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, 2004
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.
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(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
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number:
(740) 354-3177
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Securities registered pursuant to Section 12(b) of the Exchange Act:
None None
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(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, 2004, were
$9.7 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 $26.7 million on
September 22, 2004.
1,686,063 of the issuer's common shares were issued and outstanding on
September 22, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of the Annual Report
to Shareholders for the fiscal year ended June 30, 2004.
Part III of Form 10-KSB - Portions of the Proxy Statement
for the 2004 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 principally engages 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 Cities of Portsmouth and 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
Savings Association Insurance Fund ("SAIF") administered by the Federal
Deposit Insurance Corporation (the "FDIC"), and loan principal and
mortgage-backed security repayments. American also obtains advances from
the Federal Home Loan Bank ("FHLB") of Cincinnati to fund lending
activities.
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") and the United States Securities and Exchange
Commission ("SEC"). 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
first mortgages on 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. 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,
--------------------------------------------------------------------
2004 2003 2002
-------------------- -------------------- --------------------
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 $ 76,197 55.8% $ 71,577 60.5% $ 73,300 65.8%
Multifamily 5,399 4.0 6,224 5.3 4,717 4.2
Nonresidential and land 18,694 13.7 15,643 13.2 12,436 11.2
Construction 11,124 8.1 5,334 4.5 1,342 1.2
Home equity 3,620 2.6 4,160 3.5 5,093 4.6
-------- ----- -------- ----- -------- -----
Total real estate loans 115,034 84.2 102,938 87.0 96,888 87.0
Commercial 17,075 12.5 11,336 9.6 10,622 9.5
Consumer and other loans:
Passbook 545 .4 461 .4 647 .6
Home improvement 1,545 1.1 1,427 1.2 1,220 1.1
Automobile 1,763 1.3 1,585 1.3 1,801 1.6
Other 588 .4 544 .5 234 .2
-------- ----- -------- ----- -------- -----
Total consumer and other loans 4,441 3.3 4,017 3.4 3,902 3.5
-------- ----- -------- ----- -------- -----
Total loans 136,550 100.0% 118,291 100.0% 111,412 100.0%
Less:
Loans in process 5,536 2,181 1,365
Net deferred loan origination fees
and unearned discounts 194 182 177
Allowance for loan losses 999 1,009 855
-------- -------- --------
Total loans - net $129,821 $114,919 $109,015
======== ======== ========
Loan Maturity. The following table sets forth the contractual
maturity of American's total loans at June 30, 2004 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)
2005 $ 9,236 $ 302 $ 3,944 $1,391 $ 14,873
2006 2,425 349 4,189 1,485 8,448
2007 2,576 370 4,448 1,565 8,959
2008 - 2009 5,639 808 9,741 - 16,188
2010 - 2014 17,450 2,492 13,447 - 33,389
2015 - 2019 23,561 1,078 - - 24,639
2020 and thereafter 24,518 - - - 24,518
------- ------ ------- ------ --------
Total $85,405 $5,399 $35,769 $4,441 $131,014
======= ====== ======= ====== ========
--------------------
Includes construction loans.
Includes home equity loans.
Includes land development and commercial loans.
2
The following table sets forth the dollar amount of all loans due after
June 30, 2005, which have fixed interest rates and which have floating or
adjustable interest rates:
Due after June 30, 2005
-----------------------
(In thousands)
Fixed rate of interest $ 78,742
Adjustable rate of interest 37,399
--------
$116,141
========
One- to Four-Family Real Estate Loans. American's principal lending
activity is the origination of permanent conventional loans secured by
first mortgages on one- to four-family residences, primarily single-family
homes, located within American's primary market area. At June 30, 2004,
American's one- to four-family residential real estate loan portfolio,
including construction loans secured by one- to four-family residences, was
approximately $76.2 million, or 55.8% of total loans.
OTS regulations limit the amount which American may lend in
relationship to the appraised value of the real estate and improvements
(the "Loan-to-Value Ratio" or "LTV") at the time of loan origination. In
accordance with OTS regulations, American makes loans on one- to four-
family residences with LTVs of up to 95%. Private mortgage insurance
purchased by the borrower usually covers the principal amount of any loan
which exceeds an 85% LTV at the time of origination.
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 either 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,
2004, American's home equity loans totaled $3.6 million, or 2.6% of total
loans.
