UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to _______________
Commission File Number: 0-25906
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ASB FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Ohio 31-1429488
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
503 Chillicothe Street, Portsmouth, Ohio 45662
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(Address of principal executive offices)(Zip Code)
(740) 354-3177
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
May 12, 2005 - 1,705,047 common shares, no par value
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1
INDEX
Page
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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 12
PART II - OTHER INFORMATION 18
SIGNATURES 19
2
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
March 31, June 30,
ASSETS 2005 2004
(Unaudited)
Cash and due from banks $ 1,719 $ 2,078
Interest-bearing deposits in other financial institutions 5,853 5,307
-------- --------
Cash and cash equivalents 7,572 7,385
Certificates of deposit in other financial institutions 72 178
Investment securities available for sale - at market 9,452 12,487
Mortgage-backed securities available for sale - at market 10,430 11,768
Loans receivable - net 141,547 129,821
Office premises and equipment - at depreciated cost 1,851 1,814
Federal Home Loan Bank stock - at cost 1,225 1,104
Accrued interest receivable on loans 409 336
Accrued interest receivable on mortgage-backed securities 41 50
Accrued interest receivable on investments and interest-bearing deposits 85 130
Prepaid expenses and other assets 380 830
Bank-owned life insurance 3,205 -
Prepaid federal income taxes 133 183
Deferred federal income taxes 105 285
-------- --------
Total assets $176,507 $166,371
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $139,832 $136,761
Advances from the Federal Home Loan Bank 16,257 10,899
Advances by borrowers for taxes and insurance 111 180
Accrued interest payable 471 52
Other liabilities 1,030 1,055
-------- --------
Total liabilities 157,701 148,947
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;
1,966,318 and 1,911,180 shares issued at March 31, 2005 and
June 30, 2004, respectively - -
Additional paid-in capital 10,649 10,165
Retained earnings, restricted 10,605 9,848
Shares acquired by stock benefit plans (63) (126)
Accumulated comprehensive income, unrealized gains on securities
designated as available for sale, net of related tax effects 455 377
Less 250,117 shares of treasury stock at March 31, 2005
and June 30 2004, respectively - at cost (2,840) (2,840)
-------- --------
Total shareholders' equity 18,806 17,424
-------- --------
Total liabilities and shareholders' equity $176,507 $166,371
======== ========
3
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(In thousands, except per share data)
For the nine months For the three months
ended March 31, ended March 31,
2005 2004 2005 2004
Interest income
Loans $6,474 $6,045 $2,223 $2,053
Mortgage-backed securities 310 152 102 73
Investment securities 322 513 91 167
------ ------ ------ ------
Total interest income 7,106 6,710 2,416 2,293
Interest expense
Deposits 2,208 2,165 751 734
Borrowings 314 106 122 74
------ ------ ------ ------
Total interest expense 2,522 2,271 873 808
------ ------ ------ ------
Net interest income 4,584 4,439 1,543 1,485
Provision for losses on loans 149 81 32 31
------ ------ ------ ------
Net interest income after provision for
losses on loans 4,435 4,358 1,511 1,454
Other income
Gain on sale of investment securities - 10 - -
Gain on sale of office premises - 58 - -
Other operating 566 447 226 134
------ ------ ------ ------
Total other income 566 515 226 134
General, administrative and other expense
Employee compensation and benefits 1,621 1,568 575 567
Occupancy and equipment 179 172 65 56
Franchise taxes 124 129 42 44
Data processing 343 322 119 110
Other operating 638 719 208 206
------ ------ ------ ------
Total general, administrative and other expense 2,905 2,910 1,009 983
------ ------ ------ ------
Earnings before income taxes 2,096 1,963 728 605
Federal income taxes
Current 388 372 52 122
Deferred 180 129 169 33
------ ------ ------ ------
Total federal income taxes 568 501 221 155
------ ------ ------ ------
NET EARNINGS $1,528 $1,462 $ 507 $ 450
====== ====== ====== ======
EARNINGS PER SHARE
Basic $ .90 $ .88 $ .30 $ .27
====== ====== ====== ======
Diluted $ .90 $ .85 $ .30 $ .26
====== ====== ====== ======
4
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
For the nine months For the three months
ended March 31, ended March 31,
2005 2004 2005 2004
Net earnings $1,528 $1,462 $ 507 $450
Other comprehensive income (loss), net of taxes (benefits):
Unrealized holding gains (losses) on securities during
the period, net of taxes (benefits) of $40, $(4), $(111)
and $33 during the respective periods 78 (8) (216) 64
------ ------ ----- ----
Comprehensive income $1,606 $1,454 $ 291 $514
====== ====== ===== ====
Accumulated comprehensive income $ 455 $ 665 $ 455 $665
====== ====== ===== ====
5
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended March 31,
