-----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, TGATRornuolkX3iFu0lzd6JrPakIf/vCix8imCmP5PfIvLSlNDeEv/qF82yE2Y+1 MuVx1N/QKpmEMbbyrhcUcQ== 0001046386-02-000120.txt : 20020930 0001046386-02-000120.hdr.sgml : 20020930 20020930164608 ACCESSION NUMBER: 0001046386-02-000120 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020930 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASB FINANCIAL CORP /OH CENTRAL INDEX KEY: 0000944304 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 311429488 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25906 FILM NUMBER: 02776817 BUSINESS ADDRESS: STREET 1: 503 CHILLICOTHE ST CITY: PORTSMOUTH STATE: OH ZIP: 45662 BUSINESS PHONE: 6143543177 MAIL ADDRESS: STREET 1: 503 CHILLICTHE ST CITY: PORTSMOUTH STATE: OH ZIP: 45662 10KSB 1 asb10ksb_63002.txt ANNUAL REPORT ON FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Fiscal Year Ended June 30, 2002 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______________ to ________________ Commission File Number: 0-25906 ASB FINANCIAL CORP. ------------------------------------- (Name of small business issuer in its charter) Ohio 31-1429488 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 503 Chillicothe Street, Portsmouth, Ohio 45662 (Address of principal executive offices) (zip code) Issuer's telephone number: (740) 354-3177 Securities registered pursuant to Section 12(b) of the Exchange Act: None None -------------------- ---------------------- (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g)of the Exchange Act: Common Shares, without par value ---------------------------------------------------------- (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for the fiscal year ended June 30, 2002, were $10.0 million. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average of the bid and asked prices quoted by the Nasdaq National Market, was $16.6 million on September 16, 2002. 1,526,062 of the issuer's common shares were issued and outstanding on September 16, 2002. DOCUMENTS INCORPORATED BY REFERENCE PartII of Form 10-KSB - Portions of the Annual Report to Shareholders for the fiscal year ended June 30, 2002. Part III of Form 10-KSB - Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders. Transitional Small Business Disclosure Format (check one): Yes No X --- --- PART I Item 1. Description of Business General ASB Financial Corp. ("ASB"), an Ohio corporation formed in 1995, is a unitary savings and loan holding company which owns all of the outstanding common shares of American Savings Bank, fsb ("American"), a federal savings bank, issued by American upon its conversion from a mutual savings association to a stock savings association in May 1995 (the "Conversion"). American 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, the City of Waverly and contiguous areas of Scioto and Pike County, Ohio. American also makes loans secured by multifamily real estate (over four units) and nonresidential real estate and secured and unsecured consumer loans. In addition, American purchases interests in multifamily real estate and nonresidential real estate loans originated and serviced by other lenders. American also invests in mortgage-backed securities, U.S. Government agency obligations, obligations of state and political subdivisions, and other investments permitted by applicable law. Funds for lending and other investment activities are obtained primarily from savings deposits, which are insured up to applicable limits by the Federal Deposit Insurance Corporation (the "FDIC"), and loan principal and mortgage-backed security repayments. American conducts business from its main office in Portsmouth, Ohio and a branch office in Waverly, Ohio. American's primary market area for lending consists of Scioto and Pike County, Ohio, and for deposits consists of Scioto and Pike County and adjacent communities in North Central Kentucky. ASB is subject to regulation, supervision and examination by the Office of Thrift Supervision of the United States Department of the Treasury (the "OTS"). American is subject to regulation, supervision and examination by the OTS and the FDIC. ASB's activities have been limited primarily to holding the common stock of American since the Conversion. Consequently, the following discussion focuses primarily on the business of American. Lending Activities General. American's principal lending activity is the origination of conventional real estate loans, including construction loans, secured by one- to four-family residential real estate located in American's primary market area. American also offers loans, including construction loans, secured by multifamily properties containing five units or more and nonresidential properties. American also purchases interests in multifamily real estate loans and nonresidential real estate loans originated and serviced by other financial institutions. 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 commercial loans and consumer loans, including automobile loans, loans secured by deposit accounts, home improvement loans and a limited number of unsecured loans. -1- Loan Portfolio Composition. The following table presents certain information regarding the composition of American's loan portfolio at the dates indicated:
At June 30, 2002 2001 2000 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 $ 73,300 65.8% $ 71,817 67.6% $65,278 67.4% Multifamily 4,717 4.2 3,452 3.2 3,160 3.3 Nonresidential and land 12,436 11.2 11,684 11.0 11,691 12.1 Construction 1,342 1.2 1,649 1.6 992 1.0 Home equity 5,093 4.6 5,366 5.0 5,863 6.0 ------- ----- ------- ----- ------ ----- Total real estate loans 96,888 87.0 93,968 88.4 86,984 89.8 Commercial 10,622 9.5 8,094 7.6 5,842 6.0 Consumer and other loans: Passbook 647 .6 594 .6 834 .9 Home improvement 1,220 1.1 1,194 1.1 1,277 1.3 Automobile 1,801 1.6 1,979 1.9 1,666 1.7 Other 234 .2 461 .4 322 .3 ------- ----- ------- ----- ------ ----- Total consumer and other loans 3,902 3.5 4,228 4.0 4,099 4.2 ------- ----- ------- ----- ------ ----- Total loans 111,412 100.0% 106,290 100.0% 96,925 100.0% ===== ===== ===== Less: Loans in process 1,365 2,065 1,255 Net deferred loan origination fees and unearned discounts 177 204 203 Allowance for loan losses 855 713 723 ------- ------- ------ Total loans - net $109,015 $103,308 $94,744 ======= ======= ======
Loan Maturity. The following table sets forth the contractual maturity of American's total loans at June 30, 2002 before consideration of net items:
Due during the fiscal One- to Consumer year ending June 30, four-family (1)(2) Multifamily (1) Nonresidential (1)(3) and other Total (In thousands) 2003 $ 2,456 $ 228 $ 2,248 $ 736 $ 5,668 2004 2,646 247 2,423 806 6,122 2005 2,852 266 2,611 881 6,610 2006 - 2007 6,386 598 5,846 1,479 14,309 2008 - 2012 20,841 1,971 9,930 - 32,742 2013 - 2017 30,288 1,407 - - 31,695 2018 and thereafter 14,266 - - - 14,266 ------ ----- ------ ----- ------- Total $79,735 $4,717 $23,058 $3,902 $111,412 ====== ===== ====== ===== =======
- ----------------------------- (1) Includes construction loans. (2) Includes home equity loans. (3) Includes land development and commercial loans. 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. A first mortgage on the underlying real estate and any improvements thereon secures each of such loans. At June 30, 2002, American's one- to four-family residential real estate loan portfolio, including construction loans secured by one- to four-family residences, was approximately $73.3 million, or 65.8% of total loans. -2- OTS regulations limit the amount which American may lend in relationship to the appraised value of the real estate and improvements (the "Loan-to-Value Ratio" or "LTV") at the time of loan origination. In accordance with OTS regulations, American makes loans on one- to four-family residences with LTVs of up to 95%. Private mortgage insurance usually covers the principal amount of any loan which exceeds an 85% LTV at the time of origination, at the expense of the borrower. American currently offers fixed-rate loans for terms of up to 30 years. Most of the fixed-rate loans in American's portfolio, however, have terms of 15 years or less. American also offers adjustable-rate residential real estate loans ("ARMs") for terms of up to 30 years. The interest rate adjustment periods on the ARMs are either one year or three years. The interest rate adjustments on one-year and three-year ARMs presently originated by American are tied to the one-year and three-year U.S. Treasury securities rates or the Previously Occupied Homes index published by the Federal Housing Finance Board. The maximum allowable adjustment at each adjustment date is 2% with a maximum adjustment of 6% over the term of the loan. The initial rate on a three-year ARM is typically higher than the initial rate on a one-year ARM to compensate for the reduced interest rate sensitivity. Adjustable-rate loans decrease American's interest rate risk but involve other risks, primarily credit risk. As interest rates rise, the payment by the borrower rises to the extent permitted by the terms of the loan, thereby increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. American also offers home equity loans for current mortgage customers on one- to four-family residences with LTV's of up to 100%. At June 30, 2002, American's home equity loans totaled $5.1 million, or 4.6% of total loans. Loans Secured by Multifamily Real Estate. American originates and purchases interests in loans secured by multifamily properties containing over four units. American originates multifamily loans with terms of up to 15 years and a maximum LTV of 75%. Approximately 45% of the multifamily real estate loans held by American are participation interests in loans originated and serviced by other financial institutions and secured by real estate located in Ohio, Kentucky, Florida and North Carolina. See "Loan Originations, Purchases and Sales." Multifamily lending is generally considered to involve a higher degree of risk than one- to four-family residential lending because the borrower typically depends upon income generated by the project to cover operating expenses and debt service. The profitability of a project can be affected by economic conditions, government policies and other factors beyond the control of the borrower. American attempts to reduce the risk associated with multifamily lending by evaluating the creditworthiness of the borrower and the projected income from the project and by obtaining personal guarantees on loans made to corporations and partnerships. American requires that borrowers submit rent rolls and financial statements annually to enable American to monitor the loan. At June 30, 2002, loans secured by multifamily properties totaled approximately $4.7 million, or 4.2% of total loans, of which $2.1 million are participation interests purchased in loans originated by other financial institutions. Loans Secured by Nonresidential Real Estate and Land. At June 30, 2002, approximately $12.4 million, or 11.2% 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 real estate loan portfolio is $3.2 million in participation interests which have been purchased in loans originated by other financial institutions. American has land loans with principal balances totaling $1.0 million secured by developed land which has been subdivided for single-family home construction in American's market area. American occasionally originates loans for the construction of nonresidential real estate. At June 30, 2002, American had outstanding nonresidential real estate construction loans with an aggregate balance of $126,000. 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 -3- 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. American makes loans to individuals for the construction and permanent financing of their primary residences. These construction loans are offered with adjustable and fixed rates for terms of up to 30 years. During the first year, while the residence is being constructed, the borrower is required to pay interest only. Construction loans generally involve greater underwriting and default risks than do loans secured by mortgages on existing properties. Loan funds are advanced upon the security of the project under construction, which is more difficult to value before the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, it is relatively difficult to evaluate accurately the LTV and the total loan funds required to complete a project. In the event a default on a construction loan occurs and foreclosure follows, American would have to take control of the project and attempt either to arrange for completion of construction or dispose of the unfinished project. At June 30, 2002, construction loans, in the aggregate, totaled $1.3 million, or 1.2% of American's total loans. Approximately 90% of American's construction loans are secured by property in Scioto County, Ohio. Commercial Loans. At June 30, 2002, approximately $10.6 million, or 9.5%, of American's total loans were commercial loans. The majority of commercial loans are originated to businesses in American's primary market area. Commercial loans may be secured by real estate, inventory, accounts receivable or equity securities, or they may be unsecured. Commercial loans are generally deemed to entail significantly greater risk than real estate lending. The repayment of commercial loans is typically dependant on the income stream and successful operation of a business, which can be affected by economic conditions. Consumer and Other Loans. American makes various types of consumer loans, including loans made to depositors on the security of their deposit accounts, automobile loans, home improvement loans and unsecured personal loans. Consumer loans, other than loans on deposits, are generally made at fixed rates of interest only and for varying terms based on the type of loan. At June 30, 2002, American had approximately $3.9 million, or 3.5% 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 a fixed rate of interest. Consumer loans, particularly consumer loans which are unsecured or are secured by rapidly depreciating assets such as automobiles, may entail greater risk than do residential real estate loans. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. The risk of default on consumer loans increases during periods of recession, high unemployment and other adverse economic conditions. Loan Solicitation and Processing. American develops loan originations from a number of sources, including continuing business with depositors, other borrowers and real estate developers, solicitations by American's lending staff and walk-in customers. American's loan personnel take all loan applications for permanent real estate loans. American obtains a credit report, verification of employment and other documentation concerning the creditworthiness of the borrower. An appraisal of the fair market value of the real estate which will be given as security for the loan is prepared by a fee appraiser approved by the Board of Directors. 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. Any loan for more than $250,000 must be reviewed and approved by the full Board of Directors. If a real estate loan application is approved, either an attorney's opinion or title insurance is obtained on the real estate which will secure the mortgage loan. Most of the loans in American's portfolio have an attorney's opinion. American requires borrowers to carry satisfactory fire and casualty insurance and flood insurance, if applicable, and to name American as an insured mortgagee. 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. -4- 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"). In fiscal 2001, American began to originate loans with documentation that conforms to the secondary market standards of the FHLMC and FNMA. To supplement loan demand in its primary market area, American purchases participation interests in multifamily and nonresidential real estate loans originated and serviced by other financial institutions. American does not purchase participation interests through brokers. 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. The following table presents American's loan origination and purchase activity for the periods indicated:
Year ended June 30, 2002 2001 2000 (In thousands) Loans originated: Adjustable-rate: One- to four-family real estate $ 3,075 $ 3,616 $ 1,683 Multifamily real estate - - 640 Nonresidential real estate 3,832 4,451 1,577 Commercial 2,459 2,286 4,311 ------ ------ ------ Total adjustable-rate 9,366 10,353 8,211 Fixed-rate: One- to four-family real estate 16,945 11,830 18,048 Nonresidential real estate 136 155 821 Commercial 5,451 3,492 - Consumer 2,635 2,817 2,885 ------ ------ ------ Total fixed-rate 25,167 18,294 21,754 Loans purchased 2,000 2,872 1,875 Loans acquired from Waverly Building and Loan Company 3,770 - - ------ ------ ------ Total loans originated, purchased and acquired 40,303 31,519 31,840 Reductions: Principal repayments 34,588 23,005 19,232 Increase (decrease) in other items, net (1) (8) 50 46 ------ ------ ------ Net increase $ 5,707 $ 8,564 $12,654 ====== ====== ======
