June 30 is as follows: 1999 1998 (In thousands) Taxes (payable) refundable on temporary differences at estimated corporate tax rate: Deferred tax assets: General loan loss allowance $ 251 $ 258 Deferred compensation 503 502 Employee stock benefit plans 42 67 Book/tax depreciation 12 1 ----- ----- Total deferred tax assets 808 828 Deferred tax liabilities: Percentage of earnings bad debt deduction (220) (265) Deferred loan origination costs (118) (33) Federal Home Loan Bank stock dividends (152) (134) Unrealized gain on securities designated as available for sale (136) (366) ----- ----- Total deferred tax liabilities (626) (798) ----- ----- Net deferred tax asset $ 182 $ 30 ===== ===== 39 41 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE I - FEDERAL INCOME TAXES (continued) The Savings Bank was allowed a special bad debt deduction, generally limited to 8% of otherwise taxable income, and subject to certain limitations based on aggregate loans and deposit account balances at the end of the year. If the amounts that 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, 1999 includes approximately $2.6 million for which federal income taxes have not been provided. The amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $660,000 at June 30, 1999. See Note M for additional information regarding future percentage of earnings bad debt deductions. NOTE J - LOAN COMMITMENTS The Savings Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statement of financial condition. The contract or notional amounts of the commitments reflect the extent of the Savings Bank's involvement in such financial instruments. The Savings Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Savings Bank uses the same credit policies in making commitments and conditional obligations as those utilized for on-balance-sheet instruments. At June 30, 1999, the Savings Bank had outstanding commitments to originate and to purchase loans totaling approximately $1.2 million and $1.3 million, respectively. In addition, the Savings Bank was obligated under unused lines and letters of credit totaling $4.1 million. In the opinion of management, all loan commitments equaled or exceeded prevalent market interest rates as of June 30, 1999, and will be funded from normal cash flow from operations. NOTE K - REGULATORY CAPITAL The Savings Bank is subject to minimum regulatory capital standards promulgated by the Office of Thrift Supervision (the "OTS"). Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Savings Bank must meet specific capital guidelines that involve quantitative measures of the Savings Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Savings Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 40 42 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE K - REGULATORY CAPITAL (continued) The minimum capital standards of the OTS 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) equal to 3.0% of adjusted total assets. An OTS proposal, if adopted in present form, would increase the core capital requirement to a range of 4.0% - 5.0% of adjusted total assets for substantially all savings associations. Management anticipates no material change to the Savings Bank's excess regulatory capital position as a result of this proposed change in the regulatory capital requirement. The risk-based capital requirement currently 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, 1999 and 1998, management believes that the Savings Bank met all capital adequacy requirements to which it was subject.
AS OF JUNE 30, 1999 FOR CAPITAL ACTUAL ADEQUACY PURPOSES ---------------- --------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO (Dollars in thousands) Tangible capital $12,769 10.4% greater than or equal to $1,833 greater than or equal to 1.5% Core capital $12,769 10.4% greater than or equal to $3,666 greater than or equal to 3.0% Risk-based capital $13,502 21.3% greater than or equal to $5,069 greater than or equal to 8.0%
TO BE "WELL- CAPITALIZED" UNDER PROMPT CORRECTIVE ACTION PROVISIONS ------------------------------------------------------------------ AMOUNT RATIO Tangible capital greater than or equal to $6,110 greater than or equal to 5.0% Core capital greater than or equal to $7,332 greater than or equal to 6.0% Risk-based capital greater than or equal to $6,336 greater than or equal to 10.0%
AS OF JUNE 30, 1998 FOR CAPITAL ACTUAL ADEQUACY PURPOSES --------------- ---------------------------------------------------------------- AMOUNT RATIO AMOUNT RATIO (Dollars in thousands) Tangible capital $14,690 12.8% greater than or equal to $1,725 greater than or equal to 1.5% Core capital $14,690 12.8% greater than or equal to $3,451 greater than or equal to 3.0% Risk-based capital $15,391 27.5% greater than or equal to $4,479 greater than or equal to 8.0%