(In thousands)
2005 2004
Cash flows from operating activities:
Net earnings for the period $ 1,528 $ 1,462
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net 49 209
Amortization of deferred loan origination fees (44) (108)
Depreciation and amortization 123 118
Amortization of expense related to stock benefit plans 118 308
Provision for losses on loans 149 81
Gain on sale of investment securities - (10)
Gain on sale of office premises - (58)
Federal Home Loan Bank stock dividends (36) (32)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (185) 136
Prepaid expenses and other assets 450 257
Accrued interest payable 419 341
Other liabilities 80 (225)
Federal income taxes
Current (68) (264)
Deferred 180 129
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Net cash provided by operating activities 2,763 2,344
Cash flows used in investing activities:
Proceeds of maturities of certificates of deposit 106 -
Proceeds from maturity of investment securities 5,301 7,710
Proceeds from sale of investment securities - 500
Purchase of investment securities (2,304) (6,611)
Principal repayments on mortgage-backed securities 2,687 4,094
Purchase of mortgage-backed securities (1,349) (3,061)
Loan principal repayments 25,117 29,303
Loan disbursements (36,787) (41,248)
Proceeds from sale of office premises - 58
Purchase of bank owned life insurance (3,205) -
Purchase of office premises and equipment (160) (140)
-------- --------
Net cash used in investing activities (10,594) (9,395)
Cash flows provided by financing activities:
Net increase in deposit accounts 3,071 2,150
Proceeds from Federal Home Loan Bank advances 15,100 16,881
Repayment of Federal Home Loan Bank advances (9,742) (10,122)
Advances by borrowers for taxes and insurance (69) (74)
Purchase of treasury stock - (134)
Proceeds from exercise of stock options 429 39
Dividends paid and declared on common stock (771) (699)
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Net cash provided by financing activities 8,018 8,041
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Net increase in cash and cash equivalents 187 990
Cash and cash equivalents at beginning of period 7,385 7,610
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Cash and cash equivalents at end of period $ 7,572 $ 8,600
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7
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
For the nine months ended December 31,
(In thousands)
2005 2004
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 415 $ 640
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Interest on deposits and borrowings $ 2,103 $ 1,930
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Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ 78 $ (8)
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Transfer from loans to real estate acquired through foreclosure $ - $ 97
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7
ASB Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine- and three-month periods ended March 31, 2005 and 2004
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements were prepared
in accordance with the instructions for Form 10-Q 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, 2004. 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 nine- and three-month periods
ended March 31, 2005, are not necessarily indicative of the results which
may be expected for the entire fiscal year.
2. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include all of the
accounts of the Corporation, American Savings Bank, fsb ("American") and
American's wholly-owned subsidiaries, ASB Community Development Corp. and
A.S.L. Services, Inc. All significant intercompany items have been
eliminated.
3. Critical Accounting Policies
----------------------------
Certain of the Corporation's accounting policies are important to the
portrayal of the Corporation's financial condition, since they require
management to make difficult, complex or subjective judgments, some of which
may relate to matters that are inherently uncertain. Estimates associated
with these policies are susceptible to material changes as a result of
changes in facts and circumstances. Facts and circumstances which could
affect these judgments include, without limitation, changes in interest
rates, changes in the performance of the economy or changes in the financial
condition of borrowers. Management believes that its critical accounting
policy focuses primarily on determining the allowance for loan losses. This
critical accounting policy is discussed in detail in the Annual Report to
Shareholders for the year ended June 30, 2004 (incorporated by reference
into the Corporation's Form 10-KSB filing) in Note A of the Notes to
Consolidated Financial Statements under "Allowance for Loan Losses." If
management were to underestimate the allowance for loan losses, earnings
could be reduced in the future as a result of greater than expected net loan
losses. Overestimation of the required allowance could result in future
increases in income, as loan loss recoveries increase or provisions for
losses on loans decrease.