- ------------------------------ (1) Consists of loans in process, unearned discounts and deferred loan origination fees and the allowance for loan losses. -5- Federal Lending Limit. OTS regulations impose a lending limit on the aggregate amount that a savings association can lend to any one borrower to an amount equal to 15% of the association's total capital for risk-based capital purposes plus any loan loss reserves not already included in total capital (the "Lending Limit Capital"). A savings association may loan to one borrower an additional amount not to exceed 10% of the association's Lending Limit Capital, if the additional amount is fully secured by certain forms of "readily marketable collateral." Real estate is not considered "readily marketable collateral." In applying this limit, the regulations require that loans to certain related or affiliated borrowers be aggregated. An exception to this limit permits loans of any type to one borrower of up to $500,000. In addition, the OTS may permit exceptions to the lending limit on a case-by-case basis under certain circumstances. Based on the 15% limit, American was able to lend approximately $2.1 million to one borrower at June 30, 2002. The largest loan American had outstanding to one borrower at June 30, 2002, was a $1.3 million loan secured by nonresidential real estate. Loan Origination and Other Fees. American realizes loan origination fees and other fee income from its lending activities, including late payment charges, application fees and fees for other miscellaneous services. Loan origination fees and other fees are a volatile source of income, varying with the volume of lending, loan repayments and general economic conditions. All nonrefundable loan origination fees and certain direct loan origination costs are deferred and recognized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 91 as an adjustment to yield over the life of the related loan. Delinquent Loans, Nonperforming Assets and Classified Assets. Delinquent loans are loans for which payment has not been received within 30 days of the payment due date. 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. A real estate loan is assessed a late penalty of 3% as soon as the loan is more than 30 days delinquent. A consumer loan is assessed a penalty of 5% of the payment due once the loan is more than 15 days delinquent. When a loan secured by real estate becomes delinquent more than 90 days, the Board of Directors reviews the loan and foreclosure proceedings are normally instituted and an appraisal of the collateral is performed. If the appraisal indicates that the value of the collateral is less than the book value of the loan, a valuation allowance is established for such loan. When a consumer loan becomes more than 90 days past due, American establishes a specific allowance for loss for the amount of the loan. -6- The following table reflects the amount of loans in a delinquent status at the dates indicated:
At June 30, 2002 Residential real estate Nonresidential real estate (2) Consumer and other Total Number Amount % (1) Number Amount % (1) Number Amount % (1) Number Amount % (1) (Dollars in thousands) Loans delinquent for: 30-59 days 16 $ 976 .9% - $ - - % 11 $137 .1% 27 $1,113 1.0% 60-89 days 14 778 .7 - - - 10 168 .2 24 946 .9 90 days and over 14 517 .4 2 445 .4 15 190 .1 31 1,152 .9 -- ----- --- -- --- -- -- --- -- -- ----- --- Total delinquent loans 44 $2,271 2.0% 2 $445 .4% 36 $495 .4% 82 $3,211 2.8% == ===== === == === == == === == == ===== === At June 30, 2001 Residential real estate Nonresidential real estate (2) Consumer and other Total Number Amount % (1) Number Amount % (1) Number Amount % (1) Number Amount % (1) (Dollars in thousands) Loans delinquent for: 30-59 days 29 $1,175 1.1% 4 $314 .3% 13 $358 .3% 46 $1.847 1.7% 60-89 days 6 218 .2 - - - 7 32 - 13 250 .2 90 days and over 12 562 .5 - - - 14 56 .1 26 618 .6 -- ----- --- -- --- -- -- --- -- -- ----- --- Total delinquent loans 47 $1,955 1.8% 4 $314 .3% 34 $446 .4% 85 $2,715 2.5% == ===== === == === == == === == == ===== === At June 30, 2000 Residential real estate Nonresidential real estate (2) Consumer and other Total Number Amount % (1) Number Amount % (1) Number Amount % (1) Number Amount % (1) (Dollars in thousands) Loans delinquent for: 30-59 days 30 $1,426 1.5% 1 $41 - % 15 $282 .3% 46 $1,749 1.8% 60-89 days 8 317 .3 - - - 5 68 .1 13 385 .4 90 days and over 4 266 .3 - - - 6 15 - 10 281 .3 -- ----- --- -- -- -- -- --- -- -- ----- --- Total delinquent loans 42 $2,009 2.1% 1 $41 - % 26 $365 .4% 69 $2,415 2.5% == ===== === == == == == === == == ===== ===
- ---------------------------- (1) Percentages correlate to total loans before net items. (2) Includes land loans. -7- Nonperforming assets include nonaccrual loans, accruing loans which are delinquent 90 days or more, restructured loans, real estate acquired by foreclosure or by deed-in-lieu thereof and repossessed assets. Loans are placed on nonaccrual status when, in the judgment of management, the probability of collection of interest is deemed insufficient to warrant further accrual. The following table sets forth information with respect to the accrual and nonaccrual status of American's loans and other nonperforming assets at the dates indicated:
At June 30, 2002 2001 2000 (Dollars in thousands) Nonaccrual loans $ 871 $493 $229 Accruing loans delinquent 90 days or more 281 125 52 ----- --- --- Total nonperforming loans 1,152 618 281 Real estate acquired through foreclosure - - - ----- --- --- Total nonperforming assets $1,152 $618 $281 ===== === === Allowance for loan losses $855 $713 $723 === === === Nonperforming assets as a percent of total assets .78% .44% .21% Allowance for loan losses as a percent of nonperforming assets 74.22% 115.37% 257.30%
For the year ended June 30, 2002, gross interest income which American would have recorded had nonaccrual loans been current in accordance with their original terms was $44,000, and American recorded $9,000 in interest on nonaccrual loans during such period. When American acquires a property as a result of foreclosure proceedings ("REO"), it records the property at its estimated fair value, less estimated selling expenses, at the date of acquisition, and any write-down resulting therefrom is charged to the allowance for loan losses. Interest accrual, if any, ceases no later than the date of acquisition of the real estate, and American expenses all costs incurred from such date in maintaining the property. American capitalizes, to the extent of fair value, costs relating to the development and improvement of the property. American classifies its own assets on a regular basis in accordance with federal regulations. Problem assets are classified as "substandard," "doubtful" or "loss." "Substandard" assets have one or more defined weaknesses and are characterized by the distinct possibility that American will sustain some loss if the deficiencies are not corrected. "Doubtful" assets have the same weaknesses as "substandard" assets, with the additional characteristics that (i) the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable and (ii) there is a high possibility of loss. American considers an asset classified "loss" as uncollectible and of such little value that its continuance as an asset of American is not warranted. -8- The aggregate amounts of American's classified assets at the dates indicated were as follows:
At June 30, 2002 2001 2000 (In thousands) Classified assets Substandard $949 $581 $245 Doubtful - - - Loss - - - --- --- --- Total classified assets $949 $581 $245 === === ===
American may establish general loan loss allowances for loans classified as substandard or doubtful. Generally, American charges off the portion of any real estate loan deemed to be uncollectible, whereas it uses a loss classification and corresponding reserve for consumer loans. American analyzes each classified asset on a monthly basis to determine whether changes in the classifications are appropriate under the circumstances. This classification analysis focuses on a variety of factors, including the amount of any delinquency and the reasons for the delinquency, the use of any real estate securing the loan, the status of the borrower and the appraised value of any real estate. As such factors change, American changes the classification of the asset accordingly. 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. The following table sets forth an analysis of American's allowance for loan losses for the periods indicated:
For the year ended June 30, 2002 2001 2000 (Dollars in thousands) Balance at beginning of period $713 $723 $733 Charge-offs: Residential real estate loans (1) (42) - (1) Nonresidential real estate (29) - - Consumer loans (17) (11) (10) --- --- --- Total charge-offs (88) (11) (11) Provision for losses on loans 70 1 1 Allowance resulting from acquisition of Waverly Building and Loan company 160 - - --- --- --- Balance at end of period $855 $713 $723 === === === Ratio of net charge-offs to average loans outstanding during the period .08% .01% .01%
- ------------------------------ (1) Includes multifamily loans. -9- 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, 2002 2001 2000 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 $ 43 87.0% $ 25 88.4% $ 12 89.8% Commercial loans 111 9.5 - 7.6 - 6.0 Consumer and other loans 42 3.5 43 4.0 16 4.2 Unallocated 659 - 645 - 695 - --- ----- --- ----- --- ----- Total $855 100.0% $713 100.0% $723 100.0% === ===== === ===== === =====
Investment Activities American is permitted to make investments in certain commercial paper, corporate debt securities rated in one of the four highest rating categories by one or more nationally recognized statistical rating organizations, and mutual funds, as well as other investments permitted by federal regulations. The following table sets forth the composition of ASB's investments, other than mortgage-backed securities, at the dates indicated:
At June 30, 2002 2001 2000 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 $ 6,376 23.4% $ 4,009 16.2% $ 4,152 17.8% Investments designated as available for sale: U.S. Government agency obligations 19,576 71.9 19,407 78.3 18,263 78.5 Municipal obligations 40 .1 - - - - Corporate equity securities 302 1.1 276 1.1 135 .6 FHLMC stock 948 3.5 1,089 4.4 729 3.1 ------ ----- ------ ----- ------ ----- Total investments designated as available for sale 20,866 76.6 20,772 83.8 19,127 82.2 ------ ----- ------ ----- ------ ----- Total investments $27,242 100.0% $24,781 100.0% $23,279 100.0% ====== ===== ====== ===== ====== =====
-10- The following table sets forth information regarding the maturities, book value and weighted average yields of ASB's investment securities, other than mortgage-backed securities, at June 30, 2002:
Maturing in Maturing in Maturing in 1-5 years 5-10 years 10-20 years Total Weighted Weighted Weighted Amortized average Amortized average Amortized average Amortized Market cost yield cost yield cost yield cost value (Dollars in thousands) Investments designated as available for sale: U.S. Government agency obligations $10,108 4.62% $6,491 5.90% $2,803 5.98% $19,402 $19,576 Municipal obligations - - 40 4.23 - - 40 40 Corporate equity securities - - - - - - 263 302 FHLMC stock - - - - - 15 948 ------ ---- ----- ---- ----- ---- ------ ------ Total $10,108 4.62% $6,531 5.88% $2,803 5.98% $19,720 $20,866 ====== ==== ===== ==== ===== ==== ====== ======
American has been an active purchaser of mortgage-backed securities. At June 30, 2002, mortgage-backed securities totaled $7.1 million or 4.8% of total assets. All of the mortgage-backed securities in American's portfolio are government-guaranteed securities, including participations or pass-through securities issued by the Government National Mortgage Association ("GNMA"), the FHLMC or the FNMA, and collateralized mortgage obligations ("CMOs"). American generally purchases mortgage-backed securities at or near par in order to avoid prepayment risk. The following table sets forth details of American's investment in mortgage-backed securities, of which all are designated as available for sale, at the dates indicated.
At June 30, 2002 At June 30, 2001 Gross Gross Gross Gross Amortized unrealized unrealized Estimated Amortized unrealized unrealized Estimated cost gains losses fair value cost gains losses fair value (In thousands) Available for sale: FHLMC participation certificates $1,441 $ 35 $ - $1,476 $ 772 $22 $ - $ 794 FNMA participation certificates 2,373 15 3 2,385 475 9 - 484 GNMA participation certificates 2,355 97 - 2,452 3,207 42 13 3,236 Collateralized mortgage obligations 780 - 2 778 4,196 18 12 4,202 ----- --- -- ----- ----- -- -- ----- Total mortgage-backed securities $6,949 $147 $ 5 $7,091 $8,650 $91 $25 $8,716 ===== === == ===== ===== == == =====
At June 30, 2000 Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value (In thousands) Available for sale: FHLMC participation certificates $1,020 $ 5 $ 9 $1,016 FNMA participation certificates 931 3 37 897 GNMA participation certificates 2,596 15 56 2,555 Collateralized mortgage obligations 4,359 - 211 4,148 ----- -- --- ----- Total mortgage-backed securities $8,906 $23 $313 $8,616 ===== == === =====
-11- Deposits and Borrowings Deposits. American's primary source of funds for use in lending and other investment activities is deposits. In addition to deposits, American derives funds from interest payments and principal repayments on loans and mortgage-backed securities and income on interest-earning assets. Loan payments are a relatively stable source of funds, while deposit inflows and outflows fluctuate more in response to changes in general interest rates and money market conditions. American attracts deposits principally from within its primary market area through the offering of a broad selection of deposit instruments, including NOW accounts, demand deposit accounts, money market deposit accounts, money market checking accounts, passbook savings accounts, term certificate accounts and individual retirement accounts ("IRAs"). American's management periodically establishes the interest rates paid, maturity terms, service fees and withdrawal penalties for the various types of accounts based on American's liquidity requirements, growth goals and interest rates paid by competitors. American does not use brokers to attract deposits, and the amount of deposits from outside American's primary market area is not significant. The following table sets forth the dollar amount of deposits in the various types of accounts offered by American at the dates indicated:
At June 30, 2002 2001 2000 Percent Percent Percent of total of total of total Amount deposits Amount deposits Amount deposits (Dollars in thousands) Transaction accounts: Passbook accounts $ 10,919 8.6% $ 8,004 6.6% $ 7,735 7.0% Demand, NOW and Super NOW accounts 8,297 6.5 8,429 7.0 7,237 6.6 Money market deposit accounts 21,920 17.3 18,292 15.2 15,790 14.4 ------- ----- ------- ----- ------- ----- Total transaction 41,136 32.4 34,725 28.8 30,762 28.0 accounts Certificates of deposit: 2.00 - 2.99% 18,612 14.7 - - - - 3.00 - 3.99% 23,574 18.6 254 .2 - - 4.00 - 4.99% 20,196 15.9 12,638 10.4 310 .3 5.00 - 5.99% 15,071 11.9 30,836 25.5 76,022 69.1 6.00 - 6.99% 6,835 5.4 29,812 24.7 2,818 2.6 7.00 - 7.99% 1,373 1.1 12,391 10.3 30 - 8.00 - 8.99% 75 - 69 .1 65 - ------- ----- ------- ----- ------- ----- Total certificates of deposit 85,736 67.6 86,000 71.2 79,245 72.0 ------- ----- ------- ----- ------- ----- Total deposits $126,872 100.0% $120,725 100.0% $110,007 100.0% ======= ===== ======= ===== ======= =====
The following table sets forth the remaining maturities of American's certificates of deposit at the dates indicated:
At June 30, 2002 2001 2000 (In thousands) Less than one year $59,243 $59,377 $52,822 One to two years 21,897 25,150 25,108 Two to three years 1,960 1,071 1,091 Over three years 2,636 402 224 ------ ------ ------ Total $85,736 $86,000 $79,245 ====== ====== ======
-12- 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, 2002:
At June 30, 2002 Certificates of deposit with balances of $100,000 (In thousands) or more maturing in quarter ending (1): September 30, 2002 $ 5,874 December 31, 2002 2,687 March 31, 2003 2,824 June 30, 2003 2,673 After June 30, 2003 4,300 ------ Total certificates of deposit with balances of $100,000 or more $18,358 ======
- ---------------------------- (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, 2002 2001 2000 (Dollars in thousands) Beginning balance $120,725 $110,007 $100,954 Deposits 543,956 296,499 277,401 Deposits acquired from Waverly Building and Loan Company 4,723 - - Withdrawals (547,474) (290,880) (272,254) Interest credited 4,942 5,099 3,906 ------- ------- ------- Ending balance $126,872 $120,725 $110,007 ======= ======= ======= Net increase $ 6,147 $ 10,718 $ 9,053 ======= ======= ======= Percent increase 5.09% 9.74% 9.00% ==== ==== ====
