10QSB 1 asb10qsb_123102.txt QUARTERLY FINANCIAL STATEMENTS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2002 ----------------------------------------------- OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ____________ to _______________ Commission File Number: 0-25906 -------------- ASB FINANCIAL CORP. ------------------------------------------------------------------------------ (Exact name of small business issuer as specified in its charter) Ohio 31-1429488 ------------------------------- ----------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 503 Chillicothe Street, Portsmouth, Ohio 45662 ------------------------------------------------------------------------------ (Address of principal executive offices) (740) 354-3177 ------------------------------------------------------------------------------ (Issuer's telephone number) ------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the issuer filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: February 12, 2003 - 1,573,895 shares of common stock, no par value Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] 1 INDEX Page PART I - FINANCIAL INFORMATION Consolidated Statements of Financial Condition 3 Consolidated Statements of Earnings 4 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II - OTHER INFORMATION 16 SIGNATURES 17 CERTIFICATIONS 18 2 ASB Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except share data) December 31, June 30, ASSETS 2002 2002 Cash and due from banks $ 578 $ 1,428 Interest-bearing deposits in other financial institutions 7,727 6,276 ------- ------- Cash and cash equivalents 8,305 7,704 Certificates of deposit in other financial institutions 100 100 Investment securities available for sale - at market 15,260 20,866 Mortgage-backed securities available for sale - at market 10,384 7,091 Loans receivable - net 111,878 109,015 Real estate acquired through foreclosure 445 - Office premises and equipment - at depreciated cost 1,599 1,277 Federal Home Loan Bank stock - at cost 1,040 1,017 Accrued interest receivable on loans 244 216 Accrued interest receivable on mortgage-backed securities 57 41 Accrued interest receivable on investments and interest-bearing deposits 299 293 Prepaid expenses and other assets 455 646 Prepaid federal income taxes 114 - Deferred federal income taxes - 6 ------- ------- Total assets $150,180 $148,272 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $127,763 $126,872 Advances from the Federal Home Loan Bank 4,205 4,223 Advances by borrowers for taxes and insurance 174 162 Accrued interest payable 87 85 Other liabilities 1,354 1,307 Accrued federal income taxes - 169 Deferred federal income taxes 109 - ------- ------- Total liabilities 133,692 132,818 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; 1,769,851 and 1,760,681 shares issued at December 31, 2002 and June 30, 2002, respectively - - Additional paid-in capital 8,783 8,619 Retained earnings, restricted 9,753 9,152 Shares acquired by stock benefit plans (286) (537) Accumulated comprehensive income, unrealized gains on securities designated as available for sale, net of related tax effects 917 850 Less 237,219 and 232,819 shares of treasury stock at December 31, 2002 and June 30 2002, respectively - at cost (2,679) (2,630) ------- ------- Total shareholders' equity 16,488 15,454 ------- ------- Total liabilities and shareholders' equity $150,180 $148,272 ======= =======