TO BE "WELL- CAPITALIZED" UNDER PROMPT CORRECTIVE ACTION PROVISIONS ------------------------------------------------------------------ AMOUNT RATIO Tangible capital greater than or equal to $5,751 greater than or equal to 5.0% Core capital greater than or equal to $6,901 greater than or equal to 6.0% Risk-based capital greater than or equal to $5,599 greater than or equal to 10.0%
41 43 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE K - REGULATORY CAPITAL (continued) The Savings Bank's management believes that, under the current regulatory capital regulations, the Savings Bank will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond the control of the Savings Bank, such as increased interest rates or a downturn in the economy in the Savings Bank's market area, could adversely affect future earnings and, consequently, the ability to meet future minimum regulatory capital requirements. NOTE L - STOCK OPTION PLAN During fiscal 1996 the Board of Directors adopted the ASB Financial Corp. Stock Option and Incentive Plan (the "Plan") that provided for the issuance of 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 an exercise price equal to the fair value of $13.875 per share. The 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. The Corporation accounts for the Plan in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue to account for stock options and similar equity instruments under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net earnings and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Corporation applies APB Opinion No. 25 and related Interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for the Plan. The pro-forma disclosures required under SFAS No. 123 are not applicable, as the Corporation made no stock option grants during the fiscal years ended June 30, 1999, 1998 and 1997. 42 44 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE L - STOCK OPTION PLAN (continued) A summary of the status of the Corporation's stock option plan as of June 30, 1999, 1998 and 1997, and changes during the periods ending on those dates is presented below:
1999 1998 1997 WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE Outstanding at beginning of year 170,627 $10.08 190,069 $10.08 145,684 $13.875 Adjustment for return of capital distribution - - - - 51,837 (3.795) Granted - - - - - - Exercised - - (19,442) 10.08 (7,452) 10.08 Forfeited - - - - - - ------- ------ ------- ------ ------- ------- Outstanding at end of year 170,627 $10.08 170,627 $10.08 190,069 $ 10.08 ======= ====== ======= ====== ======= ======= Options exercisable at year-end 90,498 $10.08 50,438 $10.08 29,817 $ 10.08 ======= ====== ======= ====== ======= ======= The following information applies to options outstanding at June 30, 1999: Number outstanding 170,627 Range of exercise prices $10.08 Weighted-average exercise price $10.08 Weighted-average remaining contractual life 6.4 years
NOTE M - LEGISLATIVE MATTERS The deposit accounts of the Savings Bank and of other savings associations are insured by the Federal Deposit Insurance Corporation ("FDIC") through the Savings Association Insurance Fund ("SAIF"). The reserves of the SAIF were below the level required by law, because a significant portion of the assessments paid into the fund were used to pay the cost of prior thrift failures. The deposit accounts of commercial banks are insured by the FDIC through 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 1995. 43 45 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE M - LEGISLATIVE MATTERS (continued) Legislation which was enacted during fiscal 1997 to recapitalize the SAIF provided for a special assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to the level required by law. The Savings Bank held $83.8 million in deposits at March 31, 1995, resulting in an approximate $551,000, or $364,000 after-tax, charge to operations in fiscal 1997. Under separate legislation related to the recapitalization plan, the Savings Bank is required to recapture as taxable income approximately $780,000 of its tax 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 bad debt deduction in the future. The Savings Bank has provided deferred taxes for this amount and will amortize the recapture of the bad debt reserve in taxable income over a six year period, which commenced in fiscal 1998. 44 46 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE N - CONDENSED FINANCIAL STATEMENTS OF ASB FINANCIAL CORP. The following condensed financial statements summarize the financial position of ASB Financial Corp. as of June 30, 1999 and 1998, and the results of its operations and its cash flows for the fiscal years ended June 30, 1999, 1998 and 1997. ASB FINANCIAL CORP. STATEMENTS OF FINANCIAL CONDITION June 30, (In thousands)