Borrowings. American's other sources of funds include advances from the Federal Home Loan Bank ("FHLB") and other borrowings. American is a member of the FHLB of Cincinnati and must maintain an investment in the capital stock of the FHLB of Cincinnati in an amount equal to the greater of 1% of the aggregate outstanding principal amount of American's residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, and 5% of its advances from the FHLB of Cincinnati. American complies with this requirement with an investment in stock of the FHLB of Cincinnati of $1.0 million at June 30, 2002. FHLB advances are secured by collateral in one or more of the following categories: fully-disbursed, whole first mortgage loans on improved residential property or securities representing a whole interest in such loans; securities issued, insured or guaranteed by the U.S. Government or an agency thereof; deposits in any FHLB; or other real estate related collateral acceptable to the applicable FHLB, if such collateral has a readily ascertainable value and the FHLB can perfect its security interest in the collateral. At June 30, 2002, American had $4.2 million outstanding in advances from the FHLB. -13- The following table sets forth certain information as to American's FHLB advances at the dates indicated:
At June 30, 2002 2001 2000 (Dollars in thousands) FHLB advances $4,223 $4,257 $7,790 Weighted average interest rate 1.95% 3.78% 5.85%
The following table sets forth the maximum balance and average balance of FHLB advances during the periods indicated:
Year ended June 30, 2002 2001 2000 (Dollars in thousands) FHLB advances: Maximum balance $6,560 $6,788 $7,807 Average balance $5,039 $5,217 $6,884 Weighted average interest rate 2.36% 6.63% 5.72%
American had no other borrowings during fiscal 2002. 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, 2002, the stock held by the service corporation had a book value of $114,000. ASL also has an $18,000 investment in the Money Concepts Financial Planning Center, bringing the total assets of ASL to approximately $132,000 at June 30, 2002. Personnel As of June 30, 2002, American had 29 full-time employees and 9 part-time employees. American believes that relations with its employees are excellent. American offers health, disability and life benefits and retirement plan benefits. None of the employees of American is represented by a collective bargaining unit. REGULATION General As a savings and loan holding company within the meaning of the Home Owners Loan Act, as amended (the "HOLA"), 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. -14- As a federal savings association, American is subject to regulatory oversight by the OTS and, because American's deposits are insured by the FDIC, American is also subject to examination and regulation by the FDIC. American must file periodic reports with the OTS concerning its activities and financial condition. Examinations are conducted periodically by the OTS and the FDIC to determine whether American is in compliance with various regulatory requirements and is operating in a safe and sound manner. American is a member of the FHLB of Cincinnati. 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. All savings associations must have tangible capital of 1.5% of adjusted total assets, core capital of 4% of adjusted total assets, except for associations with the highest examination rating and acceptable levels of risk, and risk-based capital equal to 8% of risk-weighted assets. Assets and certain off-balance sheet items are weighted at percentage levels ranging from 0% to 100% depending on their relative risk. 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. Critically undercapitalized institutions must be placed in conservatorship or receivership within 90 days of reaching that capitalization level, except under limited circumstances. American's capital at June 30, 2002, 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. Qualified Thrift Lender Test. Savings associations must meet one of two 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"). Generally, QTIs are assets related to domestic residential real estate and manufactured housing, although they also include credit card, student and small business loans and stock issued by any FHLB, the FHLMC or the FNMA. Under the QTL test, at least 65% of an institution's "portfolio assets" (total assets less goodwill and other intangibles, property used to conduct business and 20% of liquid assets) must consist of QTI on a monthly average basis in nine out of every 12 months. The second test permits a savings association to qualify as a QTL if at least 60% of its assets consist of specified types of property, including cash, loans secured -15- 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. At June 30, 2002, American qualified as a QTL. Transactions with Insiders and Affiliates. Loans to executive officers, directors and principal shareholders and their related interests must conform to the lending limit on loans to one borrower, and the total of such loans to executive officers, directors, principal shareholders and their related interests cannot exceed the association's Lending Limit Capital (or 200% of Lending Limit Capital for qualifying institutions with less than $100 million in deposits). Most loans to directors, executive officers and principal shareholders must be approved in advance by a majority of the "disinterested" members of the board of directors of the association, with any "interested" director not participating. All loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or as offered to all employees in a company-wide benefit program, and loans to executive officers are subject to additional limitations. American was in compliance with such restrictions at June 30, 2002. 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, 2002. Limitations on Capital Distributions. The OTS imposes various restrictions or requirements on the ability of associations to make capital distributions. Capital distributions include, without limitation, payments of cash dividends, repurchases and certain other acquisitions by an association of its shares and payments to stockholders of another association in an acquisition of such other association. A subsidiary of a savings and loan company must file a notice or an application with the OTS before it can declare and pay a dividend. An application must be submitted and approval from the OTS must be obtained by a subsidiary of a savings and loan holding company (i) if the proposed distribution would cause total distributions for the calendar year to exceed net income for that year to date plus the retained net income for the preceding two years; (ii) if the savings association will not be at least adequately capitalized following the capital distribution; or (iii) if the proposed distribution would violate a prohibition contained in any applicable statute, regulation or agreement between the savings association and the OTS or the FDIC, or violate a condition imposed on the savings association in an OTS-approved application or notice. If a savings association subsidiary of a holding company is not required to file an application, it must file a notice with the OTS. Holding Company Regulation. Federal law 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 the holding company. Except with the prior approval of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such holding company's stock may also acquire control of any savings institution, other than a subsidiary institution, or any other savings and loan holding company. As a unitary savings and loan holding company, ASB generally has no restrictions on its activities. 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, however, 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 -16- and loan holding company, if the savings association subsidiary of a holding company fails to meet the QTL test, then such unitary savings and loan holding company would become subject to the activities restrictions applicable to multiple holding companies. At June 30, 2002, American met the QTL test. Federal Regulation of Acquisitions of Control of ASB and American. In addition to the Ohio law limitations on the merger and acquisition of ASB, federal limitations generally require regulatory approval of acquisitions at specified levels. Under pertinent federal law and regulations, no person, directly or indirectly, or acting in concert with others, may acquire control of American or ASB without 60 days' prior notice to the OTS. "Control" is generally defined as having more than 25% ownership or voting power; however, ownership or voting power of more than 10% may be deemed "control" if certain factors are in place. If the acquisition of control is by a company, the acquiror must obtain approval, rather than give notice, of the acquisition. Federal Deposit Insurance Corporation The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and savings and loan associations and safeguards the safety and soundness of the banking and savings and loan industries. The FDIC administers two separate insurance funds, the Bank Insurance Fund ("BIF") for commercial banks and state savings banks and the SAIF for savings associations. American is a member of the SAIF and its deposit accounts are insured by the FDIC up to the prescribed limits. The FDIC has examination authority over all insured depository institutions, including American, and has authority to initiate enforcement actions against 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. Federal Reserve Requirements FRB regulations require savings associations to maintain reserves of 3% of net transaction accounts (primarily NOW accounts) up to $41.3 million (subject to an exemption of up to $5.7 million), and of 10% of net transaction accounts in excess of $41.3 million. At June 30, 2002, American was in compliance with the reserve requirements. 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. -17- 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. 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 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, 2002, is $10.1 million, and, as a result, American does not qualify as a small corporation exempt from the alternative minimum tax. Certain thrift institutions, such as American, are allowed deductions for bad debts under methods more favorable than those granted to other taxpayers. Qualified thrift institutions may compute deductions for bad debts using either the specific charge-off method of Section 166 of the Code or the experience method of Section 593 of the Code. The experience method is also available to small banks. Under the experience method, a thrift institution is generally allowed a deduction for an addition to its bad debt reserve equal to the greater of (i) an amount based on its actual average experience for losses in the current and five preceding taxable years, or (ii) an amount necessary to restore the reserve to its balance as of the close of the base year. Thrift institutions that are treated as small banks are allowed to utilize the experience method applicable to such institutions, while thrift institutions that are treated as large banks are required to use only the specific charge off method. -18- 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, commencing with the first taxable year beginning after 1995, subject to the residential loan requirement described below. In the case of a thrift institution that is treated as a large bank, the amount of the institution's applicable excess reserves generally is the excess of (i) the balances of its reserve for losses on qualifying real property loans (generally loans secured by improved real estate) and its reserve for losses on nonqualifying loans (all other types of loans) as of the close of its last taxable year beginning before January 1, 1996, over (ii) the balances of such reserves as of the close of its last taxable year beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of a thrift institution that is treated as a small bank, like American, the amount of the institution's applicable excess reserves generally is the excess of (i) the balances of its reserve for losses on qualifying real property loans and its reserve for losses on nonqualifying loans as of the close of its last taxable year beginning before January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would have been at the close of its last year beginning before January 1, 1996, had the thrift always used the experience method. 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), which require recapture in the case of certain excessive distributions to shareholders. The pre-1988 reserves may not be utilized for payment of cash dividends or other distributions to a shareholder (including distributions in dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). Distribution of a cash dividend by a thrift institution to a shareholder is treated as made: first, out of the institution's post-1951 accumulated earnings and profits; second, out of the pre-1988 reserves; and third, out of such other accounts as may be proper. To the extent a distribution by American to ASB is deemed paid out of its pre-1988 reserves under these rules, the pre-1988 reserves would be reduced and the gross income of American for tax purposes would be increased by the amount which, when reduced by the income tax, if any, attributable to the inclusion of such amount in its gross income, equals the amount deemed paid out of the pre-1988 reserves. As of June 30, 2002, the pre-1988 reserves of American for tax purposes totaled approximately $1.9 million. American believes it had approximately $2.5 million of accumulated earnings and profits for tax purposes as of June 30, 2002, 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 1998. In the opinion of management, any examination of open returns would not result in a deficiency which could have a material adverse effect on the financial condition of American. Ohio Taxation ASB is subject to the Ohio corporation franchise tax, which, as applied to ASB, is a tax measured by both net earnings and net worth. The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 or (ii) .400% times taxable net worth. In computing its tax under the net worth method, ASB may exclude 100% of its investment in the capital stock of American, as reflected on the balance sheet of ASB in computing its taxable net worth as long as it owns at least 25% of the issued and outstanding capital stock of American. The calculation of the exclusion from net worth is based on the ratio of the excludable investment (net of any appreciation or goodwill included in such investment) to total assets multiplied by the net value of the stock. As a holding company, ASB may be entitled to various other deductions in computing taxable net worth that are not generally available to operating companies. -19- ASB may elect to be a "qualifying holding company" and as such be exempt from the net worth tax. A corporation franchise tax based salary on net earnings would still apply. To be exempt, ASB must satisfy all of the requirements of the applicable statute, including making related member adjustments that could affect the taxable net worth of American. American is a "financial institution" for State of Ohio tax purposes. As such, it is subject to the Ohio corporate franchise tax on "financial institutions," which is imposed annually at a rate of 1.3% of the taxable book net worth. As a "financial institution," American is not subject to any tax based upon net income or net profits imposed by the State of Ohio. Item 2. Description of Property American owns the property at 503 Chillicothe Street, Portsmouth, Ohio, on which its main office is located and the properties at 118 North Market Street, Waverly, Ohio and 907 Chillicothe Street, Portsmouth, Ohio. At June 30, 2002, the net book value of these properties, including the buildings was $1.1 million, and American's office premises and equipment had a total net book value of $1.3 million. For additional information regarding American's office premises and equipment, see Notes A and E of Notes to Consolidated Financial Statements. Item 3. Legal Proceedings Neither ASB nor American is presently involved in any legal proceedings of a material nature. From time to time, American is a party to legal proceedings incidental to its business to enforce its security interest in collateral pledged to secure loans made by American. 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, 2002 (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 August 7, 2002, 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 2002 Annual Meeting of Shareholders of ASB Financial Corp. (the "Proxy Statement") under the captions "Board of Directors," "Executive Officers," "Ownership of ASB Stock" and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. -20- 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 "Ownership of ASB Stock" is incorporated herein by reference. ASB maintains the ASB Financial Corp. Stock Option and Incentive Plan (the "Plan") under which it may issue equity securities to its directors, officers and employees in exchange for goods or services. The Plan was approved by ASB's shareholders at the 1995 Annual Meeting of Shareholders. The following table shows, as of June 30, 2002, the number of common shares issuable upon exercise of outstanding stock options, the weighted average exercise price of those stock options, and the number of common shares remaining for future issuance under the Plan, excluding shares issuable upon exercise of outstanding stock options.