3 ASB Financial Corp.
CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share data) For the six months For the three months ended December 31, ended December 31, 2002 2001 2002 2001 Interest income Loans $4,074 $4,034 $2,043 $1,968 Mortgage-backed securities 244 245 115 114 Investment securities 550 649 247 276 Interest-bearing deposits and other 22 3 11 2 ----- ----- ----- ----- Total interest income 4,890 4,931 2,416 2,360 Interest expense Deposits 2,021 2,808 963 1,297 Borrowings 51 83 30 37 ----- ----- ----- ----- Total interest expense 2,072 2,891 993 1,334 ----- ----- ----- ----- Net interest income 2,818 2,040 1,423 1,026 Provision for losses on loans 124 22 124 22 ----- ----- ----- ----- Net interest income after provision for losses on loans 2,694 2,018 1,299 1,004 Other income Gain on sale of investment securities 12 31 7 - Other operating 268 239 140 147 ----- ----- ----- ----- Total other income 280 270 147 147 General, administrative and other expense Employee compensation and benefits 773 708 305 318 Occupancy and equipment 91 91 47 45 Franchise taxes 64 91 61 46 Data processing 206 187 75 95 Other operating 378 370 187 198 ----- ----- ----- ----- Total general, administrative and other expense 1,512 1,447 675 702 ----- ----- ----- ----- Earnings before income taxes 1,462 841 771 449 Federal income taxes Current 378 211 255 135 Deferred 80 34 - 1 ----- ----- ----- ----- Total federal income taxes 458 245 255 136 ----- ----- ----- ----- NET EARNINGS $1,004 $ 596 $ 516 $ 313 ===== ===== ===== ===== EARNINGS PER SHARE Basic $.67 $.40 $.35 $.21 === === === === Diluted $.64 $.38 $.33 $.20 === === === ===
4 ASB Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) For the six months For the three months ended December 31, ended December 31, 2002 2001 2002 2001 Net earnings $1,004 $596 $516 $313 Other comprehensive income (loss), net of taxes: Unrealized holding gains (losses) on securities during the period, net of taxes (benefits) of $39, $3, $22 and $(9) during the respective periods 75 5 43 (17) Reclassification adjustment for realized gains included in earnings, net of taxes of $4 and $11 during the six-month periods ended December 31, 2002 and 2001 and $2 during the three-month period ended December 31, 2002 (8) (20) (5) - ----- --- --- --- Comprehensive income $1,071 $581 $554 $296 ===== === === === Accumulated comprehensive income $ 917 $764 $917 $764 ===== === === ===
5 ASB Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended December 31, (In thousands) 2002 2001 Cash flows from operating activities: Net earnings for the period $ 1,004 $ 596 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Amortization of discounts and premiums on loans, investments and mortgage-backed securities - net 82 12 Amortization of deferred loan origination fees (68) (49) Depreciation and amortization 65 65 Amortization of expense related to stock benefit plans 345 340 Provision for losses on loans 124 22 Federal Home Loan Bank stock dividends (23) (25) Gain on sale of investment securities (12) (31) Increase (decrease) in cash due to changes in: Accrued interest receivable (50) 17 Prepaid expenses and other assets 191 336 Accrued interest payable 2 - Other liabilities 47 299 Federal income taxes Current (283) (139) Deferred 80 34 ------ ------ Net cash provided by operating activities 1,504 1,477 Cash flows provided by (used in) investing activities: Purchase of investment securities (7,320) (14,826) Proceeds from maturity of investment securities 9,904 17,855 Proceeds from sale of investment securities 2,958 32 Purchase of mortgage-backed securities (7,221) - Principal repayments on mortgage-backed securities 4,024 2,307 Loan principal repayments 17,096 18,882 Loan disbursements (20,460) (19,348) Purchase of office equipment (387) (5) ------ ------ Net cash provided by (used in) investing activities (1,406) 4,897 Cash flows provided by (used in) financing activities: Net increase (decrease) in deposit accounts 891 (3,144) Repayment of Federal Home Loan Bank advances (18) (17) Advances by borrowers for taxes and insurance 12 (5) Proceeds from issuance of shares under stock option plan 70 - Purchase of treasury stock (49) (70) Dividends paid on common stock (403) (369) ------ ------ Net cash provided by (used in) financing activities 503 (3,605) ------ ------ Net increase in cash and cash equivalents 601 2,769 Cash and cash equivalents at beginning of period 7,704 4,649 ------ ------ Cash and cash equivalents at end of period $ 8,305 $ 7,418 ====== ======
6 ASB Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the six months ended December 31, (In thousands) 2002 2001 Supplemental disclosure of cash flow information: Cash paid during the period for: Federal income taxes $ 688 $ 230 ===== ===== Interest on deposits and borrowings $2,070 $2,875 ===== ===== Supplemental disclosure of noncash investing activities: Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ 67 $ (15) ===== ===== Transfers from mortgage loans to real estate acquired through foreclosure $ 445 $ - ===== =====