Multifamily Real Estate Loans. 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, 2004, loans secured by multifamily properties totaled
approximately $5.4 million, or 4.0% of total loans, of which $2.3 million
are participation interests purchased in loans originated by other
financial institutions.
3
Nonresidential Real Estate and Land Loans. At June 30, 2004,
approximately $18.7 million, or 13.7% 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, all of which are located in American's
primary market area. Also included in American's nonresidential real estate
loan portfolio is $4.3 million of participation interests which have been
purchased in loans originated by other financial institutions.
American has land loans with principal balances totaling $1.3 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, 2004,
American had outstanding nonresidential real estate construction loans with
an aggregate balance of $5.0 million.
Although the loans secured by nonresidential real estate typically
have higher interest rates and shorter terms to maturity than one- to four-
family residential real estate loans, nonresidential real estate lending is
generally considered to involve a higher degree of risk than residential
lending due to the relatively larger loan amounts and the effects of
general economic conditions on the successful operation of income-producing
properties. American has endeavored to reduce such risk by evaluating the
credit history and past performance of the borrower, the location of the
real estate, the financial condition of the borrower, the quality of the
management constructing and operating the property, 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.
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, 2004,
construction loans, in the aggregate, totaled $11.1 million, or 8.1% 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, 2004, approximately $17.1 million, or
12.5%, 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, 2004, approximately $4.4 million, or 3.3% of American's
total loans were 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.
4
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. For construction loans, an appraiser
also evaluates the building plans, construction specifications and
estimates of construction costs, and American evaluates the feasibility of
the proposed construction project and the experience and record of the
builder. 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 to American's Executive Committee for review in
accordance with American's underwriting guidelines. 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 that 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.
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 with no
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. Whole
loans and 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.
5
The following table presents American's loan origination and purchase
activity for the periods indicated:
Year ended June 30,
-------------------------------
2004 2003 2002
---- ---- ----
(In thousands)
Loans originated:
Adjustable-rate:
One- to four-family real estate $ 3,222 $ 1,685 $ 3,075
Multifamily real estate 1,647 1,211 -
Nonresidential real estate 1,930 1,480 3,832
Commercial 1,959 2,720 2,459
------- ------- -------
Total adjustable-rate 8,758 7,096 9,366
Fixed-rate:
One- to four-family real estate 27,789 23,346 16,945
Nonresidential real estate 1,764 1,486 136
Commercial 9,801 9,305 5,451
Consumer 3,789 1,588 2,635
------- ------- -------
Total fixed-rate 43,143 35,725 25,167
Loans purchased - 2,750 2,000
Loans acquired from Waverly Building and Loan Company - - 3,770
------- ------- -------
Total loans originated, purchased and acquired 51,901 45,571 40,303
Reductions:
Principal repayments (36,834) (38,907) (34,588)
Increase (decrease) in other items, net (1) (165) (760) (8)
------- ------- -------
Net increase $14,902 $ 5,904 $ 5,707
======= ======= =======
--------------------
Consists of loans in process, unearned discounts and deferred loan
origination fees and the allowance for loan losses.
6
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.
Based on the 15% limit, American was able to lend approximately $2.5
million to one borrower at June 30, 2004. The largest loan American had
outstanding to one borrower at June 30, 2004, was a $2.2 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. For loans originated before 2001, 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. Loan
payments on loans originated since fiscal 2001 are due the first day of the
month, with the portion of the payment applicable to interest having
accrued during the preceding month. When a loan payment is 30 days
delinquent, a late notice is sent. If payment is not received, a second
notice is sent and a telephone call is 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
unless alternative payment arrangements are agreed upon with the borrower
to eliminate the arrearage. 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 loss allowance for
the amount of the loan.