8
ASB Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine- and three-month periods ended March 31, 2005 and 2004
4. Earnings Per Share
------------------
Basic earnings per common share is computed based upon the weighted-average
number of common shares outstanding during the period. 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 nine months ended For the three months ended
March 31, March 31,
2005 2004 2005 2004
Weighted-average common shares
outstanding (basic) 1,699,019 1,663,885 1,715,458 1,670,931
Dilutive effect of assumed exercise
of stock options 6,526 46,720 5,869 46,720
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 1,705,545 1,710,605 1,721,326 1,717,651
========= ========= ========= =========
5. Stock Option Plan
-----------------
During fiscal 1996 the Board of Directors and shareholders adopted the ASB
Financial Corp. 1995 Stock Option and Incentive Plan (the "Plan") that
provided for the issuance of 225,423 shares, as adjusted, of authorized but
unissued common stock at fair value on the date of grant. In fiscal 1996,
the Corporation granted 197,521 options which currently have an adjusted
exercise price per share of $7.64. The number of options granted and the
exercise price have been adjusted to give effect to the return of capital
and special dividend distributions paid by the Corporation.
The Corporation accounts for the Plan in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," which contains a fair value-based
method for valuing stock-based compensation that entities may use, which
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, SFAS No. 123 permits entities to
continue to account for stock options and similar equity instruments under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Entities that continue to account for stock options
using APB Opinion No. 25 are required to make pro forma disclosures of net
earnings and earnings per share, as if the fair value-based method of
accounting defined in SFAS No. 123 had been applied.
9
ASB Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine- and three-month periods ended March 31, 2005 and 2004
5. Stock Option Plan (continued)
-----------------
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for the Plan. Accordingly, no compensation cost has been
recognized for the Plan. Had compensation cost for the Plan been determined
based on the fair value at the grant dates for awards under the Plan
consistent with the accounting method utilized in SFAS No. 123, the
Corporation's net earnings and earnings per share for the nine- and three-
month periods ended March 31, 2005 and 2004, would have been reported as the
pro forma amounts indicated below:
Nine months ended Three months ended
March 31, March,
2005 2004 2005 2004
Net earnings (In thousands) As reported $1,528 $1,462 $507 $450
Stock-based compensation, net of tax (13) (17) (4) (6)
------ ------ ---- ----
Pro-forma $1,515 $1,445 $503 $444
====== ====== ==== ====
Earnings per share
Basic As reported $ .90 $ .88 $.30 $.27
Stock-based compensation, net of tax (.01) (.01) (.01) -
------ ------ ---- ----
Pro-forma $ .89 $ .87 $.29 $.27
====== ====== ==== ====
Diluted As reported $ .90 $ .85 $.30 $.26
Stock-based compensation, net of tax (.01) (.01) (.01) -
------ ------ ---- ----
Pro-forma $ .89 $ .84 $.29 $.26
====== ====== ==== ====
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
assumptions used for grants during fiscal 2004 and 2003, respectively:
dividend yields of 2.3% and 2.9%, respectively; expected volatility of 20%
for both years; risk-free interest rates of 4.3% and 3.4%, respectively; and
an expected life of ten years for all grants.