ASSETS 1999 1998 Interest-bearing deposits in American Savings Bank, fsb $ 429 $ 377 Interest-bearing deposits in other financial institutions 639 283 Investment securities 138 128 Loan receivable from ESOP 679 819 Investment in American Savings Bank, fsb 13,055 15,412 Prepaid expenses and other 265 136 -------- -------- Total assets $ 15,205 $ 17,155 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Dividends payable $ 165 $ 165 Borrowed money - 2,500 -------- -------- Total liabilities 165 2,665 Shareholders' equity Common stock and additional paid-in capital 8,427 8,304 Retained earnings 8,909 8,292 Shares acquired by stock benefit plans (1,418) (1,677) Treasury shares (1,143) (1,143) Unrealized gains on securities designated as available for sale, net 265 714 -------- -------- Total shareholders' equity 15,040 14,490 -------- -------- Total liabilities and shareholders' equity $ 15,205 $ 17,155 ======== ========
ASB FINANCIAL CORP. STATEMENTS OF EARNINGS Year ended June 30, (In thousands)
1999 1998 1997 Revenue Interest income $ 90 $ 163 $ 292 Equity in earnings of American Savings Bank, fsb 1,199 1,034 631 ------- ------- ------- Total revenue 1,289 1,197 923 General and administrative expenses 272 103 248 ------- ------- ------- Earnings before income taxes (credits) 1,017 1,094 675 Federal income taxes (credits) (63) 18 15 ------- ------- ------- NET EARNINGS $ 1,080 $ 1,076 $ 660 ======= ======= =======
45 47 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE N - CONDENSED FINANCIAL STATEMENTS OF ASB FINANCIAL CORP. (continued) ASB FINANCIAL CORP. STATEMENTS OF CASH FLOWS Year ended June 30, (In thousands)
1999 1998 1997 Cash provided by (used in) operating activities: Net earnings for the year $ 1,080 $ 1,076 $ 660 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities (Undistributed earnings of) excess of distributions from consolidated subsidiary 2,303 (1,034) 4,369 Loss on sale of investment securities - - 9 Increase (decrease) in cash due to changes in: Prepaid expenses and other assets (122) (32) (36) Other liabilities - (7) 1 ------- ------- ------- Net cash provided by operating activities 3,261 3 5,003 Cash flows provided by (used in) investing activities: Proceeds from repayment of loan 140 140 159 Proceeds from return of capital on investment securities 21 - - Proceeds from sale of investment securities - - 3,491 Purchase of investment securities (51) (136) - ------- ------- ------- Net cash provided by investing activities 110 4 3,650 Cash flows provided by (used in) financing activities: Proceeds from borrowed money - 2,500 - Proceeds from exercise of stock options - 196 103 Repayment of borrowed money (2,500) - - Payment of dividends on common stock (463) (3,971) (9,260) Purchase of treasury shares - (1,143) - ------- ------- ------- Net cash used in financing activities (2,963) (2,418) (9,157) ------- ------- ------- Net increase (decrease) in cash and cash equivalents 408 (2,411) (504) Cash and cash equivalents at beginning of year 660 3,071 3,575 ------- ------- ------- Cash and cash equivalents at end of year $ 1,068 $ 660 $ 3,071 ======= ======= =======
46 48 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE N - CONDENSED FINANCIAL STATEMENTS OF ASB FINANCIAL CORP. (continued) As a condition to regulatory approval of the stock conversion and reorganization to the holding company form of ownership, the Savings Bank agreed to limit the amount of dividends payable to the Corporation. Regulations of the Office of Thrift Supervision (OTS) impose limitations on the payment of dividends and other capital distributions by savings associations. Under such regulations, a savings association that, immediately prior to, and on a pro forma basis after giving effect to, a proposed capital distribution, has total capital (as defined by OTS regulation) that is equal to or greater than the amount of its fully phased-in capital requirement is generally permitted without OTS approval (but subsequent to 30 days prior notice to the OTS of the planned dividend) to make capital distributions during a calendar year in the amount of up to the greater of (i) 100% of its net earnings to date during the year plus an amount equal to one-half of the amount by which its total capital-to-assets ratio exceeded its fully phased-in capital-to-assets ratio at the beginning of the year or (ii) 75% of its net earnings for the most recent four quarters. Pursuant to such OTS dividend regulations, the Savings Bank had the ability to pay dividends of approximately $4.6 million to the Corporation at June 30, 1999. NOTE O - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes the Corporation's quarterly results for the fiscal years ended June 30, 1999 and 1998. Certain amounts, as previously reported, have been reclassified to conform to the 1999 presentation.