Equity Compensation Plan Information (a) (b) (c) Number of securities remaining available for Number of securities future issuance under to be issued upon Weighted-average equity compensation plans exercise of exercise price of (excluding securities Plan Category outstanding options outstanding options reflected in column (a)) - ------------------------------------------------------------------------------------------------------------------ Equity compensation plans approved by security holders 212,915 $7.69 21,979 - ------------------------------------------------------------------------------------------------------------------ Equity compensation plans not approved by security holders. N/A N/A N/A - ------------------------------------------------------------------------------------------------------------------ Total 212,915 $7.69 21,979 - ------------------------------------------------------------------------------------------------------------------
Item 12. Certain Relationships and Related Transactions Not applicable. Item 13. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Incorporation (incorporated by reference) 3.2 Code of Regulations (incorporated by reference) 10.1 ASB Financial Corp. 1995 Stock Option and Incentive Plan (incorporated by reference) 10.2 American Savings Bank, fsb Management Recognition Plan and Trust Agreement (incorporated by reference) -21- 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) 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002 (b) No reports on Form 8-K have been filed during the last quarter of the fiscal year covered by this Report. Item 14. Controls and Procedures Since this Form 10-KSB is being filed for the period ended June 30, 2002, no disclosures are required pursuant to Item 307(a) of Regulation S-B. There have not been any significant changes in internal controls or in other factors that would require disclosure pursuant to Item 307(b). -22- SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ASB FINANCIAL CORP. By /s/ Robert M. Smith --------------------------------- Robert M. Smith President Date: September 27, 2002 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ Gerald R. Jenkins By /s/ Lee O. Fitch ------------------------------- ------------------------ Gerald R. Jenkins Lee O. Fitch Director Director Date: September 27, 2002 Date: September 27, 2002 By /s/ William J. Burke By /s/ Louis M. Schoettle ------------------------------- ----------------------- William J. Burke Louis M. Schoettle Director Director Date: September 27, 2002 Date: September 27, 2002 By /s/ Robert M. Smith By /s/ Michael L. Gampp ------------------------------- --------------------- Robert M. Smith Michael L. Gampp President and Director Chief Financial Officer (Principal Executive Officer) (Principal Financial Officer and Principal Accounting Officer) Date: September 27, 2002 Date: September 27, 2002 -23- CERTIFICATION I, Robert M. Smith, certify that: 1. I have reviewed this annual report on Form 10-KSB of ASB Financial Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 27, 2002 /s/ Robert M. Smith ------------------------------- Robert M. Smith President [Chief Executive Officer] -24- CERTIFICATION I, Michael L. Gampp, certify that: 1. I have reviewed this annual report on Form 10-KSB of ASB Financial Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 27, 2002 /s/ Michael L. Gampp ------------------------------- Michael L. Gampp Chief Financial Officer -25-
INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION 3.1 Articles of Incorporation of ASB Financial Corp. Incorporated by reference to the Form 10-KSB for fiscal year ended June 30, 1995 filed 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 1995 Form 10-KSB, Exhibit 3.5 10.1 ASB Financial Corp. 1995 Stock Option and Incentive Plan Incorporated by reference to the Form 10-KSB for the fiscal year ended June 30, 1996 filed with the SEC on September 30, 1996, (the "1996 Form 10-KSB") Exhibit 10.1 10.2 American Savings Bank, fsb Management Recognition Plan Incorporated by reference to the 1996 and Trust Agreement Form 10-KSB, Exhibit 10.2 13 2002 Annual Report to Shareholders 20 Proxy Statement for 2002 Annual Meeting Incorporated by reference to the Proxy Statement for the 2002 Annual Meeting of Shareholders filed with the SEC on September 23, 2002 21 Subsidiaries of ASB Financial Corp. Incorporated by reference to the 1995 Form 10-KSB, Exhibit 21 99.1 Certification of Chief Executive Officer Pursuant to18 U.S.C. Section 1350 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
-26- EX-13 3 asb10ksb_ex1363002.txt 2002 ANNUAL REPORT TO SHAREHOLDERS ASB FINANCIAL CORP. 2002 ANNUAL REPORT TO SHAREHOLDERS Dear Fellow Shareholder: It is with a great deal of pleasure that we present our Annual Report to Shareholders covering the fiscal year ended June 30, 2002. We were very pleased with another year of solid operating results in fiscal 2002. Net earnings for the fiscal year ended June 30, 2002, totaled $1.5 million, or $.97 per diluted share, which represents an increase of $379,000, or 33.4%, compared to the $1.1 million of net earnings reported for fiscal 2001. Fiscal 2002 net earnings were enhanced by a $229,000, or $.15 per diluted share, extraordinary income item resulting from our acquisition of the Waverly Building and Loan Company. Before consideration of the effects of this non-recurring income, fiscal 2002 net earnings increased over fiscal 2001 by $150,000, or 13.2%. At June 30, 2002, total assets amounted to a record $148.3 million, an increase of $7.3 million, or 5.2% over June 30, 2001. The loan portfolio grew by $5.7 million, or 5.5%, during fiscal 2002, ending the year with a record total of $109.0 million. Similarly, deposits increased by $6.1 million, or 5.1%, during the fiscal year, totaling an unprecedented level of $126.9 million at June 30, 2002. Your Corporation's focus for fiscal 2003 and beyond is an unwavering commitment to growth. The continued expansion of our business will be accomplished through the tireless efforts of our employees who provide the excellent customer service that has become synonymous with our name. It is the Board's intention to have shareholders directly participate in the success of the Company. Therefore, the Board increased the quarterly dividend for the third consecutive year, announcing an 8.3% increase from $.12 to $.13 per share effective July 31, 2002. In addition, the Company was able to increase each investor's percentage of ownership by repurchasing 1.7% of its common shares during the past year. Since our conversion to stock form in 1995, the Company has repurchased 13.6% of its common stock and returned over 80% of the offering proceeds to our shareholders in the form of special dividends and returns of capital. We shall continue to utilize these effective capital management strategies so as to maintain our overall capital ratio at optimal levels. The purchase of assets and assumption of liabilities of the Waverly Building and Loan Company in Pike County gives us access to a larger market area. The Waverly purchase is a natural medium for expansion of American Savings Bank. While Waverly and Portsmouth are similar markets, the move into another county has given our Bank a new opportunity to offer our products and services to the Pike County communities. In the future, we shall continue to be a community-oriented, relationship-focused financial institution, which we feel is the right strategy for growth and success. The Board of Directors and management team remain committed to the communities we serve and to achieving growth and increasing returns to our shareholders in the years ahead. Thank you for your continued confidence. Very truly yours, ASB FINANCIAL CORP. /s/Robert M. Smith Robert M. Smith President BUSINESS OF ASB FINANCIAL CORP. ============================================================================== ASB Financial Corp. ("ASB" or the "Corporation"), a unitary savings and loan holding company incorporated under the laws of the State of Ohio, owns all of the issued and outstanding common shares of American Savings Bank, fsb ("American" or the "Savings Bank"), a 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 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 main office at 503 Chillicothe Street in Portsmouth, Ohio and a branch office at 118 North Market Street, Waverly, Ohio. The principal business of American is the origination of loans secured by one- to four-family residential real estate located in American's primary market area, which consists of the City of Portsmouth and the City of Waverly and contiguous areas of Scioto County and Pike County, Ohio. American also originates loans secured by multifamily residences (over four units) and nonresidential real estate and purchases interests in loans originated by other lenders secured by multifamily real estate and nonresidential real estate located outside of American's primary market area. In addition to real estate lending, American invests in mortgage-backed securities, U.S. Government and agency obligations and other investments 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. 2 MARKET PRICE OF ASB'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS ============================================================================== There were 1,512,305 common shares of ASB outstanding on September 1, 2002, held of record by approximately 800 shareholders. Price information for ASB's common shares is quoted on the Nasdaq National Market ("Nasdaq") under the symbol "ASBP." The table below sets forth the high and low closing prices for the common shares of ASB, as quoted by Nasdaq, together with dividends declared per share, for each quarter of fiscal 2002 and 2001. Cash dividends Quarter ended High close Low close declared Fiscal 2002 September 30, 2001 $10.98 $10.00 $.12 December 31, 2001 $10.96 $ 9.51 $.12 March 31, 2002 $10.85 $10.02 $.12 June 30, 2002 $11.61 $10.25 $.13 Fiscal 2001 September 30, 2000 $10.75 $8.75 $.11 December 31, 2000 $ 9.94 $8.63 $.11 March 31, 2001 $ 9.38 $8.63 $.11 June 30, 2001 $10.00 $8.63 $.12 The income of ASB consists of interest and dividends on investment and mortgage-backed and related securities and dividends which may periodically be paid on the common shares of American held by ASB. In addition to certain federal income tax considerations, OTS regulations impose limitations on the payment of dividends and other capital distributions by savings associations. 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. Under OTS regulations applicable to all savings associations, 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 regulations) that is equal to or greater than the amount of its "well-capitalized" capital requirement, is generally permitted, without OTS approval (but subsequent to 30 days' prior notice of the planned dividend to the OTS) to make capital distributions during a calendar year in an amount not to exceed its net earnings for that year to date plus its retained net earnings for the preceding two years. Savings associations which have total capital in excess of the "well-capitalized" capital requirement and which have been notified by the OTS that they are in need of more than normal supervision can be subject to greater restrictions on dividends. In addition, 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 the definition of a "well-capitalized" institution and, unless the OTS determines that American is an institution requiring more than normal supervision, may pay dividends in accordance with the foregoing provisions of the OTS regulations. 3 SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA ============================================================================== The following tables set forth certain information concerning the consolidated financial condition, earnings and other data regarding ASB at the dates and for the periods indicated.
Selected consolidated financial At June 30, condition data: 2002 2001 2000 1999 1998 (In thousands) Total amount of: Assets $148,272 $140,987 $131,898 $123,248 $116,437 Cash and cash equivalents (1) 7,704 4,649 5,069 7,566 13,890 Certificates of deposit in other financial 100 - - 293 2,004 institutions Investment securities available for sale - at market 20,866 20,772 19,127 19,387 11,850 Mortgage-backed securities available for sale - at 7,091 8,716 8,616 10,232 8,924 market Loans receivable - net 109,015 103,308 94,744 82,430 76,550 Deposits 126,872 120,725 110,007 100,954 93,477 Advances from the FHLB 4,223 4,257 7,790 5,823 4,354 Shareholders' equity, restricted (2) 15,454 14,503 12,581 15,040 14,490
- ------------------------------ (1) Consists of cash and due from banks and interest-bearing deposits in other financial institutions. (2) At June 30, 2002, 2001, 2000, 1999 and 1998, includes $850,000, $779,000, $(592,000), $265,000 and $714,000, respectively, of unrealized gains (losses) on securities designated as available for sale, net of related tax effects, pursuant to Statement of Financial Accounting Standards ("SFAS") No. 115.
Selected consolidated operating Year ended June 30, data: 2002 2001 2000 1999 1998 (In thousands, except per share data) Interest income $9,543 $10,262 $9,257 $8,580 $8,541 Interest expense 5,050 6,379 5,427 5,112 4,961 ----- ------ ----- ----- ----- Net interest income 4,493 3,883 3,830 3,468 3,580 Provision for (recoveries of) losses on loans 70 1 1 (1) (5) ----- ------ ----- ----- ----- Net interest income after provision for (recoveries of) losses on loans 4,423 3,882 3,829 3,469 3,585 Other income 486 495 354 330 281 General, administrative and other expense 3,077 2,783 2,673 2,286 2,345 ----- ------ ----- ----- ----- Earnings before income taxes 1,832 1,594 1,510 1,513 1,521 Federal income taxes 548 460 426 433 445 ----- ------ ----- ----- ----- Earnings before extraordinary item 1,284 1,134 1,084 1,080 1,076 Extraordinary item - negative goodwill arising from Waverly acquisition - net of tax 229 - - - - ----- ------- ----- ----- ----- Net earnings $1,513 $ 1,134 $1,084 $1,080 $1,076 ===== ======= ===== ===== ===== Earnings per share Basic $1.00 $.75 $.70 $.68 $.68 ==== === === === === Diluted $.97 $.73 $.70 $.67 $.67 === === === === ===
4
Year ended June 30, Selected financial ratios: 2002 2001 2000 1999 1998 Return on average assets 1.06% .83% .86% .90% .95% Average interest rate spread during period 2.84 2.46 2.74 2.54 2.46 Net interest margin 3.23 2.94 3.15 3.04 3.25 Return on average equity 11.48 8.22 8.21 7.22 6.38 Equity to total assets at end of period 10.42 10.29 9.54 12.20 12.44 Average interest-earning assets to average interest-bearing liabilities 110.90 109.93 109.25 111.02 117.41 Net interest income to general, administrative and other expense 146.02 139.53 143.28 151.71 152.67 General, administrative and other expense to average total assets 2.16 2.05 2.13 1.91 2.08 Nonperforming assets to total assets .78 .44 .21 .31 .34 Loan loss allowance to nonperforming loans 74.22 115.37 257.30 193.40 316.25 Dividend payout ratio 49.00 60.00 201.43 58.82 352.94
5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ============================================================================== GENERAL ASB was incorporated for the purpose of owning the outstanding common shares of American. As a result, the discussion and analysis that follows focuses primarily on the financial condition and results of operations of American. The following discussion and analysis of the consolidated financial condition and results of operations of ASB and American should be read in conjunction with and with reference to the consolidated financial statements, and the notes thereto, presented in this Annual Report. On June 28, 2002, American acquired substantially all of the assets and liabilities of the Waverly Building and Loan Company ("Waverly"). The acquisition was accounted for in a manner similar to the purchase method of accounting. Forward-Looking Statements are Subject to Change Certain statements are made in this document as to what management expects may happen in the future. These statements usually contain the words "believe," "estimate," "project," "expect," "anticipate," "intend" or similar expressions. Because these statements look to the future, they are based on management's current expectations and beliefs. Actual results or events may differ materially from those reflected in the forward-looking statements. Management's current expectations and beliefs as to future events are subject to change at any time, and no assurances can be provided that the future events will actually occur. CHANGES IN FINANCIAL CONDITION FROM JUNE 30, 2001 TO JUNE 30, 2002 ASB's total assets amounted to $148.3 million at June 30, 2002, an increase of $7.3 million, or 5.2%, over 2001 levels. The increase in total assets resulted primarily from the acquisition of Waverly, which increased total assets by $5.6 million and total deposits by $4.7 million. The increase in assets was funded by growth in deposits of $1.4 million and an increase in shareholders' equity of $951,000. Cash and interest-bearing deposits totaled $7.7 million at June 30, 2002, an increase of $3.1 million, or 65.7%, over 2001 levels. The Waverly acquisition contributed $1.8 million to total cash and interest-bearing deposits. Investment securities totaled $20.9 million at June 30, 2002, an increase of $94,000, or ..5%, over the balance at June 30, 2001. Mortgage-backed securities totaled $7.1 million at June 30, 2002, a decrease of $1.6 million, or 18.6%, year to year. During fiscal 2002, purchases of investment and mortgage-backed securities totaling $26.9 million were offset by maturities, sales and principal repayments totaling $28.6 million. Loans receivable increased by $5.7 million, or 5.5%, to a total of $109.0 million at June 30, 2002, compared to $103.3 million at June 30, 2001. The increase resulted primarily from $4.5 million in loans acquired in the Waverly transaction. Loan disbursements of $34.5 million and purchases of $2.0 million exceeded principal repayments of $34.6 million during fiscal 2002. Growth in loans secured by residential real estate totaled $2.4 million, or 3.2%, and the consumer loan portfolio increased by $1.9 million, or 10.9%, year to year. At June 30, 2002, American's allowance for loan losses was $855,000, representing .77% of total loans and 74.2% of nonperforming loans. The acquisition of Waverly contributed $160,000 to the allowance during fiscal 2002. At June 30, 2001, American's allowance for loan losses was $713,000, representing .67% of total loans and 115.4% of nonperforming loans. Nonperforming loans totaled $1.2 million and $618,000 at June 30, 2002 and 2001, 6 respectively. At June 30, 2002, nonperforming loans were comprised of $606,000 of loans secured by one- to four-family residential real estate, $465,000 of loans secured by nonresidential real estate and $81,000 of consumer and other loans. Management believes that American's nonperforming loans are adequately collateralized and no loss is anticipated on such loans. Although management believes that its allowance for loan losses at June 30, 2002, 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. Deposits increased by $6.1 million, or 5.1%, during fiscal 2002 to a total of $126.9 million at June 30, 2002. The increase resulted primarily from $4.7 million in deposits acquired in the Waverly transaction. The additional $1.4 million growth in deposits was generally used to fund new loan originations. Shareholders' equity totaled $15.5 million at June 30, 2002, an increase of $951,000, or 6.6%, over June 30, 2001 levels. The increase resulted primarily from net earnings of $1.5 million, a $71,000 increase in unrealized gains on available for sale securities and the effects of $276,000 of amortization related to stock benefit plans, which were partially offset by dividends paid of $754,000 and treasury stock purchases of $260,000 during the year. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2002 AND 2001 General. Net earnings amounted to $1.5 million for the fiscal year ended June 30, 2002, an increase of $379,000, or 33.4%, over fiscal 2001. The increase in earnings resulted primarily from the recognition of after-tax negative goodwill totaling $229,000 in connection with the Waverly acquisition and a $610,000 increase in net interest income, which were partially offset by a $294,000 increase in general, administrative and other expense and an $88,000 increase in the provision for federal income taxes. Net Interest Income. Total interest income amounted to $9.5 million for the fiscal year ended June 30, 2002, a decrease of $719,000, or 7.0%, from fiscal 2001. Interest income on loans totaled $7.9 million in fiscal 2002, a decrease of $268,000, or 3.3%. This decrease was due primarily to an 83 basis point decrease in the average yield year to year, which was partially offset by a $7.3 million, or 7.4%, increase in the weighted-average balance of loans outstanding. Interest income on mortgage-backed securities decreased by $143,000, or 25.7%, as a result of a $1.4 million, or 16.7%, decrease in the weighted-average balance outstanding, and a 72 basis point decrease in yield year to year. Interest income on investment securities and interest-bearing deposits decreased by $308,000, or 20.0%, due primarily to a 135 basis point decrease in the average yield, which was partially offset by a $686,000, or 2.7%, increase in the weighted-average balance outstanding year to year. Interest expense totaled $5.1 million for the fiscal year ended June 30, 2002, a decrease of $1.3 million, or 20.8%, from the $6.4 million total recorded in fiscal 2001. Interest expense on deposits decreased by $1.1 million, or 18.3%, due primarily to a 114 basis point decrease in the weighted-average cost of deposits, which was partially offset by a $5.1 million, or 4.4%, increase in the weighted-average balance outstanding year to year. Interest expense on borrowings decreased by $227,000, or 65.6%, due primarily to a 427 basis point decrease in the average cost of borrowings, to 2.36% in fiscal 2002. Decreases in the average yields on interest-earning assets and the average costs of interest-bearing liabilities were due primarily to the overall reductions in interest rates in the economy during 2001. This low interest rate environment continued through the first six months of 2002. As a result of the foregoing changes in interest income and interest expense, net interest income increased by $610,000, or 15.7%, to a total of $4.5 million for the fiscal year ended June 30, 2002, compared to $3.9 million in fiscal 2001. The interest rate spread increased by 38 basis points to 2.84% in fiscal 7 2002 from 2.46% in fiscal 2001, and the net interest margin increased by 29 basis points to 3.23% in fiscal 2002 from 2.94% in fiscal 2001. Provision for Losses on Loans. American charges a provision for losses on loans to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, the volume and type of lending conducted by American, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to American's market area, and other factors related to the collectibility of American's loan portfolio. As a result of such analysis, management elected to record a $70,000 provision for losses on loans during the fiscal year ended June 30, 2002. The fiscal 2002 provision was predicated primarily upon the increase in nonperforming loans and the level of loan charge-offs during the period. There can be no assurance that the loan loss allowance will be adequate to absorb losses on known nonperforming assets or that the allowance will be adequate to cover losses on nonperforming assets in the future. Other Income. Other income totaled $486,000 for the fiscal year ended June 30, 2002, a decrease of $9,000, or 1.8%, from the $495,000 recorded in fiscal 2001. The decrease resulted from an $86,000 decrease in gain on sale of investment securities year to year, which was substantially offset by an increase of $77,000, or 20.4%, in other operating income. The increase in other operating income was comprised of increases in fees on loans and deposits transactions. General, Administrative and Other Expense. General, administrative and other expense totaled $3.1 million for the fiscal year ended June 30, 2002, an increase of $294,000, or 10.6%, over the total recorded in fiscal 2001. The increase resulted primarily from increases of $68,000, or 4.5%, in employee compensation and benefits, $47,000, or 13.5%, in data processing costs and $225,000, or 40.3%, in other operating expense, which were partially offset by a decrease of $55,000, or 33.1%, in franchise taxes. The increase in employee compensation and benefits was due primarily to normal merit increases, partially offset by a decline in expense related to stock benefit plans year to year. The increase in data processing was due primarily to costs related to enhanced computer programs for item-processing and advanced system upgrades, as well as increased costs related to American's overall growth year to year. The increase in other operating expense was due primarily to expense related to the Savings Bank's investment in a low income housing project, as well as increased expense associated with the debit card program, increased professional fees associated with the acquisition of Waverly and pro-rata increases in operating costs due to the Corporation's overall growth year to year. The decrease in franchise taxes was due primarily to refund claims on prior year tax filings. Federal Income Taxes. The provision for federal income taxes totaled $548,000 for the fiscal year ended June 30, 2002, an increase of $88,000, or 19.1%, over the $460,000 recorded in fiscal 2001. The increase was due primarily to the effects of a $238,000, or 14.9%, increase in pre-tax earnings. ASB's effective tax rates were 29.9% and 28.9% for the fiscal years ended June 30, 2002 and 2001, respectively. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 2001 AND 2000 General. Net earnings amounted to $1.1 million for the fiscal year ended June 30, 2001, an increase of $50,000, or 4.6%, over fiscal 2000. The increase in earnings resulted from a $53,000 increase in net interest income and a $141,000 increase in other income, which were partially offset by a $110,000 increase in general, administrative and other expense and a $34,000 increase in the provision for federal income taxes. Net Interest Income. Total interest income amounted to $10.3 million for the fiscal year ended June 30, 2001, an increase of $1.0 million, or 10.9%, over fiscal 2000. Interest income on loans totaled $8.2 million in fiscal 2001, an increase of $1.0 million, or 14.2%. This increase was due primarily to an $11.4 million, or 13.0%, increase in the weighted-average balance of loans 8 outstanding, and a 9 basis point increase in the average yield year to year. Interest income on mortgage-backed securities decreased by $45,000, or 7.5%, as a result of a $1.4 million, or 14.7%, decrease in the weighted-average balance outstanding, which was partially offset by a 52 basis point increase in yield year to year. Interest income on investment securities and interest-bearing deposits increased by $34,000, or 2.3%, due primarily to an $893,000, or 3.7%, increase in the weighted-average balance outstanding, which was partially offset by an 8 basis point decrease in the average yield year to year. Interest expense totaled $6.4 million for the fiscal year ended June 30, 2001, an increase of $952,000, or 17.5%, over the $5.4 million total recorded in fiscal 2000. Interest expense on deposits increased by $1.0 million, or 19.9%, due primarily to a $10.8 million, or 10.4%, increase in the weighted-average balance outstanding and a 42 basis point increase in the weighted-average cost of deposits year to year. Interest expense on borrowings decreased by $48,000, or 12.2%, due primarily to a $1.7 million, or 24.2%, decrease in the weighted-average balance outstanding, which was partially offset by a 91 basis point increase in the average cost of borrowings, to 6.63% in fiscal 2001. As a result of the foregoing changes in interest income and interest expense, net interest income increased by $53,000, or 1.4%, to a total of $3.9 million for the fiscal year ended June 30, 2001, compared to $3.8 million in fiscal 2000. The interest rate spread decreased by 28 basis points to 2.46% in fiscal 2001 from 2.74% in fiscal 2000, and the net interest margin decreased by 21 basis points to 2.94% in 2001 from 3.15% in 2000. Provision for Losses on Loans. American charges a provision for losses on loans to earnings to bring the total allowance for loan losses to a level considered appropriate by management based on historical experience, the volume and type of lending conducted by American, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to American's market area, and other factors related to the collectibility of American's loan portfolio. As a result of such analysis, management determined that the allowance for loan losses was adequate and elected to record a minimal provision for losses on loans during the fiscal years ended June 30, 2001 and 2000. Other Income. Other income totaled $495,000 for the fiscal year ended June 30, 2001, an increase of $141,000, or 39.8%, over the $354,000 recorded in fiscal 2000. The increase resulted from a $108,000 increase in the gain on sale of investment securities year to year and an increase of $33,000, or 9.6%, in other operating income. The increase in other operating income was comprised of an increase in fees on loans and deposits transactions. General, Administrative and Other Expense. General, administrative and other expense totaled $2.8 million for the fiscal year ended June 30, 2001, an increase of $110,000, or 4.1%, over the total recorded in fiscal 2000. The increase resulted primarily from increases of $36,000, or 25.4%, in occupancy and equipment expense, $49,000, or 16.4%, in data processing costs and $78,000, or 16.3%, in other operating expense, which were partially offset by a decrease of $24,000, or 12.6%, in franchise taxes and a $15,000, or 37.5%, decrease in federal deposit insurance premiums. The increase in occupancy and equipment expense resulted primarily from an increase in depreciation expense on capital additions in fiscal 2001 and 2000 for renovations to the main office and the completion of a new drive-through location. The increase in data processing was due primarily to American's overall growth year to year and costs related to enhanced computer programs for loan underwriting, item-processing and advanced system upgrades. The increase in other operating expense was due primarily to expense related to the Savings Bank's investment in a low income housing project, as well as increased advertising and supplies expense and pro-rata increases in operating costs connected with the Corporation's overall growth year to year. Federal Income Taxes. The provision for federal income taxes totaled $460,000 for the fiscal year ended June 30, 2001, an increase of $34,000, or 8.0%, over the $426,000 recorded in fiscal 2000. The increase was due primarily to the effects of an $84,000, or 5.6%, increase in pre-tax earnings. ASB's effective tax rates were 28.9% and 28.2% for the fiscal years ended June 30, 2001 and 2000, respectively. 9 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, 2002 2001 2000 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 $106,024 $7,901 7.45% $ 98,713 $ 8,169 8.28% $ 87,363 $7,153 8.19% Mortgage-backed securities 6,947 413 5.95 8,338 556 6.67 9,779 601 6.15 Investment securities and other interest-earning assets 25,930 1,229 4.74 25,244 1,537 6.09 24,351 1,503 6.17 ------- ----- ------- ------ ---- ------- ----- ---- Total interest-earning assets 138,901 9,543 6.87 132,295 10,262 7.76 121,493 9,257 7.62 Non-interest-earning assets 3,728 3,780 3,951 ------- ------- ------- Total assets $142,629 $136,075 $125,444 ======= ======= ======= Interest-bearing liabilities: Deposits $120,212 4,931 4.10 $115,126 6,033 5.24 $104,324 5,033 4.82 Borrowings 5,039 119 2.36 5,217 346 6.63 6,884 394 5.72 ------- ----- ---- ------- ------ ---- ------- ----- ---- Total interest-bearing liabilities 125,251 5,050 4.03 120,343 6,379 5.30 111,208 5,427 4.88 ------- ----- ------- ------ ------- ----- ---- Non-interest-bearing liabilities 4,199 1,933 1,032 ------- ------- ------- Total liabilities 129,450 122,276 112,240 Shareholders' equity 13,179 13,799 13,204 ------- ------- ------- Total liabilities and shareholders' equity $142,629 $136,075 $125,444 ======= ======= ======= Net interest income $4,493 $ 3,883 $3,830 ===== ====== ===== Interest rate spread 2.84% 2.46% 2.74% ==== ==== ==== Net interest margin (net interest income as a percent of average interest-earning assets) 3.23% 2.94% 3.15% ==== ==== ==== Average interest-earning assets to average interest- bearing liabilities 110.90% 109.93% 109.25% ====== ====== ======
10 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 June30, 2002 vs. 2001 2001 vs. 2000 Increase Increase (decrease) (decrease) due to due to Volume Rate Total Volume Rate Total (In thousands) Interest-earning assets: Loans receivable $582 $ (850) $ (268) $938 $ 78 $1,016 Mortgage-backed securities (87) (56) (143) (106) 61 (45) Investment securities and interest - bearing assets 40 (348) (308) 53 (19) 34 --- ----- ----- --- ---- ----- Total interest-earning assets 535 (1,254) (719) 885 120 1,005 --- ----- ----- --- ---- ----- Interest-bearing liabilities: Deposits 257 (1,359) (1,102) 544 456 1,000 Borrowings (11) (216) (227) (140) 92 (48) --- ----- ----- --- ---- ----- Total interest-bearing liabilities 246 (1,575) (1,329) 404 548 952 --- ----- ----- --- ---- ----- Increase (decrease) in net interest income $289 $ 321 $ 610 $481 $(428) $ 53 === ====== ===== === ==== =====
ASSET AND LIABILITY MANAGEMENT American, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets reprice differently than its interest-bearing liabilities. As a part of its effort to monitor its interest rate risk, American reviews the reports of the OTS which set forth the application of the "net portfolio value" ("NPV") methodology used by the OTS. Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning and other assets and outgoing cash flows on interest-bearing liabilities. The methodology attempts to quantify interest rate risk as the change in the NPV which would result from theoretical changes in market interest rates. The following table presents, at June 30, 2002 and 2001, 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. 11
At June 30, 2002 At June 30, 2001 NPV as a % of NPV as a % of Changes in interest rate Board limit PV of Assets Change PV of Assets Change (basis points) % changes Ratio in NPV Ratio in NPV +300 (6)% 8.61% (377)bp 6.96% (457)bp +200 (6) 10.01 (237) 8.68 (285) +100 (6) 11.35 (103) 10.42 (111) - - 12.38 - 11.53 - -100 6 12.55 17 12.14 61 -200 6 - - 12.18 65 -300 6 - - 12.21 68
The model reflects that American's NPV is more sensitive to an increase in interest rates than a decrease in interest rates. This occurs principally because, as rates rise, the market values of the Savings Bank's investments, adjustable-rate mortgage loans, fixed-rate loans and mortgage-backed securities decline due to the rate increases. The values of the Savings Bank's deposits and borrowings change in approximately the same proportion in rising or falling rate scenarios. If interest rates rise from current levels, American's net interest income could be expected to be negatively affected. Moreover, rising interest rates could negatively affect American's earnings due to diminished loan demand. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the assets. Further, in the event of a change in interest rates, expected rates of prepayment on loans and early withdrawal from certificates could likely deviate significantly from those assumed in calculating the table. 12 LIQUIDITY AND CAPITAL RESOURCES Liquidity refers to the ability of an institution to generate sufficient cash to fund current loan demand, meet deposit withdrawals and pay operating expenses. Liquidity is influenced by financial market conditions, fluctuations in interest rates, general economic conditions and regulatory requirements. ASB's liquidity, primarily represented by cash and cash equivalents and investment securities available for sale, is a result of the operating, investing and financing activities of American. These activities are summarized below on a consolidated basis for the years ended June 30, 2002, 2001, and 2000:
Year ended June30, 2002 2001 2000 (In thousands) Net cash from operating activities $1,932 $1,536 $ 1,554 Net cash from investing activities 647 (8,250) (12,065) Net cash from financing activities 476 6,294 8,014 ----- ----- ------ Net change in cash and cash equivalents 3,055 (420) (2,497) Cash and cash equivalents at the beginning of the year 4,649 5,069 7,566 ----- ----- ------ Cash and cash equivalents at the end of the year $7,704 $4,649 $ 5,069 ===== ===== ======
At June 30, 2002, American had outstanding commitments of approximately $499,000 to originate loans. Additionally, American was obligated under unused lines and letters of credit totaling $11.7 million. In the opinion of management, all loan commitments had interest rates which equaled or exceeded market interest rates as of June 30, 2002, 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, 2002, American exceeded all applicable minimum capital requirements. The following table sets forth the amount and percentage level of American's regulatory capital at June 30, 2002, 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. American meets the definition of a "well capitalized" institution.