A summary of the status of the Plan as of March 31, 2005 and June 30, 2004
and 2003, and changes during the periods ending on those dates is presented
below:
Nine months ended Year ended
March 31, June 30,
2005 2004 2003
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of period 78,128 $10.15 77,694 $ 8.89 212,915 $ 7.69
Granted - - 6,000 26.00 9,712 16.50
Exercised (55,138) 7.77 (5,566) 9.57 (144,933) 7.64
------- ------ ------ ------ -------- ------
Outstanding at end of period 22,990 $15.87 78,128 $10.15 77,694 $ 8.89
======= ====== ====== ====== ======== ======
Options exercisable at period-end 9,620 $11.87 59,616 $ 7.87 61,982 $ 7.71
======= ====== ====== ====== ======== ======
Weighted-average fair value of
options granted during the period $ - $11.41 $ 5.28
====== ====== ======
10
ASB Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine- and three-month periods ended March 31, 2005 and 2004
5. Stock Option Plan (continued)
-----------------
The following information applies to options outstanding at March 31, 2005:
Number outstanding 9,220
Exercise price $8.75
Number outstanding 13,770
Range of exercise prices $16.50-$26.00
Weighted-average exercise price $15.87
Weighted-average remaining contractual life 7.8 years
6. Effects of Recent Accounting Pronouncements
-------------------------------------------
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued a revision to Statement of Financial Accounting Standards ("SFAS")
No. 123 which establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services,
primarily on accounting for transactions in which an entity obtains employee
services in share-based transactions. SFAS 123R, "Share-Based Payment,"
requires a public entity to measure the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair
value of the award, with limited exceptions. That cost will be recognized
over the period during which an employee is required to provide services in
exchange for the award - the requisite service period. No compensation cost
is recognized for equity instruments for which employees do not render the
requisite service. Employee share purchase plans will not result in
recognition of compensation cost if certain conditions are met.
Initially, the cost of employee services received in exchange for an award
of liability instruments will be measured based on current fair value; the
fair value of that award will be remeasured subsequently at each reporting
date through the settlement date. Changes in fair value during the requisite
service period will be recognized as compensation cost over that period. The
grant-date fair value of employee share options and similar instruments will
be estimated using option-pricing models adjusted for the unique
characteristics of those instruments (unless observable market prices for
the same or similar instruments are available). If an equity award is
modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award immediately before
the modification.
Excess tax benefits, as defined by SFAS 123R, will be recognized as an
addition to additional paid in capital. Cash retained as a result of those
excess tax benefits will be presented in the statement of cash flows as
financing cash inflows. The write-off of deferred tax assets relating to
unrealized tax benefits associated with recognized compensation cost will be
recognized as income tax expense unless there are excess tax benefits from
previous awards remaining in additional paid in capital to which it can be
offset.
Compensation cost is required to be recognized in beginning of the first
annual period that begins after December 15, 2005, or July 1, 2006 as to the
Corporation. Management believes the effect of SFAS No. 123 on interim
operations will approximate the amounts disclosed in the stock option plan
pro-forma disclosures in Note 5 above.
11
ASB Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
--------------------------
Certain statements contained in this report that are not historical facts
are forward-looking statements that are subject to certain risks and
uncertainties. When used herein, the terms "anticipates," "plans,"
"expects," "believes," and similar expressions as they relate to ASB or its
management are intended to identify such forward looking statements. ASB's
actual results, performance or achievements may materially differ from those
expressed or implied in the forward-looking statements. Risks and
uncertainties that could cause or contribute to such material differences
include, but are not limited to, general economic conditions, interest rate
environment, competitive conditions in the financial services industry,
changes in law, governmental policies and regulations, and rapidly changing
technology affecting financial services.
Discussion of Financial Condition Changes from June 30, 2004 to
---------------------------------------------------------------
March 31, 2005
--------------
At March 31, 2005, the Corporation's assets totaled $176.6 million, an
increase of $10.2 million, or 6.2%, over total assets at June 30, 2004.
Cash and cash equivalents increased by $187,000, or 2.5%, from June 30, 2004
levels, to a total of $7.6 million at March 31, 2005. Investment securities
and certificates of deposit totaled $9.5 million at March 31, 2005, a
decrease of $3.1 million, or 24.8%, from June 30, 2004 levels. Maturities
and discount accretion related to investment securities totaling
approximately $5.4 million, were partially offset by purchases of $2.3
million. Purchases of investment securities consisted primarily of fixed-
rate medium-term callable U.S. Government agency obligations. Mortgage-
backed securities totaled $10.4 million at March 31, 2005, a decrease of
$1.3 million, or 11.4%, from the total at June 30, 2004, due primarily to
purchases totaling $1.3 million, which were more than offset by principal
repayments of $2.7 million, a pre-tax increase in unrealized gains totaling
$59,000 and premium amortization of $61,000.