THREE MONTHS ENDED SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1999: (In thousands, except per share data) Total interest income $ 2,149 $ 2,120 $ 2,136 $ 2,175 Total interest expense 1,322 1,287 1,269 1,234 ------- ------- ------- ------- Net interest income 827 833 867 941 Provision for (recoveries of) losses on loans - (1) - - Other income 59 100 97 74 General, administrative and other expense 542 573 586 585 ------- ------- ------- ------- Earnings before income taxes 344 361 378 430 Federal income taxes 101 103 103 126 ------- ------- ------- ------- Net earnings $ 243 $ 258 $ 275 $ 304 ======= ======= ======= ======= Earnings per share Basic $ .16 $ .16 $ .17 $ .19 ======= ======= ======= ======= Diluted $ .15 $ .16 $ .17 $ .19 ======= ======= ======= =======
47 49 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 1999, 1998 and 1997 NOTE O - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (continued)
THREE MONTHS ENDED SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, 1998: (In thousands, except per share data) Total interest income $ 2,164 $ 2,124 $ 2,123 $ 2,130 Total interest expense 1,249 1,225 1,238 1,249 ------- ------- ------- ------- Net interest income 915 899 885 881 Provision for (recoveries of) losses on loans - (4) (8) 7 Other income 65 74 57 85 General, administrative and other expense 612 599 535 599 ------- ------- ------- ------- Earnings before income taxes 368 378 415 360 Federal income taxes 122 124 139 60 ------- ------- ------- ------- Net earnings $ 246 $ 254 $ 276 $ 300 ======= ======= ======= ======= Earnings per share Basic $ .16 $ .16 $ .18 $ .18 ======= ======= ======= ======= Diluted $ .16 $ .16 $ .18 $ .17 ======= ======= ======= =======
48 50 ASB FINANCIAL CORP. DIRECTORS AND OFFICERS ================================================================================ Gerald R. Jenkins Director and Chairman of the Board Robert M. Smith Director and President President and Chief Executive 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. 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 Chairman of the Board Robert M. Smith Director, President and CEO William J. Burke Director Lee O. Fitch Director and Attorney Louis M. Schoettle, M.D. Director Jack A. Stephenson Vice President Carlisa R. Baker Treasurer M. Kathryn Scott Secretary 49 51 SHAREHOLDER SERVICES ================================================================================ The Fifth Third Bank serves as transfer agent and dividend distributing agent for ASB's shares. Communications regarding change of address, transfer of shares, lost certificates and dividends should be sent to: 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 27, 1999, at 11:00 a.m., Eastern Time, at Best Western Motor Inn of Portsmouth, 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: Robert M. Smith, President 50 EX-20 3 EXHIBIT 20 1 ASB FINANCIAL CORP. 503 CHILLICOTHE STREET PORTSMOUTH, OHIO 45662 (740) 354-3177 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS The 1999 Annual Meeting of Shareholders of ASB Financial Corp. ("ASB") will be held in the Best Western Motor Inn of Portsmouth, U.S. Route 23 North, Portsmouth, Ohio 45662, on October 27, 1999, 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 2000; 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 August 31, 1999, 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 Robert M. Smith, President September 17, 1999 2 ASB FINANCIAL CORP. 503 CHILLICOTHE STREET PORTSMOUTH, OHIO 45662 (740) 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 1999 Annual Meeting of Shareholders of ASB to be held in the Best Western Motor Inn of Portsmouth, U.S. Route 23 North, Portsmouth, Ohio 45662, on October 27, 1999, 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 William J. Burke, Lee O. Fitch and Gerald R. Jenkins as directors of ASB for terms expiring in 2000; 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. The 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 August 31, 1999 (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 1,746,924 votes entitled to be cast at the Annual Meeting. This Proxy Statement is first being mailed to shareholders of ASB on or about September 17, 1999. 