7
The following table reflects the amount of loans in a delinquent
status at the dates indicated:
At June 30, 2004
-----------------------------------------------------------------------------------------------------
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 28 $1,843 1.4% 1 $133 .1% 18 $298 .2% 47 $2,274 1.7%
60-89 days 6 275 .2 - - - 14 73 - 20 348 .2
90 days and over 17 841 .6 1 115 .1 11 91 .1 29 1,047 .8
-- ------ --- - ---- -- -- ---- -- -- ------ ---
Total delinquent loans 51 $2,959 2.2% 2 $248 .2% 43 $462 .3% 96 $3,669 2.7%
== ====== === = ==== == == ==== == == ====== ===
At June 30, 2003
-----------------------------------------------------------------------------------------------------
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 $1,946 1.7% - $ - - 15 $259 .2% 44 $2,205 1.9%
60-89 days 7 252 .2 - - - 12 85 .1 19 337 .3
90 days and over 17 742 .6 3 245 .2 18 231 .2 38 1,218 1.0
-- ------ --- - ---- -- -- ---- -- -- ------ ---
Total delinquent loans 53 $2,940 2.5% 3 $245 .2% 45 $575 .5% 101 $3,760 3.2%
== ====== === = ==== == == ==== == == ====== ===
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 .1 24 946 .9
90 days and over 14 517 .4 2 445 .4 15 190 .2 31 1,152 1.0
-- ------ --- - ---- -- -- ---- -- -- ------ ---
Total delinquent loans 44 $2,271 2.0% 2 $445 .4% 36 $495 .4% 82 $3,211 2.9%
== ====== === = ==== == == ==== == == ====== ===
Percentages correlate to total loans before net items.
Includes land loans.
8
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,
----------------------------
2004 2003 2002
---- ---- ----
(Dollars in thousands)
Nonaccrual loans $ 767 $ 828 $ 871
Accruing loans delinquent
90 days or more 280 390 281
------ ------ ------
Total nonperforming loans 1,047 1,218 1,152
------ ------ ------
Total nonperforming assets $1,047 $1,218 $1,152
====== ====== ======
Allowance for loan losses $ 999 $1,009 $ 855
====== ====== ======
Nonperforming assets as a percent
of total assets .63% .80% .78%
Allowance for loan losses as a percent
of nonperforming assets 95.42% 82.84% 74.22%
For the year ended June 30, 2004, gross interest income which
American would have recorded had nonaccrual loans been current in
accordance with their original terms was $66,000, and American recorded
$13,600 in interest on nonaccrual loans during such period.
When American acquires a property as a result of foreclosure
proceedings or by deed-in-lieu of foreclosure ("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.
9
The aggregate amounts of American's classified assets at the dates
indicated were as follows:
At June 30,
------------------------
2004 2003 2002
---- ---- ----
(In thousands)
Classified assets
Substandard $1,164 $1,189 $949
Loss - 29 -
------ ------ ----
Total classified assets $1,164 $1,218 $949
====== ====== ====
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 a change in its classification is 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.
Federal examiners are authorized to classify an institution's assets.
If the institution does not agree with the examiner's classification, it
may appeal the determination to the OTS Regional Director. American had no
disagreements with the examiners regarding the classification of its assets
at the time of its last examination.
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 assets, 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 future adjustments to the allowance, 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,
---------------------------
2004 2003 2002
---- ---- ----
(Dollars in thousands)
Balance at beginning of period $1,009 $ 855 $713
Charge-offs:
Residential real estate loans (1) (42) (8) (42)
Nonresidential real estate (2) (66) (75) (29)
Consumer loans (13) (12) (17)
------ ------ ----
Total charge-offs (121) (95) (88)
Provision for losses on loans 111 249 70
Allowance resulting from acquisition of Waverly
Building and Loan Company - - 160
------ ------ ----
Balance at end of period $ 999 $1,009 $855
====== ====== ====
Ratio of net charge-offs to average loans
outstanding during the period .10% .09% .08%
--------------------
Includes multifamily loans.
Includes commercial loans.
10
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,
-----------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- -----------------------
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 $109 84.2% $ 83 87.0% $ 43 87.0%
Commercial loans 120 12.5 61 9.6 111 9.5
Consumer and other loans 51 3.3 35 3.4 42 3.5
Unallocated 719 - 830 - 659 -
---- ----- ------ ----- ---- -----
Total $999 100.0% $1,009 100.0% $855 100.0%
==== ===== ====== ===== ==== =====
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,
--------------------------------------------------------------------
2004 2003 2002
-------------------- -------------------- --------------------
Carrying Percent Carrying Percent Carrying Percent
value of total value of total value of total
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Investments designated
as held to maturity:
Interest-bearing deposits in other
financial institutions (1)
$ 5,485 30.5% $ 4,851 27.2% $ 6,376 23.4%
Investments designated
as available for sale:
U.S. Government agency obligations 10,675 59.4 12,022 67.3 19,576 71.9
Municipal obligations 862 4.8 208 1.2 40 .1
Corporate equity securities - - - - 302 1.1
FHLMC stock 950 5.3 775 4.3 948 3.5
------- ----- ------- ----- ------- -----
Total investments designated
as available for sale 12,487 69.5 13,005 72.8 20,866 76.6
------- ----- ------- ----- ------- -----
Total investments $17,972 100.0% $17,856 100.0% $27,242 100.0%
======= ===== ======= ===== ======= =====
Includes certificates of deposit in other financial institutions.