Loans receivable increased by $11.7 million, or 9.0%, during the nine-month
period ended March 31, 2005, to a total of $141.5 million. Loan
disbursements amounted to $36.8 million for the nine months ended March 31,
2005, and were partially offset by principal repayments of $25.1 million.
During the nine months ended March 31, 2005, loans originated consisted of
$16.3 million of loans secured by one- to four-family residential real
estate, $7.7 million of loans secured by nonresidential real estate, $9.3
million of commercial loans and $3.5 million of consumer loans.
The allowance for loan losses increased by $75,000, or 7.3%, during the
nine-month period ended March 31, 2005, to a total of $1.1 million.
Nonperforming and nonaccrual loans totaled $1.0 million at March 31, 2005,
unchanged from the balance at June 30, 2004. The allowance for loan losses
represented 110.0% and 99.9% of nonperforming loans at March 31, 2005 and
June 30, 2004, respectively. At March 31, 2005, nonperforming loans
consisted of $800,000 in one- to four-family residential real estate loans
and $200,000 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 March 31, 2005, was adequate based upon the
available facts and circumstances, there can be no assurance that additions
to the allowance will not be necessary in future periods, which could
adversely affect the Corporation's results of operations.
Deposits totaled $139.8 million at March 31, 2005, an increase of $3.1
million, or 2.2%, from June 30, 2004 levels. The increase in deposits was
due primarily to growth in market share in the communities served by
American.
12
ASB Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from June 30, 2004 to
---------------------------------------------------------------
March 31, 2005 (continued)
--------------
Federal Home Loan Bank advances increased by $5.4 million, or 49.2%, during
the nine-month period ended March 31, 2005. New borrowings amounted to $15.1
million for the six months ended March 31, 2005, and were partially offset
by repayments of $9.7 million. The proceeds from the advances were primarily
used to fund new loan originations.
Shareholders' equity totaled $18.8 million at March 31, 2005, an increase of
$1.4 million, or 7.9%, from the June 30, 2004 level. The increase was due to
net earnings of $1.5 million, $429,000 in proceeds from the exercise of
stock options, $118,000 from the amortization of stock benefit plans and a
$78,000 net increase in unrealized gains on securities, which were partially
offset by dividends on common shares totaling $771,000. Dividends totaled
$.15 per share for the nine months ended March 31, 2005.
American is required to meet minimum regulatory capital requirements
promulgated by the Office of Thrift Supervision ("OTS"). At March 31, 2005,
American's regulatory capital exceeded the minimum capital requirements.
Comparison of Operating Results for the Nine-Month Periods Ended
----------------------------------------------------------------
March 31, 2005 and 2004
-----------------------
General
-------
Net earnings totaled $1.5 million for the nine months ended March 31, 2005,
essentially unchanged from the same period in 2004. Increases of $145,000 in
net interest income and $51,000 in other income and a decrease of $5,000 in
general, administrative and other expense were partially offset by a $68,000
increase in the provision for losses on loans and an increase of $67,000 in
the provision for federal income taxes.
Net Interest Income
-------------------
Interest income on loans increased by $429,000, or 7.1%, for the nine months
ended March 31, 2005, compared to the 2004 period. This increase was due
primarily to a $14.7 million, or 12.0%, increase in the average portfolio
balance outstanding period to period, which was partially offset by a 27
basis point decrease in the weighted-average yield, to 6.27% for the 2005
nine-month period. Interest income on investment securities, mortgage-backed
securities and interest-bearing deposits decreased by $33,000, or 5.0%, due
primarily to a 30 basis point decrease in the weighted-average yield, to
2.8% for the 2005 period and a $1.3 million, or 4.5%, decrease in the
average balance of the related earning assets outstanding period to period.
Interest expense on deposits increased by $43,000, or 2.0%, for the nine
months ended March 31, 2005, compared to the same period in 2004. This
increase was due primarily to a $6.1 million, or 4.7%, increase in the
average balance of deposits outstanding period to period and a 5 basis point
increase in the weighted-average cost of deposits, to 2.17% for the nine
months ended March 31, 2005. Interest expense on borrowings increased by
$208,000, or 196.2%, due to a 116 basis point increase in the average cost
of borrowings during the period and a $6.3 million, or 82.6%, increase in
the average balance outstanding.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $145,000, or 3.3%, to a total of
$4.6 million for the nine months ended March 31, 2005. The interest rate
spread decreased to 3.44% for the nine months ended March 31, 2005, from
3.72% for the 2004 period, while the net interest margin decreased to 3.64%
in the 2005 period, compared to 3.89% in the 2004 period.
