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 December 31, 2004
-----------------
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:
February 11, 2004 - 1,701,920 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)
December 31, June 30,
ASSETS 2004 2004
Cash and due from banks $ 1,145 $ 2,078
Interest-bearing deposits in other financial institutions 4,422 5,307
-------- --------
Cash and cash equivalents 5,567 7,385
Certificates of deposit in other financial institutions 71 178
Investment securities available for sale - at market 10,935 12,487
Mortgage-backed securities available for sale - at market 11,287 11,768
Loans receivable - net 137,916 129,821
Office premises and equipment - at depreciated cost 1,887 1,814
Federal Home Loan Bank stock - at cost 1,128 1,104
Accrued interest receivable on loans 305 336
Accrued interest receivable on mortgage-backed securities 45 50
Accrued interest receivable on investments and
interest-bearing deposits 107 130
Prepaid expenses and other assets 282 830
Bank-owned life insurance 3,137 -
Prepaid federal income taxes 169 183
Deferred federal income taxes 125 285
-------- --------
Total assets $172,961 $166,371
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $138,035 $136,761
Advances from the Federal Home Loan Bank 14,952 10,899
Advances by borrowers for taxes and insurance 185 180
Accrued interest payable 44 52
Other liabilities 1,084 1,055
-------- --------
Total liabilities 154,300 148,947
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; 1,952,037 and 1,936,180 shares
issued at December 31, 2004 and June 30, 2004,
respectively - -
Additional paid-in capital 10,540 10,165
Retained earnings, restricted 10,353 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 671 377
Less 250,117 shares of treasury stock at December 31, 2004
and June 30 2004, respectively - at cost (2,840) (2,840)
Total shareholders' equity 18,661 17,424
-------- --------
Total liabilities and shareholders' equity $172,961 $166,371
======== ========
3
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
For the six months For the three months
ended December 31, ended December 31,
2004 2003 2004 2003
Interest income
Loans $4,278 $3,992 $2,184 $2,000
Mortgage-backed securities 208 79 118 47
Investment securities 233 346 110 175
------ ------ ------ ------
Total interest income 4,719 4,417 2,412 2,222
Interest expense
Deposits 1,456 1,431 737 705
Borrowings 193 33 103 18
------ ------ ------ ------
Total interest expense 1,649 1,464 840 723
------ ------ ------ ------
Net interest income 3,070 2,953 1,572 1,499
Provision for losses on loans 117 50 96 28
------ ------ ------ ------
Net interest income after
provision for losses on loans 2,953 2,903 1,476 1,471
Other income
Gain on sale of investment securities - 10 - 10
Gain on sale of office premises - 58 - -
Other operating 340 313 162 160
------ ------ ------ ------
Total other income 340 381 162 170
General, administrative and other expense
Employee compensation and benefits 1,046 1,001 516 493
Occupancy and equipment 115 116 58 63
Franchise taxes 82 85 41 43
Data processing 224 212 105 103
Other operating 429 512 212 279
------ ------ ------ ------
Total general, administrative and
other expense 1,896 1,926 932 981
------ ------ ------ ------
Earnings before income taxes 1,397 1,358 706 660
Federal income taxes
Current 365 217 88 149
Deferred 11 129 98 -
------ ------ ------ ------
Total federal income taxes 376 346 186 149
------ ------ ------ ------
NET EARNINGS $1,021 $1,012 $ 520 $ 511
====== ====== ====== ======
EARNINGS PER SHARE
Basic $ .60 $ .61 $ .31 $ .31
====== ====== ====== ======
Diluted $ .60 $ .59 $ .30 $ .30
====== ====== ====== ======
4
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
For the six months For the three months
ended December 31, ended December 31,
2004 2003 2004 2003
Net earnings $1,021 $1,012 $520 $511
Other comprehensive income (loss),
net of taxes (benefits):
Unrealized holding gains (losses) on
securities during the period, net of
taxes (benefits) of $151, $(33), $26
and $36 during the respective periods 294 (65) 51 77
Reclassification adjustment for realized
gains included in earnings, net of
taxes of $3 during both the six-month
and three-month periods ended
December 31, 2003 - (7) - (7)
------ ------ ---- ----
Comprehensive income $1,315 $ 940 $571 $581
====== ====== ==== ====
Accumulated comprehensive income $ 671 $ 601 $671 $601