7 ASB Financial Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For six- and three-month periods ended December 31, 2002 and 2001 1. Basis of Presentation The accompanying unaudited consolidated financial statements were prepared in accordance with the instructions for Form 10-QSB and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of ASB Financial Corp. (the "Corporation") included in the Annual Report on Form 10-KSB for the year ended June 30, 2002. However, in the opinion of management, all adjustments (consisting of only normal recurring accruals) which are necessary for a fair presentation of the financial statements have been included. The results of operations for the six- and three-month periods ended December 31, 2002, are not necessarily indicative of the results which may be expected for the entire fiscal year. In June 2002, the Corporation's wholly-owned subsidiary, American Savings Bank, fsb ("American" or 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, the Corporation's prior years operating results were not restated for the acquisition. 2. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Corporation and American. All significant intercompany items have been eliminated. 3. Earnings Per Share Basic earnings per common share are computed based upon the weighted-average number of common shares outstanding during the period less shares in the ESOP that are unallocated and not committed to be released. Weighted-average common shares deemed outstanding give effect to 9,179 and 21,929 unallocated ESOP shares for the six and three month periods ended December 31, 2002 and 2001, respectively. Diluted earnings per common share include the dilutive effect of all additional potential common shares issuable under the Corporation's stock option plan. The computations are as follows:
For the six months ended For the three months ended December 31, December 31, 2002 2001 2002 2001 Weighted-average common shares outstanding (basic) 1,503,904 1,501,710 1,502,586 1,499,560 Dilutive effect of assumed exercise of stock options 75,218 46,549 85,672 46,548 --------- --------- --------- --------- Weighted-average common shares outstanding (diluted) 1,579,122 1,548,259 1,588,258 1,546,108 ========= ========= ========= =========
8 ASB Financial Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For six- and three-month periods ended December 31, 2002 and 2001 4. Effects of Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("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," which 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. 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, without material effect on the Corporation's financial condition or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 provides financial accounting and reporting guidance for costs associated with exit or disposal activities, including one-time termination benefits, contract termination costs other than for a capital lease, and costs to consolidate facilities or relocate employees. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 is not expected to have a material effect on the Corporation's financial condition or results of operations. In October 2002, the FASB issued SFAS No. 147, "Accounting for Certain Financial Institutions: An Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9," which removes acquisitions of financial institutions from the scope of SFAS No. 72, "Accounting for Certain Acquisitions of Banking and Thrift Institutions," except for transactions between mutual enterprises. Accordingly, the excess of the fair value of liabilities assumed over the fair value of tangible and intangible assets acquired in a business combination should be recognized and accounted for as goodwill in accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 147 also requires that the acquisition of a less-than-whole financial institution, such as a branch, be accounted for as a business combination if the transferred assets and activities constitute a business. Otherwise, the acquisition should be accounted for as the acquisition of net assets. SFAS No. 147 also amends the scope of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include long-term customer relationship assets of financial institutions (including mutual enterprises) such as depositor- and borrower-relationship intangible assets and credit card holder intangible assets. The provisions of SFAS No. 147 related to unidentifiable intangible assets and the acquisition of a less-than-whole financial institution are effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions related to impairment of long-term customer relationship assets are effective October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets are effective on October 1, 2002, with earlier application permitted. SFAS No. 147 is not expected to have a material effect on the Corporation's financial condition or results of operations. 9 ASB Financial Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For six- and three-month periods ended December 31, 2002 and 2001 4. Effects of Recent Accounting Pronouncements (continued) In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting used for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. SFAS No. 148 is not expected to have a material effect on the Corporation's financial condition or results of operations. 10 ASB Financial Corp. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Discussion of Financial Condition Changes from June 30, 2002 to December 31, 2002 At December 31, 2002, the Corporation's assets totaled $150.2 million, an increase of $1.9 million, or 1.3%, over total assets at June 30, 2002. Cash and cash equivalents increased by $601,000, or 7.8%, from June 30, 2002 levels, to a total of $8.3 million at December 31, 2002. Investment securities totaled $15.3 million at December 31, 2002, a decrease of $5.6 million, or 26.9%, from June 30, 2002 levels. The decrease was due primarily to maturities of $9.9 million and sales of $3.0 million, which were partially offset by purchases of $7.3 million. Purchases of investment securities consisted primarily of fixed-rate medium-term U.S. Government agency obligations. Mortgage-backed securities totaled $10.4 million at December 31, 2002, an increase of $3.3 million, or 46.4%, over the total at June 30, 2002, due primarily to purchases of $7.2 million, which were partially offset by principal repayments of $4.0 million during the period. Loans receivable increased by $2.9 million, or 2.6%, during the six-month period ended December 31, 2002, to a total of $111.9 million. Loan disbursements amounted to $20.5 million and were substantially offset by principal repayments of $17.1 million. During the six months ended December 31, 2002, loans originated consisted of $11.2 million of loans secured by one- to four-family residential real estate, $4.9 million of loans secured by nonresidential real estate, $2.7 million of commercial loans and $1.7 million of consumer loans. The allowance for loan losses totaled $963,000 and $855,000 at December 31, 2002 and June 30, 2002, respectively. Nonperforming and nonaccrual loans totaled $1.2 million and $707,000 at December 31, 2002 and June 30, 2002, respectively. The allowance for loan losses represented 83.1% and 120.9% of nonperforming loans as of December 31, 2002 and June 30, 2002, respectively. At December 31, 2002, nonperforming loans consisted of $672,000 in one- to four-family residential real estate loans and $487,000 in nonresidential real estate, consumer and other loans. Management believes such loans are adequately collateralized and does not expect to incur any losses on such loans. Although management believes that its allowance for loan losses at December 31, 2002, was adequate based upon the available facts and circumstances, there can be no assurance that additions to such allowance will not be necessary in future periods, which could adversely affect the Corporation's results of operations. Deposits totaled $127.8 million at December 31, 2002, an increase of $891,000, or .7%, over June 30, 2002 levels. The increase in deposits was due primarily to an increase in money market accounts. Shareholders' equity totaled $16.5 million at December 31, 2002, an increase of $1.0 million, or 6.7%, over June 30, 2002 levels. The increase resulted primarily from net earnings of $1.0 million and a $67,000 increase in unrealized gains on securities designated as available for sale, which were partially offset by dividends on common shares totaling $403,000 and a $49,000 repurchase of treasury shares. American is required to meet minimum capital standards promulgated by the Office of Thrift Supervision ("OTS"). At December 31, 2002, American's regulatory capital was well in excess of the minimum capital requirements. 11 ASB Financial Corp. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Operating Results for the Three-Month Periods Ended December 31, 2002 and 2001 General Net earnings amounted to $516,000 for the three months ended December 31, 2002, an increase of $203,000, or 64.9%, compared to the $313,000 of net earnings reported for the same period in 2001. The increase in earnings resulted primarily from a $397,000 increase in net interest income and a $27,000 decrease in general, administrative and other expense, which were partially offset by increases of $102,000 in the provision for losses on loans and $119,000 in the provision for federal income taxes. The aforementioned increases in income and expense are partially attributable to the acquisition of Waverly in June 2002. Prior year results were not restated for the acquisition. Net Interest Income Interest income on loans increased by $75,000, or 3.8%, during the quarter ended December 31, 2002, compared to the 2001 period. This increase was due primarily to a $7.4 million, or 7.1%, increase in the average portfolio balance outstanding year to year, which was partially offset by a 23 basis point decrease in the weighted-average yield, to 7.37% for the 2002 quarter. Interest income on investment securities, mortgage-backed securities and interest-bearing deposits decreased by $19,000, or 4.8%, due primarily to a 35 basis point decrease in the weighted-average yield, to 4.44% for the 2002 quarter, which was partially offset by an $826,000, or 2.5%, increase in the average balance of the related assets year to year. Interest expense on deposits decreased by $334,000, or 25.8%, for the three months ended December 31, 2002, compared to the same quarter in 2001. This decrease was due primarily to a 133 basis point decrease in the weighted-average cost of deposits, to 3.02% for the quarter ended December 31, 