13
ASB Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended
----------------------------------------------------------------
March 31, 2005 and 2004 (continued)
-----------------------
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 $149,000 during the nine months ended
March 31, 2005, an increase of $68,000, or 84.0%, from the comparable nine-
month period in 2004. The increase in the provision during the 2005 period
was primarily due to an increase in the balance of commercial loans
outstanding with a corresponding adjustment of the provision for losses on
loans to reflect increased risk associated with commercial loans. There can
be no assurance that the loan loss allowance will be adequate to absorb
losses on known nonperforming loans or that the allowance will be adequate
to cover losses on nonperforming assets in the future, which could adversely
affect the Corporation's results of operations.
Other Income
------------
Other income totaled $566,000 for the nine months ended March 31, 2005, a
increase of $51,000, or 9.9%, from the same period in 2004. The increase was
due to a $119,000, or 26.6%, increase in other operating income, primarily
derived from income received from bank owned life insurance, which was
partially offset by the absence of $58,000 in gain on sale of office
premises and $10,000 in gain on sale of investment securities.
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense totaled $2.9 million for the nine
months ended March 31, 2005, a decrease of $5,000, or .2%, over the same
period in 2004. This decrease was comprised of decreases of $81,000, or
11.3%, in other operating expense and $5,000 or 3.9%, in franchise tax
expense, which were partially offset by increases of $53,000, or 3.4%, in
employee compensation and benefits and $21,000, or 6.5%, in data processing
costs. The increase in employee compensation and benefits was due primarily
to normal merit increases and incentives for employees. The increase in data
processing was due primarily to rising vendor costs. The decrease in other
operating expenses was due to decreases in legal, accounting and compliance
costs.
Federal Income Taxes
--------------------
The provision for federal income taxes totaled $568,000 for the nine months
ended March 31, 2005, an increase of $67,000, or 13.4%, compared to the same
period in 2004. This increase was due to an increase in earnings before
taxes of $133,000, or 6.8%, which was partially offset by the effects of New
Markets Tax Credits which were awarded to ASB Community Development Corp. in
fiscal 2004. The effective tax rates were 27.1% and 25.5% for the six-month
periods ended March 31, 2005 and 2004, respectively.
14
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
-----------------------------------------------------------------
March 31, 2005 and 2004
-----------------------
General
-------
Net earnings totaled $507,000 for the three months ended March 31, 2005, an
increase of $57,000, or 12.7%, from the $450,000 in earnings reported for
the same quarter in 2004. Increases of $58,000 in net interest income and
$92,000 in other income were partially offset by increases of $1,000 in
provision for losses on loans, $26,000 in general, administrative and other
expenses and $66,000 in the provision for federal income taxes.
Net Interest Income
-------------------
Interest income on loans increased by $170,000, or 8.3%, for the three
months ended March 31, 2005, compared to the 2004 period. This increase was
due primarily to a $14.2 million, or 11.3%, increase in the average
portfolio balance outstanding period to period, which was slightly offset by
a 3 basis point decrease in the weighted-average yield, to 6.48% for the
2005 three-month period. Interest income on investment securities, mortgage-
backed securities and interest-bearing deposits decreased by $47,000, or
19.6%, due primarily to a $204,000, or .7%, decrease in the average balance
of the related assets outstanding period to period and a 62 basis point
decrease in the weighted-average yield, to 2.53% for the 2005 period.
Interest expense on deposits increased by $17,000, or 2.3%, for the three
months ended March 31, 2005, compared to the same period in 2004. This
increase was due primarily to a $6.9 million, or 5.2%, increase in the
average balance of deposits outstanding period to period. The weighted
average cost of deposits was 2.15%, a 6 basis point decrease from 2004.