11
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, 2004:
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 $5,247 3.68% $3,467 5.64% $2,149 5.46% $10,863 $10,675
Municipal obligations 565 2.95 40 4.40% 276 5.50 881 862
FHLMC stock - - - - - - 15 950
------ ---- ------ ---- ------ ---- ------- -------
Total $5,812 3.61% $3,507 5.63% $2,425 5.46% $11,759 $12,487
====== ==== ====== ==== ====== ==== ======= =======
American has been an active purchaser of mortgage-backed securities.
At June 30, 2004, mortgage-backed securities totaled $11.8 million or 7.1%
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, 2004 At June 30, 2003
------------------------------------------------ ------------------------------------------------
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 $ 2,031 $10 $ 32 $ 2,009 $ 3,593 $ 45 $ 2 $ 3,636
FNMA participation
certificates 7,910 13 154 7,769 6,468 63 12 6,519
GNMA participation
certificates 1,931 23 20 1,934 1,817 69 - 1,886
Collateralized mortgage
obligations 55 1 - 56 89 - - 89
------- --- ---- ------- ------- ---- --- -------
Total mortgage-backed
securities $11,927 $47 $206 $11,768 $11,967 $177 $14 $12,130
======= === ==== ======= ======= ==== === =======
At June 30, 2002
------------------------------------------------
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
--------- ---------- ---------- ----------
(In thousands)
Available for sale:
FHLMC participation
certificates $1,441 $ 35 $- $1,476
FNMA participation
certificates 2,373 15 3 2,385
GNMA participation
certificates 2,355 97 - 2,452
Collateralized mortgage
obligations 780 - 2 778
------ ---- -- ------
Total mortgage-backed
securities $6,949 $147 $5 $7,091
====== ==== == ======
12
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 negotiable order of withdrawal ("NOW")
accounts, Super 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,
-------------------------------------------------------------------
2004 2003 2002
-------------------- -------------------- -------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
Transaction accounts:
Passbook accounts $ 11,828 8.7% $ 10,963 8.4% $ 10,919 8.6%
Demand, NOW and Super NOW accounts 7,706 5.6 8,463 6.5 8,297 6.5
Money market deposit accounts 32,543 23.8 30,319 23.1 21,920 17.3
-------- ----- -------- ----- -------- -----
Total transaction accounts 52,077 38.1 49,745 38.0 41,136 32.4
Certificates of deposit:
0.00 - 1.99% 21,950 16.0 6,332 4.8 - -
2.00 - 2.99% 39,100 28.6 30,521 23.3 18,612 14.7
3.00 - 3.99% 16,411 12.0 32,368 24.8 23,574 18.6
4.00 - 4.99% 6,655 4.9 10,157 7.8 20,196 15.9
5.00 - 5.99% 112 .1 1,198 .9 15,071 11.9
6.00 - 6.99% 256 .2 279 .2 6,835 5.4
7.00 - 7.99% 200 .1 180 .2 1,373 1.1
8.00 - 8.99% - - - - 75 -
-------- ----- -------- ----- -------- -----
Total certificates of deposit 84,684 61.9 81,035 62.0 85,736 67.6
-------- ----- -------- ----- -------- -----
Total deposits $136,761 100.0% $130,780 100.0% $126,872 100.0%
======== ===== ======== ===== ======== =====
13
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, 2004:
At June 30, 2004
----------------
(In thousands)
Certificates of deposit with balances of $100,000
or more maturing in quarter ending (1):
September 30, 2004 $ 2,299
December 31, 2004 951
March 31, 2005 298
June 30, 2005 908
After June 30, 2005 9,451
-------
Total certificates of deposit with balances of $100,000 or more $13,907
=======
--------------------
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,
----------------------------------
2004 2003 2002
---- ---- ----
(Dollars in thousands)
Beginning balance $130,780 $126,872 $120,725
Deposits 763,898 769,775 543,956
Deposits acquired from Waverly
Building and Loan Company - - 4,723
Withdrawals (759,501) (768,129) (547,474)
Interest credited 1,584 2,262 4,942
-------- -------- --------
Ending balance $136,761 $130,780 $126,872
======== ======== ========
Net increase $ 5,981 $ 3,908 $ 6,147
======== ======== ========
Percent increase 4.57% 3.08% 5.09%
======== ======== ========
Borrowings. American's other sources of funds include advances from
the 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 outstanding advances from the FHLB of Cincinnati. American
complied with this requirement at June 30, 2004 with an investment in stock
of the FHLB of Cincinnati of $1.1 million.