====== ====== ==== ====
5
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31,
(In thousands)
2004 2003
Cash flows from operating activities:
Net earnings for the period $ 1,021 $ 1,012
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net 44 161
Amortization of deferred loan origination fees (31) (95)
Depreciation and amortization 81 74
Amortization of expense related to stock benefit plans 118 308
Provision for losses on loans 117 50
Federal Home Loan Bank stock dividends (24) (21)
Gain on sale of investment securities - (10)
Gain on sale of office premises - (58)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 59 63
Prepaid expenses and other assets 548 348
Accrued interest payable (8) (37)
Other liabilities 29 (157)
Federal income taxes
Current 11 (289)
Deferred 11 129
-------- --------
Net cash provided by operating activities 1,976 1,478
Cash flows provided by (used in) investing activities:
Purchase of investment securities (1,240) (4,988)
Proceeds from maturities of certificates of deposit 107 -
Proceeds from sale of office premises - 58
Proceeds from maturity of investment securities 3,000 4,010
Proceeds from sale of investment securities - 500
Purchase of mortgage-backed securities (1,349) (2,783)
Principal repayments on mortgage-backed securities 1,952 3,318
Loan principal repayments 18,252 22,001
Loan disbursements (26,361) (32,145)
Purchase of bank-owned life insurance (3,137) -
Purchase of office equipment (154) (95)
-------- --------
Net cash used in investing activities (8,930) (10,124)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 1,274 1,702
Proceeds from Federal Home Loan Bank advances 7,900 9,931
Repayment of Federal Home Loan Bank advances (3,847) (4,700)
Advances by borrowers for taxes and insurance 5 8
Proceeds from issuance of shares under stock option plan 320 -
Purchase of treasury stock - (134)
Dividends paid on common stock (516) (465)
-------- --------
Net cash provided by financing activities 5,136 6,342
-------- --------
Net decrease in cash and cash equivalents (1,818) (2,304)
Cash and cash equivalents at beginning of period 7,385 7,610
-------- --------
Cash and cash equivalents at end of period $ 5,567 $ 5,306
======== ========
6
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended December 31,
(In thousands)
2004 2003
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 354 $ 559
======== ========
Interest on deposits and borrowings $ 1,657 $ 1,501
======== ========
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ 294 $ (72)
======== ========
7
ASB Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six- and three-month periods ended December 31, 2004 and 2003
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 six- and three-month periods
ended December 31, 2004, 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 six- and three-month periods ended December 31, 2004 and 2003
4. Earnings Per Share
------------------
Basic earnings per common share is computed based upon the weighted-average
number of common shares outstanding during the period less shares in the ASB
Financial Corp. Employee Stock Ownership Plan ("ESOP") that are unallocated
and not committed to be released. At December 31, 2004, all ESOP shares
were allocated. At December 31, 2003, basic earnings per share included the
effects of 8,128 unallocated ESOP shares. Diluted earnings per common share
include the dilutive effect of all additional potential common shares
issuable under the Corporation's stock option plan. The computations are as
follows:
For the six months ended For the three months ended
December 31, December 31,
2004 2003 2004 2003
Weighted-average common shares
outstanding (basic) 1,690,979 1,659,994 1,696,883 1,659,994
Dilutive effect of assumed exercise
of stock options 16,240 49,576 15,467 49,576
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 1,707,219 1,709,570 1,712,350 1,709,570
========= ========= ========= =========
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 shares of 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 six- and three-month periods ended December 31, 2004 and 2003
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 six- and three-
month periods ended December 31, 2004 and 2003, would have been reported as
the pro forma amounts indicated below:
Six months ended Three months ended
December 31, December,
2004 2003 2004 2003