June 30, 2002 Excess of regulatory capital Regulatory Current over current capital requirement requirement Amount Percent Amount Percent Amount Percent (Dollars in thousands) Tangible capital $13,461 9.1% $2,214 1.5% $11,247 7.6% Core capital $13,461 9.1% $5,903 4.0% $7,558 5.1% Risk-based capital $14,316 16.5% $6,930 8.0% $7,386 8.5%
13 EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations," which requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method. The pooling-of-interests method of accounting is prohibited except for combinations initiated before June 30, 2001. The remaining provisions of SFAS No. 141 relating to business combinations accounted for by the purchase method, including identification of intangible assets, accounting for negative goodwill, financial statement presentation and disclosure, are effective for combinations completed after June 30, 2001. Management adopted SFAS No. 141 effective July 1, 2001, as required, without material effect on the Corporation's financial position or results of operations. In June 2001, the FASB issued SFAS No. 142 "Goodwill and Intangible Assets," which prescribes accounting for all purchased goodwill and intangible assets. Pursuant to SFAS No. 142, acquired goodwill is not amortized, but is tested for impairment at the reporting unit level annually and whenever an impairment indicator arises. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Management adopted SFAS No. 142 effective July 1, 2002, as required, without material effect on the Corporation's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 carries over the recognition and measurement provisions in SFAS No. 121. Accordingly, an entity must recognize an impairment loss if the carrying value of a long-lived asset or asset group (a) is not recoverable and (b) exceeds its fair value. Similar to SFAS No. 121, SFAS No. 144 requires an entity to test an asset or asset group for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. SFAS No. 144 differs from SFAS No. 121 in that it provides guidance on estimating future cash flows to test recoverability. An entity may use either a probability-weighted approach or best-estimate approach in developing estimates of cash flows to test recoverability. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Management adopted SFAS No. 144 effective July 1, 2002, as required, without material effect on the Corporation's financial condition or results of operations. 14 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS AND CONSOLIDATED FINANCIAL STATEMENTS ============================================================================= Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 16 FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 17 CONSOLIDATED STATEMENTS OF EARNINGS 18 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 19 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 20 CONSOLIDATED STATEMENTS OF CASH FLOWS 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 15 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, 2002 and 2001, and the related consolidated statements of earnings, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended June 30, 2002. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ASB Financial Corp. as of June 30, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/GRANT THORNTON LLP Cincinnati, Ohio August 7, 2002 16 ASB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, 2002 and 2001 (In thousands, except share data) ASSETS 2002 2001 Cash and due from banks $ 1,428 $ 640 Interest-bearing deposits in other financial institutions 6,276 4,009 ------- ------- Cash and cash equivalents 7,704 4,649 Certificates of deposit in other financial institutions 100 - Investment securities available for sale - at market 20,866 20,772 Mortgage-backed securities available for sale - at market 7,091 8,716 Loans receivable - net 109,015 103,308 Office premises and equipment - at depreciated cost 1,277 1,394 Federal Home Loan Bank stock - at cost 1,017 788 Accrued interest receivable on loans 216 188 Accrued interest receivable on mortgage-backed securities 41 50 Accrued interest receivable on investments and interest-bearing deposits 293 295 Prepaid expenses and other assets 646 788 Prepaid federal income taxes - 39 Deferred federal income taxes 6 - ------- ------- Total assets $148,272 $140,987 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $126,872 $120,725 Advances from the Federal Home Loan Bank 4,223 4,257 Advances by borrowers for taxes and insurance 162 171 Accrued interest payable 85 129 Other liabilities 1,307 1,201 Accrued federal income taxes 169 - Deferred federal income taxes - 1 ------- ------- Total liabilities 132,818 126,484 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; 1,760,681 and 1,746,924 shares issued at June 30, 2002 and 2001, respectively - - Additional paid-in capital 8,619 8,482 Retained earnings, restricted 9,152 8,393 Shares acquired by stock benefit plans (537) (781) Accumulated comprehensive income, unrealized gains on securities designated as available for sale, net of related tax effects 850 779 Less 232,819 and 208,145 shares of treasury stock - at cost, at June 30, 2002 and 2001, respectively (2,630) (2,370) ------- ------- Total shareholders' equity 15,454 14,503 ------- ------- Total liabilities and shareholders' equity $148,272 $140,987 ======= =======
The accompanying notes are an integral part of these statements. 17 ASB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF EARNINGS For the year ended June 30, 2002, 2001 and 2000 (In thousands, except per share data) 2002 2001 2000 Interest income Loans $7,901 $ 8,169 $7,153 Mortgage-backed securities 413 556 601 Investment securities 1,221 1,533 1,491 Interest-bearing deposits and other 8 4 12 ----- ------ ----- Total interest income 9,543 10,262 9,257 Interest expense Deposits 4,931 6,033 5,033 Borrowings 119 346 394 ----- ------ ----- Total interest expense 5,050 6,379 5,427 ----- ------ ----- Net interest income 4,493 3,883 3,830 Provision for losses on loans 70 1 1 ----- ------ ----- Net interest income after provision for losses on loans 4,423 3,882 3,829 Other income Gain on sale of investment securities 31 117 9 Other operating 455 378 345 ----- ------ ----- Total other income 486 495 354 General, administrative and other expense Employee compensation and benefits 1,576 1,508 1,522 Occupancy and equipment 190 178 142 Federal deposit insurance premiums 22 25 40 Franchise taxes 111 166 190 Data processing 395 348 299 Other operating 783 558 480 ----- ------ ----- Total general, administrative and other expense 3,077 2,783 2,673 ----- ------ ----- Earnings before income taxes and extraordinary item 1,832 1,594 1,510 Federal income taxes Current 595 494 474 Deferred (47) (34) (48) ----- ------ ----- Total federal income taxes 548 460 426 ----- ------ ----- Earnings before extraordinary item 1,284 1,134 1,084 Extraordinary item - negative goodwill arising from Waverly acquisition - net of tax effects of $118 229 - - ----- ------ ----- NET EARNINGS $1,513 $ 1,134 $1,084 ===== ====== ===== EARNINGS PER SHARE Basic $1.00 $.75 $.70 ==== === === Diluted $.97 $.73 $.70 === === ===
The accompanying notes are an integral part of these statements. 18 ASB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the year ended June 30, 2002, 2001 and 2000 (In thousands) 2002 2001 2000 Net earnings $1,513 $1,134 $1,084 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) on securities during the period, net of taxes (benefits) of $47, $746 and $(437) in 2002, 2001 and 2000, respectively 91 1,448 (851) Reclassification adjustment for realized gains included in earnings, net of tax of $11, $40 and $3 in 2002, 2001 and 2000, respectively (20) (77) (6) ----- ----- ----- Comprehensive income $1,584 $2,505 $ 227 ===== ===== ===== Accumulated comprehensive income (loss) $ 850 $ 779 $ (592) ===== ===== =====
The accompanying notes are an integral part of these statements. 19 ASB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended June 30, 2002, 2001 and 2000 (In thousands, except share data) Unrealized gains Shares (losses) on Additional acquired securities Common paid-in Retained by stock designated as Treasury stock capital earnings benefit plans available for sale stock Total Balance at July 1, 1999 $ - $8,306 $8,909 $(1,297) $ 265 $(1,143) $15,040 Amortization of expense related to stock benefit plans - 87 - 238 - - 325 Net earnings for the year ended June 30, 2000 - - 1,084 - - - 1,084 Cash dividends of $1.41 per share - - (2,123) - - - (2,123) Purchase of treasury shares - at cost - - - - - (949) (949) Issuance of shares under stock option plan - 61 - - - - 61 Unrealized losses on securities designated as available for sale, net of related tax effects - - - - (857) - (857) --- ----- ----- ------ ----- ------ ------ Balance at June 30, 2000 - 8,454 7,870 (1,059) (592) (2,092) 12,581 Amortization of expense related to stock benefit plans - 28 - 278 - - 306 Net earnings for the year ended June 30, 2001 - - 1,134 - - - 1,134 Cash dividends of $.45 per share - - (611) - - - (611) Purchase of treasury shares - at cost - - - - - (278) (278) Unrealized gains on securities designated as available for sale, net of related tax effects - - - - 1,371 - 1,371 --- ----- ----- ------ ----- ------ ------ Balance at June 30, 2001 - 8,482 8,393 (781) 779 (2,370) 14,503 Amortization of expense related to stock benefit plans - 32 - 244 - - 276 Net earnings for the year ended June 30, 2002 - - 1,513 - - - 1,513 Cash dividends of $.49 per share - - (754) - - - (754) Purchase of treasury shares - at cost - - - - - (260) (260) Issuance of shares under stock option plan - 105 - - - - 105 Unrealized gains on securities designated as available for sale, net of related tax effects - - - - 71 - 71 --- ----- ----- ------ ----- ------ ------ Balance at June 30, 2002 $ - $8,619 $9,152 $ (537) $ 850 $(2,630) $15,454 === ===== ===== ====== ===== ====== ======
The accompanying notes are an integral part of these statements. 20 ASB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended June 30, 2002, 2001 and 2000 (In thousands) 2002 2001 2000 Cash flows from operating activities: Net earnings for the year $ 1,513 $ 1,134 $ 1,084 Adjustments to reconcile net earnings to net cash from operating activities: Amortization of discounts and premiums on loans, investments and mortgage-backed securities - net 13 35 32 Amortization of deferred loan origination fees (62) (51) (47) Amortization of expense related to stock benefit plans 276 306 325 Depreciation and amortization 128 122 86 Provision for losses on loans 70 1 1 Gain on sale of investment securities (31) (117) (9) Federal Home Loan Bank stock dividends (44) (55) (55) Increase (decrease) in cash, net of acquisition of Waverly Building and Loan Company, due to changes in: Accrued interest receivable on loans (35) (125) 15 Accrued interest receivable on mortgage-backed securities 9 9 7 Accrued interest receivable on investments and interest-bearing deposits 6 60 (65) Prepaid expenses and other assets 142 (20) 172 Accrued interest payable (44) 139 (4) Other liabilities (52) (57) 88 Federal income taxes Current 90 189 (28) Deferred (47) (34) (48) ------ ------ ------ Net cash provided by operating activities 1,932 1,536 1,554 Cash flows from investing activities: Proceeds from maturity of investment securities 23,885 7,986 350 Proceeds from sale of investment securities 31 119 1,011 Purchase of investment securities (23,914) (7,911) (2,116) Purchase of mortgage-backed securities (3,011) (1,260) - Principal repayments on mortgage-backed securities 4,706 1,480 1,310 Purchase of loans (2,000) (2,872) (1,875) Loan principal repayments 34,588 23,005 19,232 Loan disbursements (34,533) (28,647) (29,965) Purchase of office premises and equipment (11) (150) (405) Redemption of Federal Home Loan Bank stock - - 100 Decrease in certificates of deposit in other financial institutions - net - - 293 Net cash received through acquisition of Waverly Building and Loan Company 906 - - ------ ------ ------ Net cash provided by (used in) investing activities 647 (8,250) (12,065) ------ ------ ------ Net cash provided by (used in) operating and investing activities (subtotal carried forward) 2,579 (6,714) (10,511) ------ ------ ------
21 ASB FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the year ended June 30, 2002, 2001 and 2000 (In thousands) 2002 2001 2000 Net cash provided by (used in) operating and investing activities (subtotal brought forward) $2,579 $(6,714) $(10,511) Cash flows from financing activities: Net increase in deposit accounts 1,428 10,718 9,053 Proceeds from Federal Home Loan Bank advances 8,300 3,000 9,500 Repayment of Federal Home Loan Bank advances (8,334) (6,533) (7,533) Advances by borrowers for taxes and insurance (9) (2) 5 Proceeds from issuance of shares under stock option plan 105 - 61 Purchase of treasury stock (260) (278) (949) Dividends paid on common stock (754) (611) (2,123) ----- ------ ------- Net cash provided by financing activities 476 6,294 8,014 ----- ------ ------- Net increase (decrease) in cash and cash equivalents 3,055 (420) (2,497) Cash and cash equivalents at beginning of year 4,649 5,069 7,566 ----- ------ ------- Cash and cash equivalents at end of year $7,704 $ 4,649 $ 5,069 ===== ====== ======= Supplemental disclosure of cash flow information: Cash paid during the year for: Federal income taxes $ 390 $ 435 $ 547 ===== ====== ======= Interest on deposits and borrowings $5,094 $ 6,339 $ 5,431 ===== ====== ======= Supplemental disclosure of noncash investing activities: Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ 71 $ 1,371 $ (857) ===== ====== ======= Fair value of assets received in acquisition of the Waverly Building and Loan Company $5,646 $ - $ - ===== ====== =======
The accompanying notes are an integral part of these statements. 22 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ASB Financial Corp. (the "Corporation") is a savings and loan holding company whose primary activity is holding the stock of its wholly-owned subsidiary, American Savings Bank, fsb (the "Savings Bank"). The Savings Bank conducts a general banking business in southeastern Ohio which consists of attracting deposits from the general public and primarily applying those funds to the origination of loans for residential, consumer and nonresidential purposes. The Savings Bank's profitability is significantly dependent on net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Savings Bank can be significantly influenced by a number of factors, such as governmental monetary policy, that are outside of management's control. In June 2002, the Savings Bank acquired substantially all of the assets and liabilities of The Waverly Building and Loan Company ("Waverly"). The acquisition was accounted for using the purchase method of accounting. The business combination with Waverly added approximately $5.6 million in assets and $4.6 million in liabilities to the Corporation at June 30, 2002. Consistent with the purchase method of accounting, Waverly's revenue and expense accounts for fiscal 2002 were not included in the Corporation's operating results for the fiscal year ended June 30, 2002. Financial and pro-forma disclosures pursuant to SFAS No. 141 have not been presented as the acquisition was not material to the Corporation. The consolidated financial information presented herein has been prepared in accordance with accounting principles generally accepted in the United States of America ("U. S. GAAP") and general accounting practices within the financial services industry. In preparing consolidated financial statements in accordance with U. S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates. The following is a summary of the Corporation's significant accounting policies which have been consistently applied in the preparation of the accompanying consolidated financial statements. Principles of Consolidation The consolidated financial statements include the accounts of the Corporation, the Savings Bank and A.S.L. Services, Inc., the Savings Bank's subsidiary. All significant intercompany balances and transactions have been eliminated. 23 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investment Securities and Mortgage-Backed Securities The Corporation accounts for investment and mortgage-backed securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that investments in debt and equity securities be categorized as held-to-maturity, trading, or available for sale. Securities classified as held-to-maturity are carried at cost only if the Corporation has the positive intent and ability to hold these securities to maturity. Trading securities and securities designated as available for sale are carried at fair value with resulting unrealized gains or losses recorded to operations or shareholders' equity, respectively. At June 30, 2002 and 2001, the Corporation had designated all investment and mortgage-backed securities as available for sale. Realized gains and losses on sales of securities are recognized using the specific identification method. Loans Receivable Loans receivable are stated at the principal amount outstanding, adjusted for deferred loan origination fees and the allowance for loan losses. Interest is accrued as earned unless the collectibility of the loan is in doubt. Interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments has returned to normal, in which case the loan is returned to accrual status. If the ultimate collectibility of the loan is in doubt, in whole or in part, all payments received on nonaccrual loans are applied to reduce principal until such doubt is eliminated. Loan Origination Fees The Savings Bank accounts for loan origination fees in accordance with SFAS No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Cost of Leases." Pursuant to the provisions of SFAS No. 91, origination fees received from loans, net of direct origination costs, are deferred and amortized to interest income using the level-yield method, giving effect to actual loan prepayments. Additionally, SFAS No. 91 generally limits the definition of loan origination costs to the direct costs of originating a loan, i.e., principally actual personnel costs. Fees received for loan commitments that are expected to be drawn upon, based on the Savings Bank's experience with similar commitments, are deferred and amortized over the life of the loan using the level-yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis. 24 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Allowance for Loan Losses It is the Savings Bank's policy to provide valuation allowances for estimated losses on loans based on past loss experience, trends in the level of delinquent and problem loans, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current and anticipated economic conditions in the Savings Bank's primary lending area. When the collection of a loan becomes doubtful or otherwise troubled, the Savings Bank records a loan charge-off equal to the difference between the fair value of the property securing the loan and the loan's carrying value. Major loans (including development projects) and major lending areas are reviewed periodically to determine potential problems at an early date. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs (net of recoveries). The Savings Bank accounts for impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which requires that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or, as an alternative, at the loan's observable market price or fair value of the collateral. The Savings Bank's current procedures for evaluating impaired loans result in carrying such loans at the lower of cost or fair value. A loan is defined under SFAS No. 114 as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In applying the provisions of SFAS No. 114, the Savings Bank considers its investment in one- to four-family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. With respect to the Savings Bank's investment in multi-family and nonresidential loans and its evaluation of impairment thereof, such loans are collateral dependent and, as a result, are carried as a practical expedient at the lower of cost or fair value. It is the Savings Bank's policy to charge off unsecured credits that are more than ninety days delinquent. Similarly, 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. The Savings Bank's total impaired loans were as follows at June 30: 2002 2001 (In thousands) Impaired loans with related allowance $396 $403 Impaired loans with no related allowance - - --- --- Total impaired loans $396 $403 === === 25 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Allowance for Loan Losses (continued)
2002 2001 2000 (In thousands) Allowance on impaired loans Beginning balance $ 46 $ 46 $ 46 Provision - - - --- --- --- Ending balance $ 46 $ 46 $ 46 === === === Average balance of impaired loans $446 $452 $461 Interest income recognized on impaired loans $ 30 $ 36 $ 34