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 FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral. At June 30, 2004, American had $10.9 million outstanding in
advances from the FHLB.
14
The following table sets forth certain information as to American's
FHLB advances at the dates indicated:
At June 30,
---------------------------
2004 2003 2002
---- ---- ----
(Dollars in thousands)
FHLB advances $10,899 $4,188 $4,223
Weighted average interest rate 3.12% 1.33% 1.95%
The following table sets forth the maximum balance and average
balance of FHLB advances during the periods indicated:
Year ended June 30,
------------------------------
2004 2003 2002
---- ---- ----
(Dollars in thousands)
FHLB advances:
Maximum balance $10,963 $7,409 $6,560
Average balance $ 8,459 $4,354 $5,039
Weighted average interest rate 2.23% 1.63% 2.36%
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, mortgage companies, 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 provided. 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 two wholly-owned subsidiaries. A.S.L. Services, Inc.
("ASL"), owns stock in American's data processing service provider. At June
30, 2004, the stock held by ASL 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,
2004. Additionally, American owns ASB Community Development Corp. ("ASB
Development"), which participates in a federal tax program designed to
promote lending in new markets, which in turn provides federal income tax
credits to American. At June 30, 2004, ASB Development's assets consisted
primarily of deposits in American of $123,000 and loans of $1.9 million.
Personnel
As of June 30, 2004, American had 31 full-time employees and 11 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.
15
REGULATION
General
As a savings and loan holding company, 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
an Ohio corporation, ASB is subject to provisions of the Ohio Revised Code
applicable to corporations generally.
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.
Office of Thrift Supervision
General. The OTS is responsible for the regulation and supervision of
all federally-chartered savings associations and all other savings
associations the deposits of which are insured by the FDIC 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. Under certain circumstances, 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 and truth-in-savings disclosures, equal
credit opportunity, fair credit reporting and community reinvestment.
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. 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.
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. American exceeded these requirements
with tangible capital of 9.3%, core capital of 9.3% and risk-based capital
of 16.6% at June 30, 2004.
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 and
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. An undercapitalized association 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, 2004, 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
16
on an average during each of four preceding calendar quarters and must
provide adequate assurances of performance.
Qualified Thrift Lender Test. If a savings association fails to meet
one of the two tests in order to be a qualified thrift lender ("QTL"), the
association and its holding company become subject to certain operating and
regulatory restrictions. 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 first 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 by residential real estate or deposits,
educational loans and certain governmental obligations. The OTS may grant
exceptions to the QTL tests under certain circumstances. At June 30, 2004,
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,
2004.
All transactions between savings associations and their affiliates
must comply with Sections 23A and 23B of the Federal Reserve Act (the
"FRA") and the Federal Reserve Board's Regulation W. 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 and
Regulation W (i) limit the extent to which a savings association or its
subsidiaries may engage in "covered transactions" with any one affiliate up
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 up 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, acceptance of securities issued by an affiliate as
collateral for an extension of credit to any person, issuance of a
guarantee and other similar types of transactions. In addition to the
limits in Sections 23A and 23B and Regulation W, 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, 2004.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of savings associations to make
capital distributions. Capital distributions include 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 holding company must file a notice
or an application with the OTS before it can pay a dividend. An application
must be submitted to and approved by the OTS (i) if the proposed
distribution would cause the savings association's 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. As a unitary savings and loan holding
company, ASB generally has no restrictions on its activities. If, however,
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,
17
soundness or stability of its subsidiary savings association, the OTS may
impose such restrictions as deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings association,
(ii) transactions between the savings association and its affiliates, and
(iii) any activities of the savings association that might create a serious
risk that the liabilities of ASB and its affiliates may be imposed on the
savings association. If the savings association subsidiary of a holding
company fails to meet the QTL test, then the holding company would become
subject to the activities restrictions applicable to multiple holding
companies. At June 30, 2004, American met the QTL test.