Interest expense on borrowings increased by $48,000, or 64.9%, due to a 41
basis point increase in the average cost of borrowings during the period and
a $4.7 million, or 43.6%, increase in the average balance outstanding.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $58,000, or 3.9%, to a total of
$1.5 million for the three months ended March 31, 2005. The interest rate
spread decreased to 3.53% for the three months ended March 31, 2005, from
3.61% for the 2004 period, while the net interest margin decreased to 3.73%
in the 2005 period, compared to 3.80% in the 2004 period.
Provision for Losses on Loans
-----------------------------
The Corporation recorded a provision for losses on loans totaling $32,000
during the three months ended March 31, 2005, an increase of $1,000, or
3.2%, from the comparable three-month period in 2004. The increase in the
provision during the 2005 period was primarily influenced by an increase in
the balance of commercial loans outstanding. There can be no assurance that
the loan loss allowance will be adequate to absorb losses on known
nonperforming loans or that the allowance will be adequate to cover losses
on nonperforming assets in the future, which could adversely affect the
Corporation's results of operations.
Other Income
------------
Other income totaled $226,000 for the three months ended March 31, 2005, a
increase of $92,000, or 68.7%, from the same period in 2004. The increase
was due primarily to earnings from bank owned life insurance.
15
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
-----------------------------------------------------------------
March 31, 2005 and 2004 (continued)
-----------------------
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense totaled $1.0 million for the three
months ended March 31, 2005, an increase of $26,000, or 2.6%, over the same
period in 2004. This increase was comprised of increases of $2,000, or 1.0%,
in other operating expense, $9,000, or 16.1%, in occupancy and equipment,
$8,000, or 1.4%, in employee compensation and benefits and $9,000, or 8.2%
in data processing costs, which were partially offset by a decrease of
$2,000, or 4.5% in franchise tax expense. The increase in employee
compensation and benefits was due primarily to normal merit increases and
incentives for employees. The increase in data processing was due primarily
to rising vendor costs.
Federal Income Taxes
--------------------
The provision for federal income taxes totaled $221,000 for the three months
ended March 31, 2005, an increase of $66,000, or 42.6%, compared to the same
period in 2004. This increase was due to an increase in earnings before
taxes of $123,000, or 20.3%, which was partially offset by the effects of
New Markets Tax Credits which were awarded to ASB Community Development
Corp. in fiscal 2004. The effective tax rates were 30.4% and 25.6% for the
three-month periods ended March 31, 2005 and 2004, respectively. The
increase in the current quarter tax rate is generally reflective of the
increase in the effective tax rate as a result of earnings growth in fiscal
2005.
Subsequent Event
----------------
The Corporation's third-party data processor is Intrieve, Incorporated
("Intrieve") of Cincinnati, Ohio. Pursuant to the terms of the original
third-party data processing agreement, the Corporation was required to
purchase non-marketable Intrieve common shares. In 2004, the Corporation
purchased additional shares of Intrieve in a secondary offering. In April,
2005, Intrieve was acquired by Harland Financial Solutions, Inc., a
subsidiary of the John H. Harland Company. In connection with this
transaction the Corporation recognized an approximate $400,000 after-tax
gain.
16
ASB Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There has been no material change in the Corporation's market risk since the
disclosure included under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Asset and Liability
Management" in the Corporation's 2004 Annual Report to Shareholders which
was included as Exhibit 13 to the Corporation's Form 10-KSB for the year
ended June 30, 2004.
ITEM 4: Controls and Procedures
-----------------------
The Corporation's management reviews the systems of internal controls with a
view towards continuous improvement. In this regard, management became aware
that commercial loan set-up was not being reviewed. Management has
implemented corrective action with respect to this matter and is currently
reviewing the set-up of commercial loans on a timely basis. The
Corporation's Chief Executive Officer and Chief Financial Officer evaluated
the effectiveness of our disclosure controls and procedures (as defined
under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file
or submit under the Securities and Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and regulations and are operating in an effective manner.
17
ASB Financial Corp.
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
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
--------
31.1 CEO Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 CFO Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 CEO Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 CFO Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
ASB Financial Corp.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASB FINANCIAL CORP.
Date: May 16, 2005 By: /s/ Robert M. Smith
---------------------- ------------------------
Robert M. Smith
President
Date: May 16, 2005 By: /s/ Michael L. Gampp
---------------------- ------------------------
Michael L. Gampp
Chief Financial Officer