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 will not be 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. -1- 3 RATIFICATION OF SELECTION OF AUDITORS The affirmative vote of the holders of a majority of the shares of ASB 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. VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information with respect to the only persons known to ASB to own beneficially more than five percent of the outstanding common shares of ASB as of August 31, 1999: Amount and nature of Percent of Name and Address beneficial ownership shares outstanding - ---------------- -------------------- ------------------ ASB Financial Corp. Employee Stock Ownership Plan 1201 Broadway 157,407 (1) 9.01% Quincy, Illinois 62301 - --------------------------- (1) Includes 88,824 unallocated shares with respect to which First Bankers Trust, N.A., as the Trustee for the ASB Financial Corp. Employee Stock Ownership Plan (the "ESOP"), has sole voting power. First Bankers Trust Company, N.A. (the "ESOP Trustee"), has shared investment power over all shares held in the ESOP Trust and sole voting power over shares held in the ESOP Trust which have not been allocated to the accounts of ESOP participants. -2- 4 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, 1999: Amount and nature of Percent of Name and Address (1) beneficial ownership (2) shares outstanding (3) - -------------------- ------------------------- ---------------------- William J. Burke 21,250 (4) 1.21% Lee O. Fitch 48,592 (5) 2.77 Gerald R. Jenkins 60,597 (6) 3.42 Louis M. Schoettle, M.D. 30,961 (7) 1.77 Robert M. Smith 49,146 (8) 2.77 All directors and executive officers of ASB as a group (8 persons) 234,940 (9) 12.84% - ----------------------------- (1) Each of the persons listed in this table may be contacted at the address of ASB. (2) All shares are owned directly with sole voting or investment power unless otherwise indicated by footnote. (3) Assumes a total of 1,746,924 common shares outstanding, plus the number of shares such person or group has the right to acquire within 60 days, if any. (4) Includes 7,070 shares which may be acquired upon the exercise of an option. (5) Includes 6,070 shares which may be acquired upon the exercise of an option and 19,021 shares held by the MRP as to which Mr. Fitch has shared voting power as a Trustee of the MRP. (6) Includes 23,475 shares which may be acquired upon the exercise of an option, 1,499 shares owned by Mr. Jenkins' spouse and 21,029 shares as to which Mr. Jenkins has shared voting and investment power. (7) Includes 7,070 shares which may be acquired upon the exercise of an option and 21,883 shares as to which Dr. Schoettle has shared voting and investment power. (8) Includes 24,726 shares which may be acquired upon the exercise of an option, 3,533 shares owned by Mr. Smith's spouse and 14,008 shares as to which Mr. Smith has shared voting and investment power. (9) Includes 82,293 shares which may be acquired upon the exercise of options, 19,021 shares held by the MRP as to which Mr. Fitch has shared voting power as Trustee of the MRP and 62,441 shares as to which the officers and directors of ASB have shared voting and investment power. BOARD OF DIRECTORS ELECTION OF DIRECTORS Prior to the death of Victor W. Morgan, a director of ASB from 1995 to October 1998, the Board of Directors consisted of six directors divided into two classes. The Board has amended the Regulations to reduce the -3- 5 number of directors to five and, pursuant to Ohio law, there is now only a single class of directors who must be reelected annually beginning in the year 2000. 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. Each of the directors of ASB is also a director of American. 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. The Board of Directors proposes the reelection of the following persons to serve as directors of ASB until the annual meeting of shareholders in 2000 and until their successors are duly elected and qualified or until their earlier resignation, removal from office or death: Director of ASB Name Age (1) Position(s) held since - ---- ------- ---------------- ----- William J. Burke 58 Director 1995 Lee O. Fitch 83 Director 1995 Gerald R. Jenkins 64 Chairman of the Board 1995 - ----------------------------- (1) As of September 15, 1999. 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 of ASB Name Age (1) Position(s) held since Term expires - ---- ------- ---------------- ------ ------------ Louis M. Schoettle, M.D. 73 Director 1995 2000 Robert M. Smith 53 Director and President 1995 2000