The allowance for impaired loans is not included in the Savings Bank's overall allowance for credit losses. Office Premises and Equipment Office premises and equipment are carried at cost and include expenditures which extend the useful lives of existing assets. Maintenance, repairs and minor renewals are expensed as incurred. For financial reporting, depreciation and amortization are provided on the straight-line and accelerated methods over the useful lives of the assets, estimated to be forty years for buildings, ten to forty years for building improvements, and five to ten years for furniture and equipment. An accelerated method is used for tax reporting purposes. Real Estate Acquired Through Foreclosure Real estate acquired through foreclosure is carried at the lower of the loan's unpaid principal balance (cost) or fair value, less estimated selling expenses at the date of acquisition. A real estate loss provision is recorded if the property's fair value subsequently declines below the amount determined at the recording date. In determining the lower of cost or fair value at acquisition, costs relating to development and improvement of property are capitalized. Costs relating to holding real estate acquired through foreclosure, net of rental income, are charged against earnings as incurred. Federal Income Taxes The Corporation accounts for federal income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes." Pursuant to the provisions of SFAS No. 109, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that will result in taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management's 26 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Federal Income Taxes (continued) -------------------- estimate of future taxable income. A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management's estimates of taxes payable on future taxable income. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future. The Corporation's principal temporary differences between pretax financial income and taxable income result from different methods of accounting for deferred loan origination fees and costs, Federal Home Loan Bank stock dividends, the general loan loss allowance, deferred compensation, and percentage of earnings bad debt deductions. Additional temporary differences result from depreciation computed using accelerated methods for tax purposes. Salary Continuation Agreement The Savings Bank has entered into salary continuation agreements with certain current and former key members of management. These agreements provide for payments of up to fifteen years of compensation under certain circumstances. Recognition of compensation expense related to these salary continuation agreements totaled $24,000, $24,000 and $26,000 for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. Benefit Plans The Corporation has an Employee Stock Ownership Plan ("ESOP") which provides retirement benefits for substantially all employees who have completed one year of service and have attained the age of 21. The Corporation accounts for the ESOP in accordance with Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee Stock Ownership Plans." SOP 93-6 requires that compensation expense recorded by employers equal the fair value of ESOP shares allocated to participants during a given fiscal year. Expense related to the ESOP totaled approximately $190,000, $162,000 and $270,000 for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. The Corporation also has a Management Recognition Plan ("MRP") which provides for awards of up to 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. Common shares awarded under the MRP vest ratably over a five year period, commencing with the date of the award. Expense recognized under the MRP totaled approximately $100,000, $93,000 and $132,000 for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. As of June 30, 2002, all shares under the Corporation's MRP have been awarded. Expense related to this plan is expected to be approximately $75,000 for each of the next four fiscal years. 27 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Earnings Per Share Basic earnings per share for the fiscal years ended June 30, 2002, 2001 and 2000 is based upon the weighted-average shares outstanding during the year, less 21,979, 34,918 and 49,633 unallocated ESOP shares, respectively. Diluted earnings per share is computed taking into consideration common shares outstanding and dilutive potential common shares to be issued under the Corporation's stock option plan. The computations were as follows:
2002 2001 2000 Weighted-average common shares outstanding (basic) 1,512,553 1,515,886 1,548,144 Dilutive effect of assumed exercise of stock options 53,177 41,191 - --------- --------- --------- Weighted-average common shares outstanding (diluted) 1,565,730 1,557,077 1,548,144 ========= ========= =========
Options to purchase 164,557 shares of common stock with a weighted-average exercise price of $10.08 were outstanding at June 30, 2000, but were excluded from the computation of common stock equivalents because their exercise price was higher than the average market price of the common stock. 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, 2002 and 2001: 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. 28 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair Value of Financial Instruments (continued) Loans receivable: The loan portfolio has been segregated into categories with similar characteristics, such as one- to four-family residential, multi-family residential and nonresidential real estate. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality. For loans on deposit accounts and consumer and other loans, fair values were deemed to equal the historic carrying values. The historical carrying amount of accrued interest on loans is deemed to approximate fair value. Federal Home Loan Bank stock: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value. Deposits: The fair values of NOW accounts, passbook accounts, money market demand accounts and advances by borrowers are deemed to approximate the amount payable on demand. Fair values for fixed-rate certificates of deposit have been estimated using a discounted cash flow calculation using the interest rates currently offered for deposits of similar remaining maturities. Advances from the Federal Home Loan Bank: The fair value of these advances are estimated using the rates currently offered for similar advances with similar remaining maturities. Commitments to extend credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At June 30, 2002 and 2001, the difference between the fair value and notional amount of loan commitments was not material. 29 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair Value of Financial Instruments (continued) Based on the foregoing methods and assumptions, the carrying value and fair value of the Corporation's financial instruments at June 30 were as follows:
2002 2001 Carrying Fair Carrying Fair value value value value (In thousands) Financial assets Cash and cash equivalents and certificates of deposit $ 7,804 $ 7,804 $ 4,649 $ 4,649 Investment securities 20,866 20,866 20,772 20,772 Mortgage-backed securities 7,091 7,091 8,716 8,716 Loans receivable 109,015 107,842 103,308 105,299 Federal Home Loan Bank stock 1,017 1,017 788 788 ------- ------- ------- ------- $145,793 $144,620 $138,233 $140,224 ======= ======= ======= ======= Financial liabilities Deposits $126,872 $125,920 $120,725 $120,362 Federal Home Loan Bank advances 4,223 4,172 4,257 4,245 Escrow deposits 162 162 171 171 ------- ------- ------- ------- $131,257 $130,254 $125,153 $124,778 ======= ======= ======= =======
Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and interest-bearing deposits due from other financial institutions with original maturities of less than ninety days. Advertising Advertising costs are expensed when incurred. The Corporation's advertising expense totaled $48,000, $49,000 and $46,000 for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. Reclassifications Certain prior year amounts have been reclassified to conform to the 2002 consolidated financial statement presentation. 30 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of investment securities at June 30, 2002 and 2001 are summarized as follows:
2002 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Available for sale: U.S. Government agency obligations $19,402 $ 174 $ - $19,576 Municipal obligations 40 - - 40 FHLMC stock 15 933 - 948 Corporate equity securities 263 62 23 302 ------ ----- --- ------ $19,720 $1,169 $ 23 $20,866 ====== ===== === ====== 2001 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value (In thousands) Available for sale: U.S. Government agency obligations $19,359 $ 89 $ 41 $19,407 FHLMC stock 16 1,073 - 1,089 Corporate equity securities 283 14 21 276 ------ ----- --- ------ $19,658 $1,176 $ 62 $20,772 ====== ===== === ======
The amortized cost and estimated fair value of U.S. Government agency obligations by contractual term to maturity at June 30 are shown below:
2002 2001 Estimated Estimated Amortized fair Amortized fair cost value cost value (In thousands) Due in three years or less $ 250 $ 251 $ - $ - Due after three years through five years 9,858 9,908 2,000 2,002 Due after five years 9,334 9,457 17,359 17,405 ------ ------ ------ ------ $19,442 $19,616 $19,359 $19,407 ====== ====== ====== ======
At June 30, 2002, the Corporation had pledged investment securities totaling $7.1 million to secure public and other deposits. At June 30, 2001, the Corporation had pledged $5.0 million of investment securities to secure public deposits. 31 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued) The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of mortgage-backed securities at June 30, 2002 and 2001 are summarized as follows:
2002 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value Available for sale: (In thousands) Federal Home Loan Mortgage Corporation participation certificates $1,441 $ 35 $ - $1,476 Government National Mortgage Association participation certificates 2,355 97 - 2,452 Federal National Mortgage Association participation certificates 2,373 15 3 2,385 Collateralized mortgage obligations 780 - 2 778 ----- --- --- ----- Total mortgage-backed securities $6,949 $147 $ 5 $7,091 ===== === === =====
2001 Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value Available for sale: (In thousands) Federal Home Loan Mortgage Corporation participation certificates $ 772 $ 22 $ - $ 794 Government National Mortgage Association participation certificates 3,207 42 13 3,236 Federal National Mortgage Association participation certificates 475 9 - 484 Collateralized mortgage obligations 4,196 18 12 4,202 ----- --- --- ----- Total mortgage-backed securities $8,650 $ 91 $ 25 $8,716 ===== === === =====
32 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued) The amortized cost of mortgage-backed securities, by contractual terms to maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties.
June 30, 2002 2001 (In thousands) Due within three years $ 36 $ 23 Due in three to five years 25 80 Due in five to ten years 1,266 324 Due in ten to twenty years 870 1,202 Due after twenty years 4,752 7,021 ----- ----- $6,949 $8,650 ===== =====
Proceeds from sales of investment and mortgage-backed securities amounted to $31,000, $119,000 and $1.0 million during the years ended June 30, 2002, 2001 and 2000, respectively, and resulted in gross realized gains totaling $31,000, $117,000 and $9,000, for those respective periods. NOTE C - LOANS RECEIVABLE The composition of the loan portfolio at June 30 was as follows:
2002 2001 (In thousands) Residential real estate One- to four- family $ 73,300 $ 71,817 Multi-family 4,717 3,452 Construction 1,342 1,649 Nonresidential real estate and land 12,436 11,684 Consumer and other 19,617 17,688 ------- ------- 111,412 106,290 Less: Undisbursed portion of loans in process 1,365 2,065 Deferred loan origination fees 177 204 Allowance for loan losses 855 713 ------- ------- $109,015 $103,308 ======= =======
33 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE C - LOANS RECEIVABLE (continued) The Savings Bank's lending efforts have historically focused on one- to four-family and multi-family residential real estate loans, which comprised approximately $78.0 million, or 72%, of the total loan portfolio at June 30, 2002, and $74.9 million, or 72%, of the total loan portfolio at June 30, 2001. 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 believed 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. In the opinion of management, such loans are consistent with sound lending practices and are within applicable regulatory lending limitations. The aggregate dollar amount of loans outstanding to directors and officers totaled approximately $810,000 and $663,000 at June 30, 2002 and 2001, respectively. NOTE D - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is summarized as follows for the years ended June 30:
2002 2001 2000 (In thousands) Balance at beginning of year $713 $723 $733 Allowance resulting from acquisition of Waverly Building and Loan Company 160 - - Provision for losses on loans 70 1 1 Charge-offs of loans (88) (11) (11) --- --- --- Balance at end of year $855 $713 $723 === === ===
As of June 30, 2002, the Savings Bank's allowance for loan losses was solely general in nature, and is includible as a component of regulatory risk-based capital, subject to certain percentage limitations. Nonperforming loans totaled approximately $1.2 million, $618,000 and $281,000 at June 30, 2002, 2001 and 2000, respectively. During the years ended June 30, 2002, 2001 and 2000, interest income of approximately $44,000, $26,000 and $11,000, respectively, would have been recognized had such nonperforming and nonaccrual loans been performing in accordance with contractual terms. 34 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE E - OFFICE PREMISES AND EQUIPMENT Office premises and equipment at June 30 were comprised of the following:
2002 2001 (In thousands) Land and improvements $ 389 $ 389 Office buildings and improvements 1,622 1,622 Furniture, fixtures and equipment 767 756 ----- ----- 2,778 2,767 Less accumulated depreciation and amortization 1,501 1,373 ----- ----- $1,277 $1,394 ===== =====
35 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE F - DEPOSITS Deposits consist of the following major classifications at June 30:
Deposit type and weighted- average interest rate 2002 2001 (In thousands) NOW accounts 2002 - .92% $ 8,297 2001 - 1.82% $ 8,429 Passbook 2002 - 1.76% 10,919 2001 - 2.94% 8,004 Money market deposit accounts 2002 - 2.15% 21,920 2001 - 3.33% 18,292 ------- ------- Total demand, transaction and passbook deposits 41,136 34,725 Certificates of deposit Original maturities of: Less than 12 months 2002 - 2.59% 6,634 2001 - 5.05% 7,739 12 months to 24 months 2002 - 4.40% 48,387 2001 - 6.15% 47,621 30 months to 36 months 2002 - 4.42% 4,462 2001 - 5.51% 5,621 More than 36 months 2002 - 4.56% 1,979 2001 - 5.92% 526 Individual retirement accounts 2002 - 4.35% 15,856 2001 - 6.22% 16,030 Jumbo accounts 2002 - 3.61% 8,418 2001 - 5.16% 8,463 ------- ------- Total certificates of deposit 85,736 86,000 ------- ------- Total deposit accounts $126,872 $120,725 ======= =======
At June 30, 2002 and 2001, the Corporation had certificate of deposit accounts with balances greater than $100,000 totaling $15.3 million and $14.1 million, respectively. 36 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE F - DEPOSITS (continued) Interest expense on deposits for the year ended June 30 is summarized as follows:
2002 2001 2000 (In thousands) Passbook $ 260 $ 226 $ 230 NOW and money market deposit accounts 567 800 611 Certificates of deposit 4,104 5,007 4,192 ----- ----- ----- $4,931 $6,033 $5,033 ===== ===== =====
Maturities of outstanding certificates of deposit at June 30 are summarized as follows:
2002 2001 (In thousands) Less than one year $59,243 $59,377 One to three years 23,857 26,221 Over three years 2,636 402 ------ ------ $85,736 $86,000 ====== ======
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank, collateralized at June 30, 2002 by pledges of certain residential mortgage loans totaling $5.3 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, 2002 2001 (Dollars in thousands) 1.89% 2004 $1,000 $1,000 1.87% - 3.16% 2008 2,223 2,257 1.89% 2009 1,000 1,000 ----- ----- $4,223 $4,257 ===== ===== Weighted-average interest rate 1.95% 3.78% ==== ====
37 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE H - FEDERAL INCOME TAXES Federal income taxes differ from the amounts computed at the statutory corporate tax rate for the years ended June 30 as follows:
2002 2001 2000 (In thousands) Federal income taxes computed at statutory rate $623 $542 $513 Increase (decrease) in taxes resulting from: Low income housing investment tax credits (78) (78) (79) Nontaxable interest income (3) (3) (3) Other 6 (1) (5) --- --- --- Federal income tax provision per consolidated financial statements $548 $460 $426 === === ===
The composition of the Corporation's net deferred tax asset (liability) at June 30 was as follows:
2002 2001 (In thousands) Taxes (payable) refundable on temporary differences at estimated corporate tax rate: Deferred tax assets: General loan loss allowance $291 $242 Deferred compensation 527 525 Stock benefit plans 68 20 Book/tax depreciation 16 25 --- --- Total deferred tax assets 902 812 Deferred tax liabilities: Percentage of earnings bad debt deduction (75) (113) Deferred loan origination costs (140) (116) Federal Home Loan Bank stock dividends (243) (183) Unrealized gain on securities designated as available for sale (438) (401) --- --- Total deferred tax liabilities (896) (813) --- --- Net deferred tax asset (liability) $ 6 $ (1) === ===
Prior to fiscal 1997, the Savings Bank was allowed a special bad debt deduction, generally limited to 8% of otherwise taxable income, and subject to certain limitations based on aggregate loans and deposit account balances at the end of the year. If the amounts that qualified as deductions for federal income taxes are later used for purposes other than bad debt losses, including distributions in liquidation, such distributions will be subject to federal income taxes at the then current corporate income tax rate. Retained earnings at June 30, 2002 includes approximately $2.2 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, 2002. The Savings Bank is required to recapture as taxable income approximately $780,000 of its tax 38 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE H - FEDERAL INCOME TAXES (continued) 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 continue to amortize the recapture of the bad debt reserve in taxable income over a six year period, which commenced in fiscal 1998. NOTE I - LOAN COMMITMENTS The Savings Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers, including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statement of financial condition. The contract or notional amounts of the commitments reflect the extent of the Savings Bank's involvement in such financial instruments. The Savings Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Savings Bank uses the same credit policies in making commitments and conditional obligations as those utilized for on-balance-sheet instruments. At June 30, 2002, the Savings Bank had outstanding commitments to originate loans totaling approximately $499,000. In addition, the Savings Bank had unused lines of credit for home equity loans and commercial loans totaling $5.1 million and $6.3 million, respectively. Further, the Savings Bank had outstanding commercial letters of credit totaling $268,000. In the opinion of management, all loan commitments equaled or exceeded prevalent market interest rates as of June 30, 2002, and will be funded from normal cash flow from operations. NOTE J - REGULATORY CAPITAL The Savings Bank is subject to minimum regulatory capital standards promulgated by the Office of Thrift Supervision (the "OTS"). Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the 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. 39 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE J - REGULATORY CAPITAL (continued) The minimum capital standards of the OTS generally require the maintenance of regulatory capital sufficient to meet each of three tests, described below as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as shareholders' equity less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) generally equal to 4.0% of adjusted total assets, except for those associations with the highest examination rating and acceptable levels of risk. The risk-based capital requirement provides for the maintenance of core capital plus general loss allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted assets, the Savings Bank multiplies the value of each asset on its statement of financial condition by a defined risk-weighting factor, e.g., one- to four-family residential loans carry a risk-weighting factor of 50%. During fiscal 2002, the Savings Bank was notified by the OTS that it was categorized as "well-capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized" the Savings Bank must maintain minimum capital ratios as set forth in the following tables. As of June 30, 2002 and 2001, management believes that the Savings Bank met all capital adequacy requirements to which it was subject.