2002, which was partially offset by an $8.5 million, or 7.1%, increase in the average balance of deposits outstanding year to year. Interest expense on borrowings decreased by $7,000, or 18.9%, due primarily to a decrease in the average balance of borrowings outstanding and a 64 basis point decrease in the average cost of borrowings. The decrease in the yields on interest-earning assets and the costs of interest-bearing liabilities was due primarily to the overall decrease in interest rates in the economy during 2002 and 2001. As a result of the foregoing changes in interest income and interest expense, net interest income increased by $397,000, or 38.7%, to a total of $1.4 million for the three months ended December 31, 2002. The interest rate spread increased to 3.68% for the three months ended December 31, 2002, from 2.61% for the 2001 period, while the net interest margin increased to 3.94% in the 2002 period, compared to 3.01% in the 2001 period. 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. The Corporation recorded a provision for losses on loans totaling $124,000 during the three months ended December 31, 2002, an increase of $102,000 compared to the same period in 2001. The current period provision was predicated primarily upon growth in the portfolio of loans secured by nonresidential real estate and an increase in nonperforming loans. 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. 12 ASB Financial Corp. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Operating Results for the Three-Month Periods Ended December 31, 2002 and 2001 (continued) Other Income Other income totaled $147,000 for both the three months ended December 31, 2002 and 2001. A $7,000 gain on sale of investment securities was offset by a $7,000, or 4.8%, decrease in other operating income. General, Administrative and Other Expense General, administrative and other expense totaled $675,000 for the three months ended December 31, 2002, a decrease of $27,000, or 3.8%, compared to the same period in 2001. This decrease was comprised primarily of decreases of $13,000, or 4.1%, in employee compensation and benefits, $20,000, or 21.1%, in data processing and $11,000, or 5.6%, in other operating expense. The decrease in employee compensation was due primarily to an increase in deferred loan origination costs related to the increase in lending volume year to year, partially offset by normal merit increases. The decrease in data processing was due primarily to a one-time charge to upgrade the on-line system recorded in the prior year. The decrease in other operating expense was due primarily to a decline in amortization of the Corporation's investment in a low income housing partnership. Federal Income Taxes The provision for federal income taxes totaled $255,000 for the three months ended December 31, 2002, an increase of $119,000, or 87.5%, compared to the same period in 2001. This increase resulted primarily from an increase in net earnings before taxes of $322,000, or 71.7%. The effective tax rates were 33.1% and 30.3% for the three-month periods ended December 31, 2002 and 2001, respectively. Comparison of Operating Results for the Six-Month Periods Ended December 31, 2002 and 2001 General Net earnings amounted to $1.0 million for the six months ended December 31, 2002, an increase of $408,000, or 68.5%, compared to the $596,000 of net earnings reported for the same period in 2001. The increase in earnings resulted primarily from increases of $778,000 in net interest income and $10,000 in other income, which were partially offset by increases of $102,000 in the provision for losses on loans, $65,000 in general, administrative and other expense and $213,000 in the provision for federal income taxes. The aforementioned increases in income and expense are partially attributable to the acquisition of Waverly in June 2002. Prior year results were not restated for the acquisition. Net Interest Income Interest income on loans increased by $40,000, or 1.0%, during the six months ended December 31, 2002, compared to the 2001 period. This increase was due primarily to a $3.4 million, or 3.6%, increase in the average portfolio balance outstanding year to year, which was partially offset by an 18 basis point decrease in the weighted-average yield, to 7.38% for the 2002 period. Interest income on investment securities, mortgage-backed securities and interest-bearing deposits decreased by $81,000, or 9.0%, due primarily to a 64 basis point decrease in the weighted-average yield, to 4.90% for the 2002 period, which was partially offset by a $3.1 million, or 10.3%, increase in the average balance of the related assets year to year. 13 ASB Financial Corp. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Operating Results for the Six-Month Periods Ended December 31, 2002 and 2001 (continued) Net Interest Income (continued) Interest expense on deposits decreased by $787,000, or 28.0%, for the six months ended December 31, 2002, compared to the 2001 period. This decrease was due primarily to a 168 basis point decrease in the weighted-average cost of deposits, to 3.09% for the period ended December 31, 2002, which was partially offset by a $13.2 million, or 11.2%, increase in the average balance of deposits outstanding year to year. Interest expense on borrowings decreased by $32,000, or 38.6%, due primarily to a decrease in the average balance of borrowings outstanding and a 138 basis point decrease in the average cost of borrowings. The decrease in the yields on interest-earning assets and the costs of interest-bearing liabilities was due primarily to the overall decrease in interest rates in the economy during 2002 and 2001. As a result of the foregoing changes in interest income and interest expense, net interest income increased by $778,000, or 38.1%, to a total of $2.8 million for the six months ended December 31, 2002. The interest rate spread increased to 3.73% for the six months ended December 31, 2002, from 2.46% for the 2001 period, while the net interest margin increased to 3.92% in the 2002 period, compared to 2.98% in the 2001 period. Provision for Losses on Loans Management recorded a provision for losses on loans totaling $124,000 during the six months ended December 31, 2002, an increase of $102,000, compared to the same period in 2001. The current period provision was predicated primarily upon growth in the portfolio of loans secured by nonresidential real estate and an increase in nonperforming loans. 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 amounted to $280,000 for the six months ended December 31, 2002, an increase of $10,000, or 3.7%, compared to the same period in 2001, due primarily to increased fee income of $24,000 on transaction accounts during the six month period and an increase in the cash surrender value of life insurance, which were partially offset by a $19,000 decrease in gain on sale of investment securities year to year. General, Administrative and Other Expense General, administrative and other expense totaled $1.5 million for the six months ended December 31, 2002, an increase of $65,000, or 4.5%, compared to the same period in 2001. This increase was comprised primarily of increases of $65,000, or 9.2%, in employee compensation and benefits and $19,000, or 10.2%, in data processing. These increases were partially offset by a $27,000, or 29.7%, decrease in franchise tax expense. The increase in employee compensation and benefits was due primarily to the effect of the Waverly acquisition, increases in health and other benefit plan costs, as well as normal merit increases year to year. The increase in data processing also related to the effects of the acquisition of Waverly as compared to the same period in 2001. The decrease in franchise taxes resulted from refund claims filed on prior year tax liabilities. 14 ASB Financial Corp. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Operating Results for the Six-Month Periods Ended December 31, 2002 and 2001 (continued) Federal Income Taxes The provision for federal income taxes totaled $458,000 for the six months ended December 31, 2002, an increase of $213,000, or 86.9%, compared to the same period in 2001. This increase resulted primarily from the increase in net earnings before taxes of $621,000, or 73.8%. The effective tax rates were 31.3% and 29.1% for the six-month periods ended December 31, 2002 and 2001, respectively. ITEM 3: Controls and Procedures (a) The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Corporation's disclosure controls and procedures (as defined under Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) as of a date within ninety days of the filing date of this quarterly report on Form 10-QSB. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Corporation's disclosure controls and procedures are effective. (b) There were no significant changes in the Corporation's internal controls or in any factors that could significantly affect these controls subsequent to the date of the Chief Executive Officer and the Chief Financial Officer's evaluation. 15 ASB Financial Corp. PART II ITEM 1. Legal Proceedings Not applicable. ITEM 2. Changes in Securities Not applicable. ITEM 3. Defaults Upon Senior Securities Not applicable. ITEM 4. Submission of Matters to a Vote of Security Holders None. ITEM 5. Other Information None. ITEM 6. Exhibits and Reports on Form 8-K Exhibits: EX-99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 EX-99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Reports on Form 8-K: None. 16 ASB Financial Corp. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ASB FINANCIAL CORP. Date: February 14, 2003 By: /s/Robert M. Smith --------------------- -------------------------------------- Robert M. Smith President and Chief Executive Officer Date: February 14, 2003 By: /s/Michael L. Gampp --------------------- -------------------------------------- Michael L. Gampp Chief Financial Officer 17 CERTIFICATION I, Robert M. Smith, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of ASB Financial Corp.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 14, 2003 /s/Robert M. Smith ------------------------------------- Robert M. Smith President and Chief Executive Officer 18 CERTIFICATION I, Michael L. Gampp, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of ASB Financial Corp.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 14, 2003 /s/Michael L. Gampp ----------------------------------------- Michael L. Gampp Chief Financial Officer 19