Federal law generally prohibits a savings and loan holding company
from controlling any other savings association or savings and loan holding
company 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, without prior approval of the OTS. 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.
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. In addition, OTS approval must be obtained
for any merger involving either ASB or American.
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 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 currently require that savings associations maintain
reserves of 3% of net transaction accounts (primarily NOW accounts) up to
$45.4 million (subject to an exemption of up to $6.6 million), and of 10%
of net transaction accounts in excess of $45.4 million. At June 30, 2004,
American was in compliance with its reserve requirements.
Ohio Corporation Law
Merger Moratorium Statute. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting 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
18
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.
Control Share Acquisition Statute. 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.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act is applicable to
all companies with equity securities required to file reports under the
Securities Exchange Act of 1934. The Sarbanes-Oxley Act established, among
other things: (i) new requirements for audit committees, including
independence, expertise, and responsibilities; (ii) additional
responsibilities regarding financial statements for the Chief Executive
Officer and Chief Financial Officer of the reporting company; (iii) new
standards for auditors and regulation of audits; (iv) increased disclosure
and reporting obligations for the reporting company and its directors and
executive officers; and (v) new and increased civil and criminal penalties
for violations of the securities laws. Many of the provisions were
effective immediately while other provisions become effective over a period
of time and are subject to rulemaking by the SEC. Because ASB's common
stock is registered with the SEC, it is subject to the Sarbanes-Oxley Act,
and any future rules or regulations promulgated under such act.
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. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" exceeds its
alternative minimum taxable income computed without regard to preference
items 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.
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.
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
19
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.
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, 2004,
the pre-1988 reserves of American for tax purposes totaled approximately
$1.9 million. American believes it had approximately $1.6 million of
accumulated earnings and profits for tax purposes as of June 30, 2004,
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 1999. 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) 0.4% of 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.
ASB may elect to be a "qualifying holding company" and as such be
exempt from the net worth tax. A corporation franchise tax based solely 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. ASB made
such an election for fiscal 2004.
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.
CRITICAL ACCOUNTING POLICIES
We consider accounting policies involving significant judgments and
assumptions by management that have, or could have, a material impact on
the carrying value of certain assets or on income to be critical accounting
policies. We consider the allowance for loan losses to be a critical
accounting policy.
20
The allowance for loan losses is the estimated amount considered
necessary to cover credit losses inherent in the loan portfolio at the
balance sheet date. The allowance is established through the provision for
loan losses which is charged against income. In determining the allowance
for loan losses, management makes significant estimates and has identified
this policy as one of the most critical for American Savings Bank.
Management performs a quarterly evaluation of the allowance for loan
losses. Consideration is given to a variety of factors in establishing this
estimate including, but not limited to, current economic conditions,
delinquency statistics, geographic and industry concentrations, the
adequacy of the underlining collateral, the financial strength of the
borrower, results of internal loans reviews and other relevant factors.
This evaluation is inherently subjective as it requires material estimates
that may be susceptible to significant change.
The analysis has two components, specific and general allocations.
Specific allocations are made for loans that are determined to be impaired.
Impairment is measured by determining the present value of expected future
cash flows or, for collateral-dependent loans, the fair value of the
collateral adjusted for market conditions and selling expenses. The general
allocation is determined by segregating the remaining loans by type of
loan, risk weighting (if applicable) and payment history. We also analyze
historical loss experience, delinquency trends, general economic conditions
and geographic and industry concentrations. This analysis establishes
factors that are applied to the loan groups to determine the amount of the
general reserve. Actual loan losses may be significantly more than the
reserves we have established which could have a material negative effect on
our financial results.
Item 2. Description of Property.
At June 30, 2004, American owned the property at 503 Chillicothe
Street, Portsmouth, Ohio, on which its main office is located and the
properties at 907 Chillicothe Street, Portsmouth, Ohio and 951 West Emmitt
Ave., Waverly, Ohio where American operated branch offices. At June 30,
2004, the net book value of these properties, including the buildings was
$1.6 million, and American's office premises and equipment had a total net
book value of approximately $260,000. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
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, 2004 (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. Financial Statements.