As of June 30, 2002 To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tangible capital $13,461 9.1% =>$2,214 =>1.5% =>$7,379 => 5.0% Core capital $13,461 9.1% =>$5,903 =>4.0% =>$8,854 => 6.0% Risk-based capital $14,316 16.5% =>$6,930 =>8.0% =>$8,662 =>10.0%
As of June 30, 2001 To be "well- capitalized" under For capital prompt corrective Actual adequacy purposes action provisions Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Tangible capital $11,728 8.4% =>$2,098 =>1.5% =>$6,994 => 5.0% Core capital $11,728 8.4% =>$5,595 =>4.0% =>$8,393 => 6.0% Risk-based capital $12,441 15.9% =>$6,248 =>8.0% =>$7,810 =>10.0%
40 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE J - 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 K - STOCK OPTION PLAN During fiscal 1996 the Board of Directors adopted the ASB Financial Corp. Stock Option and Incentive Plan (the "Plan") that provided for the issuance of 225,423 shares, as adjusted, of authorized but unissued shares of common stock at fair value at the date of grant. In fiscal 1996, the Corporation granted 197,521 options which have an adjusted exercise price of $7.64. The number of options granted and the exercise price have been adjusted to give effect to the return of capital and special dividend distributions paid by the Corporation. The Plan provides that one-fifth of the options granted become exercisable on each of the first five anniversaries of the date of grant. The Corporation accounts for the Plan in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," which contains a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue to account for stock options and similar equity instruments under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net earnings and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. The Corporation applies APB Opinion No. 25 and related Interpretations in accounting for the Plan. Accordingly, no compensation cost has been recognized for the Plan. Had compensation cost for the Corporation's stock option plan been determined based on the fair value at the grant dates for awards under the Plan consistent with the accounting method utilized in SFAS No. 123, the Corporation's net earnings and earnings per share would have been reported as the pro forma amounts indicated below:
2002 2001 2000 (In thousands, except per share data) Net earnings As reported $1,513 $1,134 $1,084 ===== ===== ===== Pro-forma $1,511 $1,111 $1,032 ===== ===== ===== Earnings per share Basic As reported $1.00 $.75 $.70 ==== === === Pro-forma $1.00 $.73 $.67 ==== === === Diluted As reported $.97 $.73 $.70 === === === Pro-forma $.97 $.71 $.67 === === ===
41 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE K - STOCK OPTION PLAN (continued) The fair value of each option grant is estimated on the date of grant using the modified Black-Scholes options-pricing model with the following assumptions used for grants during fiscal 2001 and 1996: dividend yield of 4.9% and 2.2%, respectively; expected volatility of 20.0% for both years; a risk-free interest rate of 5.0% and 5.5%, respectively; and an expected life of ten years for all grants. A summary of the status of the Corporation's Plan as of June 30, 2002, 2001 and 2000, and changes during the periods ending on those dates is presented below:
2002 2001 2000 Weighted- Weighted- Weighted- average average average exercise exercise exercise Shares price Shares price Shares price Outstanding at beginning of year 226,672 $7.70 164,557 $10.08 170,627 $10.08 Adjustment for special dividend distributions - - 52,115 (2.44) - - Granted - - 10,000 8.75 - - Exercised (13,757) 7.64 - - (6,070) 10.08 Forfeited - - - - - - ------- ---- ------- ----- ------- ----- Outstanding at end of year 212,915 $7.69 226,672 $ 7.70 164,557 $10.08 ======= ==== ======= ===== ======= ===== Options exercisable at year-end 204,915 $7.65 216,672 $ 7.64 125,052 $10.08 ======= ==== ======= ===== ======= ===== Weighted-average fair value of options granted during the year $ - $ 1.34 $ - ===== ===== =====
The following information applies to options outstanding at June 30, 2002: Number outstanding 212,915 Range of exercise prices $7.64 - $8.75 Weighted-average exercise price $7.69 Weighted-average remaining contractual life 3.9 years 42 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE L - CONDENSED FINANCIAL STATEMENTS OF ASB FINANCIAL CORP. The following condensed financial statements summarize the financial position of the Corporation as of June 30, 2002 and 2001, and the results of its operations and its cash flows for the fiscal years ended June 30, 2002, 2001 and 2000. ASB FINANCIAL CORP.
STATEMENTS OF FINANCIAL CONDITION June 30, 2002 and 2001 (In thousands) ASSETS 2002 2001 Interest-bearing deposits in American Savings Bank, fsb $ 678 $ 568 Interest-bearing deposits in other financial institutions 500 500 Investment securities 1,218 1,211 Loans receivable 338 489 Loan receivable from ESOP 259 399 Investment in American Savings Bank, fsb 14,265 12,477 Prepaid expenses and other 95 145 ------ ------ Total assets $17,353 $15,789 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Checks issued in excess of bank balance $ 1,625 $ 1,033 Dividends payable 198 185 Other liabilities 53 53 Deferred federal income taxes 23 15 ------ ------ Total liabilities 1,899 1,286 Shareholders' equity Common stock and additional paid-in capital 8,619 8,482 Retained earnings 9,152 8,393 Shares acquired by stock benefit plans (537) (781) Treasury shares (2,630) (2,370) Unrealized gains on securities designated as available for sale, net 850 779 ------ ------ Total shareholders' equity 15,454 14,503 ------ ------ Total liabilities and shareholders' equity $17,353 $15,789 ====== ======
ASB FINANCIAL CORP.
STATEMENTS OF EARNINGS Year ended June 30, 2002, 2001 and 2000 (In thousands) 2002 2001 2000 Revenue Interest income $ 185 $ 170 $ 82 Equity in earnings of American Savings Bank, fsb 1,458 1,157 1,171 ----- ----- ----- Total revenue 1,643 1,327 1,253 General and administrative expenses 101 188 225 ----- ----- ----- Earnings before income taxes (credits) 1,542 1,139 1,028 Federal income taxes (credits) 29 5 (56) ----- ----- ----- NET EARNINGS $1,513 $1,134 $1,084 ===== ===== =====
43 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE L - CONDENSED FINANCIAL STATEMENTS OF ASB FINANCIAL CORP. (continued) ASB FINANCIAL CORP.
STATEMENTS OF CASH FLOWS Year ended June 30, 2002, 2001 and 2000 (In thousands) 2002 2001 2000 Cash provided by (used in) operating activities: Net earnings for the year $1,513 $1,134 $1,084 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Amortization of premiums and discounts on loans and investment securities - net (2) 3 - (Undistributed earnings of) excess of distributions from consolidated subsidiary (1,458) (1,157) 1,828 Increase (decrease) in cash due to changes in: Prepaid expenses and other assets 50 27 104 Deferred federal income taxes (1) (20) - Other liabilities 13 65 8 ----- ----- ----- Net cash provided by operating activities 115 52 3,024 Cash flows provided by (used in) investing activities: Proceeds from repayment of loan 140 140 140 Proceeds from return of capital on investment securities 21 - - Loan principal repayments 151 11 - Loan disbursements - (500) - ----- ----- ----- Net cash provided by (used in) investing activities 312 (349) 140 Cash flows provided by (used in) financing activities: Checks issued in excess of bank balance 592 1,033 - Proceeds from exercise of stock options 105 - 61 Payment of dividends on common stock (754) (611) (2,123) Purchase of treasury shares (260) (278) (949) ----- ----- ----- Net cash provided by (used in) financing activities (317) 144 (3,011) ----- ----- ----- Net increase (decrease) in cash and cash equivalents 110 (153) 153 Cash and cash equivalents at beginning of year 1,068 1,221 1,068 ----- ----- ----- Cash and cash equivalents at end of year $1,178 $1,068 $1,221 ===== ===== ===== Supplemental disclosure of cash flow information: Dividend received from subsidiary in the form of investment securities designated as available for sale $ - $ - $1,000 ===== ===== =====
44 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE L - CONDENSED FINANCIAL STATEMENTS OF ASB FINANCIAL CORP. (continued) Regulations of the Office of Thrift Supervision (OTS) impose limitations on the payment of dividends and other capital distributions by savings associations. Generally, the Savings Bank's payment of dividends is limited, without prior OTS approval, to net earnings for the current calendar year plus the two preceding calendar years, less capital distributions paid over the comparable time period. Insured institutions are required to file an application with the OTS for capital distributions in excess of this limitation. NOTE M - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes the Corporation's quarterly results for the fiscal years ended June 30, 2002 and 2001. Certain amounts, as previously reported, have been reclassified to conform to the 2002 presentation.
Three Months Ended September 30, December 31, March 31, June 30, 2002: (In thousands, except per share data) Total interest income $2,571 $2,360 $2,316 $2,296 Total interest expense 1,552 1,334 1,117 1,047 ----- ----- ----- ----- Net interest income 1,019 1,026 1,199 1,249 Provision for losses on loans - 22 23 25 Other income 123 147 103 113 General, administrative and other expense 750 702 800 825 ----- ----- ----- ----- Earnings before income taxes and extraordinary item 392 449 479 512 Federal income taxes 109 136 150 153 ----- ----- ----- ----- Net earnings before extraordinary item 283 313 329 359 Extraordinary item - negative goodwill arising from Waverly acquisition - net of tax - - - 229 ----- ----- ----- ----- Net earnings $ 283 $ 313 $ 329 $ 588 ===== ===== ===== ===== Earnings per share Basic $.19 $.21 $.21 $.39 === === === === Diluted $.18 $.21 $.21 $.37 === === === ===
45 ASB FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2002, 2001 and 2000 NOTE M - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (continued)
Three Months Ended September 30, December 31, March 31, June 30, 2001: (In thousands, except per share data) Total interest income $2,548 $2,577 $2,590 $2,547 Total interest expense 1,569 1,653 1,605 1,552 ----- ----- ----- ----- Net interest income 979 924 985 995 Provision for losses on loans - - 1 - Other income 107 125 129 134 General, administrative and other expense 701 690 722 670 ----- ----- ----- ----- Earnings before income taxes 385 359 391 459 Federal income taxes 107 98 107 148 ----- ----- ----- ----- Net earnings $ 278 $ 261 $ 284 $ 311 ===== ===== ===== ===== Earnings per share Basic $.18 $.18 $.19 $.20 === === === === Diluted $.18 $.17 $.18 $.20 === === === ===
46 ASB FINANCIAL CORP. DIRECTORS AND OFFICERS ============================================================================== Robert M. Smith Director and President President and Chief Executive Officer American Savings Bank, fsb Gerald R. Jenkins Director Retired President and Chief Executive Officer American Savings Bank, fsb William J. Burke Director Director and Chief Executive Officer OSCO Industries, Inc. Lee O. Fitch Director Shareholder and Director Miller, Searl & Fitch, L.P.A. Louis M. Schoettle, M.D. Director Physician Retired Jack A. Stephenson Vice President Vice President American Savings Bank, fsb Michael L. Gampp Chief Financial Officer Chief Financial Officer and Vice President American Savings Bank, fsb M. Kathryn Fish Secretary Secretary American Savings Bank, fsb Carlisa R. Baker Treasurer Treasurer American Savings Bank, fsb AMERICAN SAVINGS BANK, fsb DIRECTORS AND OFFICERS ============================================================================== Robert M. Smith Director, President and CEO Gerald R. Jenkins Director William J. Burke Director Lee O. Fitch Director Louis M. Schoettle, M.D. Director Jack A. Stephenson Vice President Michael L. Gampp Chief Financial Officer and Vice President Carlisa R. Baker Treasurer M. Kathryn Fish Secretary 47 SHAREHOLDER SERVICES ============================================================================== Illinois Stock Transfer Company serves as transfer agent and dividend distributing agent for ASB's shares. Communications regarding change of address, transfer of shares, lost certificates and dividends should be sent to: Illinois Stock Transfer Company 209 West Jackson Boulevard Suite 903 Chicago, Illinois 60606-6905 (312)427-2953 ANNUAL MEETING ============================================================================== The Annual Meeting of Shareholders of ASB Financial Corp. will be held on October 23, 2002, at 11:00 a.m., Eastern Time, at the Shawnee State Park Resort and Conference Center, 4404B State Route 125, West Portsmouth, Ohio 45663. Shareholders are cordially invited to attend. ANNUAL REPORT ON FORM 10-KSB ============================================================================== A copy of ASB's Annual Report on Form 10-KSB, 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 48 EX-99.1 4 asb10ksb_ex99163002.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of ASB Financial Corp. (the "Company") on Form 10-KSB for the year ended June 30, 2002, as filed with the Securities and Exchange Commission on the date of this Certification (the "Report"), I, Robert M. Smith, the President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. September 30, 2002 /s/ Robert M. Smith --------------------------------- Robert M. Smith President [Chief Executive Officer] EX-99.2 5 asb10ksb_ex99263002.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report ASB Financial Corp. (the "Company") on Form 10-KSB for the year ended June 30, 2002, as filed with the Securities and Exchange Commission on the date of this Certification (the "Report"), I, Michael L. Gampp, the Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. September 30, 2002 /s/ Michael L. Gampp --------------------------------- Michael L. Gampp Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----