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
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