The Consolidated Financial Statements contained in the Annual Report
and the opinion of Grant Thornton LLP, dated August 12, 2004, are
incorporated herein by reference.
21
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 8A. Controls and Procedures.
ASB's Chief Executive Officer and Chief Financial Officer have
evaluated ASB's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d -15(e) of the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this report. Based upon the
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that ASB's disclosure controls and procedures are effective.
There were no changes in ASB's internal controls, which materially affected
or are reasonably likely to materially affect, ASB's internal controls over
financial reporting.
Item 8B. Other Information.
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
2004 Annual Meeting of Shareholders of ASB Financial Corp. (the "Proxy
Statement") under the captions "Election of Directors and Board
Information," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" is incorporated herein by reference.
ASB has adopted a code of ethics applicable to all officers,
directors, and employees that complies with SEC requirements. A copy of
ASB's code of ethics may be obtained without charge upon written request to
the Secretary of ASB Financial Corp. at 503 Chillicothe Street, Portsmouth,
Ohio 45662.
Item 10. Executive Compensation.
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors" and "Stock Option Plan"
is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
The information contained in the Proxy Statement under the caption
"Ownership of ASB Shares" is incorporated herein by reference.
ASB maintains the ASB Financial Corp. 1995 Stock Option and Incentive
Plan (the "Plan") under which it may issue equity securities to its
directors, officers and employees. The Plan was approved by ASB's
shareholders at the 1995 Annual Meeting of Shareholders.
22
The following table shows, as of June 30, 2004, 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 78,128 $10.15 -
------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security holders N/A N/A N/A
------------------------------------------------------------------------------------------------------------
Total 78,128 $10.15 -
------------------------------------------------------------------------------------------------------------
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, f.s.b. Management Recognition Plan
and Trust Agreement (incorporated by reference)
10.3 Deferred Compensation Plan of American Savings Bank,
f.s.b.
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)
23 Consent of Independent Registered Public Accounting Firm
23
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
On April 28, 2004, ASB filed a Form 8-K to report the issuance
of a press release regarding its earnings for the quarter ended
March 31, 2004.
Item 14. Principal Accountant Fees and Services.
The information contained in the Proxy Statement under the caption
"Audit and Non-Audit Fees" is incorporated by reference.
24
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, 2004
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/Larry F. Meredith
-------------------------- ------------------------------
Gerald R. Jenkins Larry F. Meredith
Director Director
Date: September 27, 2004 Date: September 27, 2004
By /s/William J. Burke By /s/Louis M. Schoettle
-------------------------- ------------------------------
William J. Burke Louis M. Schoettle
Director Director
Date: September 27, 2004 Date: September 27, 2004
By /s/Christopher H. Lute By /s/Michael L. Gampp
-------------------------- --------------------------------
Christopher H. Lute Michael L. Gampp
Director Chief Financial Officer
(Principal Financial Officer and
Date: September 27, 2004 Principal Accounting Officer)
Date: September 27, 2004
By /s/Robert M. Smith
-----------------------------
Robert M. Smith
President and Director
(Principal Executive Officer)
Date: September 27, 2004
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 with the SEC on September
28, 1995 (SEC File No. 000-25906) (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 EDGAR
on September 30, 1996 (SEC File
No. 000-25906) (the "1996 Form 10-KSB")
Exhibit 10.1
10.2 American Savings Bank, f.s.b. Management Recognition Incorporated by reference to the 1996
Plan and Trust Agreement Form 10-KSB, Exhibit 10.2
10.3 Deferred Compensation Plan of American Savings Bank f.s.b. Included herewith
13 2004 Annual Report to Shareholders Included herewith
20 Proxy Statement for 2004 Annual Meeting Incorporated by reference to the Proxy
Statement for the 2004 Annual Meeting
of Shareholders filed with the SEC on
September 24, 2004
21 Subsidiaries of ASB Financial Corp. Incorporated by reference to the 1995
Form 10-KSB, Exhibit 21
23 Consent of Independent Registered Public Accounting Firm Included herewith
31.1 Certification of Chief Executive Officer Pursuant to Included herewith
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Included herewith
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Included herewith
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Included herewith
Section 906 of the Sarbanes-Oxley Act of 2002
26