- ----------------------------- (1) As of September 15, 1999. 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. 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 retired as the President and Chief Executive Officer of ASB and American effective January 1998. Prior to becoming President in 1983, he held various positions at American including Secretary and Vice President. -4- 6 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 President and Chief Executive Officer of American. In 1998, he was also named the President of ASB. Prior positions held by Mr. Smith with American include Secretary, Treasurer and Executive Vice President. MEETINGS OF DIRECTORS The Board of Directors of ASB met 10 times for regularly scheduled and special meetings. Each director of ASB is also a director of American. The Board of Directors of American met 12 times for regularly scheduled and special meetings during the fiscal year ended June 30, 1999. COMMITTEES OF DIRECTORS The Board of Directors of ASB has an Audit Committee, a Compensation Committee and an Executive Committee. The full Board of Directors serves as 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 Mr. Fitch and Dr. Schoettle. The Audit Committee met once during the fiscal year ended June 30, 1999. The Compensation Committee is comprised of Mr. Fitch and Dr. Schoettle. 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, to administer the ASB Financial Corp. Stock Option and Incentive Plan (the "Stock Option Plan") and to administer the MRP. The members of the Executive Committee are Messrs. Burke, Fitch and Smith and Dr. Schoettle. The Executive Committee is authorized to act on behalf of the Board of Directors between regular meetings of the Board. The Executive Committee met seven times during the fiscal year ended June 30, 1999. EXECUTIVE OFFICERS In addition to Mr. Smith, the President of both ASB and 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 37 Treasurer of American and ASB Mary Kathryn Fish 48 Secretary of American and ASB Jack A. Stephenson 47 Vice President/Lending of American ----------------------------- (1) As of September 15, 1999. -5- 7 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. FISH 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 Robert M. Smith, the President of ASB and American, for the fiscal years ended June 30, 1999, 1998 and 1997. 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 (#) ---------------------------------------------------------------------------------------------- Robert M. Smith 1999 $96,750 $5,000 -- -- $47,451 (2) President 1998 $83,800 $3,100 -- 44,634 (3) $40,582 (4) 1997 78,750 5,200 -- 47,134 (5) $45,513 (6)
------------------------- (1) Does not include amounts attributable to other miscellaneous benefits received by Mr. Smith, the cost of which was less than 10% of their annual salary and bonus. (2) Consists of directors' fees of $19,500 and the $27,951 aggregate value of allocations to Mr. Smith's account under the ESOP. (3) Represents the number of common shares of ASB underlying options granted to Mr. Smith pursuant to the Stock Option Plan during the fiscal year ended June 30, 1997. (Footnotes continued on next page) -6- 8 (4) Consists of directors' fees of $18,900 and the $21,692 aggregate value of allocations to Mr. Smith's account under the ESOP. Represents an adjustment to the number of common shares of ASB underlying options granted to Mr. Smith during the year ended June 30, 1996. Pursuant to the terms of the Stock Option Plan, the Board of Directors adjusted the number of shares covered by, and the exercise price of, the options granted to Mr. Smith in fiscal 1996 in connection with the tax free return of capital paid by ASB in fiscal 1997. (5) Consists of directors' fees of $17,000 and the $27,813 aggregate value of allocations to Mr. Smith's account under the ESOP. SALARY PLAN American maintains a non-qualified retirement plan (the "Salary Plan") for the benefit of Messrs. Jenkins and Smith and a retired employee of American. 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. Smith 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. No options were awarded pursuant to the Stock Option Plan during the 1998 and 1999 fiscal years. 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. -7- 9 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 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. The following table sets forth information regarding the number and value of unexercised options held by Mr. Smith at June 30, 1999:
Aggregated Option/SAR Exercises in Last Fiscal Year and 6/30/99 Option /SAR Values ---------------------------------------------------------------------------------- Number of Securities Value of Unexercised In-the- Underlying Unexercised Money Options/SARs at Name Shares Acquired Value Options/SARs at 6/30/99 (#) 6/30/99 ($)(1) on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable - ------------------- --------------------- ------------------ ------------------------------- -------------------------------- Robert M. Smith 0 N/A 24,726/19,908 $66,018/$53,154
- -------------------------- (1) For purposes of this table, the value of the option was determined by multiplying the number of shares subject to the unexercised option by the difference between the $10.08 exercise price and the fair market value of ASB's common shares, which was $12.75 on June 30, 1999, 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, 34,963 of which were awarded to directors and executive officers of ASB and American during the 1996 fiscal year. The MRP is administered by the Compensation Committee. The Compensation 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. Unless the Compensation 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 -8- 10 percent (10%) of all issued and outstanding common shares of ASB. Shares that have been awarded, but not earned, may not be transferred. EMPLOYEE STOCK OWNERSHIP PLAN ASB established the ESOP for the benefit of employees of ASB and its subsidiaries, including American, who are age 21 or older and who have completed at least one year of service with ASB and its subsidiaries. The ESOP provides an ownership interest in ASB to all full-time employees of ASB and its subsidiaries. Contributions to the ESOP and shares released from the suspense account are allocated among participants on the basis of compensation. Except for participants who retire, become disabled, or die during the plan year, all other participants must have completed as least 1,000 hours of service in order to receive an allocation. Benefits become fully vested after five years. Employees of ASB and American were given credit for vesting purposes for years of service to American prior to the effective date of the ESOP. Vesting is accelerated upon retirement at or after age 65, death, disability or termination of the ESOP. Shares allocated to the account of a participant whose employment by American terminates prior to having satisfied the vesting requirement will be forfeited. Forfeitures will be reallocated among remaining participating employees. Benefits may be paid either in ASB's common shares or in cash. Benefits may be payable upon retirement, death, disability or separation from service. Benefits payable under the ESOP cannot be estimated. ASB common shares and other ESOP funds are held and invested by the ESOP Trustee. The ESOP Trustee must vote all allocated shares held in the ESOP in accordance with the instructions of participating employees. The ESOP Trustee has no authority to vote allocated shares in respect of which no instructions are received from the participating employee. Unallocated shares are voted by the ESOP Trustee in its sole discretion. As of August 31, 1999, 68,583 of the 157,407 common shares of the Company held in the ESOP Trust had been allocated to the accounts of participants. DIRECTOR COMPENSATION Each director currently receives a fee of $450 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 receives $50 per committee meeting attended. 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 common shares of ASB at various times throughout the year. Dividends on ASB shares, to the extent permitted by law and regulations governing ASB's operations, shall be reinvested in ASB shares. One month after a 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 shares of ASB unless American shall deem it prudent to convert the shares 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. -9- 11 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. PROPOSALS OF SHAREHOLDERS AND OTHER MATTERS Any proposals of shareholders intended to be included in ASB's proxy statement for the 2000 Annual Meeting of Shareholders should be sent to ASB by certified mail and must be received by ASB not later than May 31, 2000. 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 September 17, 1999 Robert M. Smith, President -10- EX-27 4 EXHIBIT 27
9 1,000 YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 4,078 3,488 0 0 29,604 293 293 82,430 733 123,248 100,954 0 1,431 5,823 0 0 0 15,040 123,248 6,394 2,144 72 8,580 4,797 5,112 3,468 (1) 61 2,286 1,513 1,080 0 0 1,080 .68 .67 3.04 261 118 0 0 759 25 0 733 0 0 733
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