Net earnings (In thousands) As reported $1,021 $1,012 $ 520 $ 511
Stock-based compensation, net of tax (14) (14) (8) (8)
------ ------ ----- -----
Pro-forma $1,007 $ 998 $ 512 $ 503
====== ====== ===== =====
Earnings per share
Basic As reported $ .60 $ .61 $ .31 $ .31
Stock-based compensation, net of tax - (.01) (.01) (.01)
------ ------ ----- -----
Pro-forma $ .60 $ .60 $ .30 $ .30
====== ====== ===== =====
Diluted As reported $ .60 $ .59 $ .30 $ .30
Stock-based compensation, net of tax (.01) (.01) - (.01)
------ ------ ----- -----
Pro-forma $ .59 $ .58 $ .30 $ .29
====== ====== ===== =====
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 Corporation's Plan as of December 31, 2004
and June 30, 2004 and 2003, and changes during the periods ending on those
dates is presented below:
Six months ended Year ended
December 31, June 30,
2004 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 (40,857) 7.80 (5,566) 9.57 (144,933) 7.64
------- ------ ------ ------ -------- ------
Outstanding at end of period 37,271 $12.73 78,128 $10.15 77,694 $ 8.89
======= ====== ====== ====== ======== ======
Options exercisable at period-end 23,901 $ 9.36 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 six- and three-month periods ended December 31, 2004 and 2003
5. Stock Option Plan (continued)
-----------------------------
The following information applies to options outstanding at December 31,
2004:
Number outstanding 23,501
Range of exercise prices $7.64 - $8.75
Number outstanding 13,770
Range of exercise prices $16.50 - $26.00
Weighted-average exercise price $12.73
Weighted-average remaining contractual life 6.7 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. This Statement 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
interim or annual period that begins after June 15, 2005, or July 1, 2005 as
to the Corporation. Management believes the effect on operations will be as
disclosed in the stock option plan pro-forma disclosures.
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 December 31, 2004
--------------------
At December 31, 2004, the Corporation's assets totaled $173.0 million, an
increase of $6.6 million, or 4.0%, over total assets at June 30, 2004.
Cash and cash equivalents decreased by $1.8 million, or 24.6%, from June 30,
2004 levels, to a total of $5.6 million at December 31, 2004. Investment
securities and certificates of deposit totaled $11.0 million at December 31,
2004, a decrease of $1.7 million, or 13.1%, from June 30, 2004 levels.
Maturities and discount accretion related to investment securities totaling
approximately $2.9 million, which were partially offset by purchases of $1.2
million. Purchases of investment securities consisted primarily of fixed-
rate medium-term callable U.S. Government agency obligations. Mortgage-
backed securities totaled $11.3 million at December 31, 2004, a decrease of
$481,000, or 4.1%, from the total at June 30, 2004, due primarily to
purchases totaling $1.3 million, which were more than offset by principal
repayments of $2.0 million, a pre-tax increase in unrealized gains totaling
$167,000 and premium amortization of $45,000.
Loans receivable increased by $8.1 million, or 6.2%, during the six-month
period ended December 31, 2004, to a total of $138.0 million. Loan
disbursements amounted to $26.4 million for the six months ended December
31, 2004, and were partially offset by principal repayments of $18.3
million. During the six months ended December 31, 2004, loans originated
consisted of $11.9 million of loans secured by one- to four-family
residential real estate, $5.8 million of loans secured by nonresidential
real estate, $6.2 million of commercial loans and $2.5 million of consumer
loans.
The allowance for loan losses increased by $100,000, or 9.1%, during the six
month period ended December 31, 2004, to a total of $1.2 million.
Nonperforming and nonaccrual loans totaled $814,000 at December 31, 2004, a
decrease of $186,000, or 19.0% from the balance at June 30, 2004. The
allowance for loan losses represented 149.2% and 99.9% of nonperforming
loans at December 31, 2004 and June 30, 2004, respectively. At December 31,
2004, nonperforming loans consisted of $178,000 in one- to four-family
residential real estate loans and $636,000 in nonresidential real estate,
consumer and other loans. Management believes such loans are adequately
collateralized and does not expect to incur any losses on such loans.
Although management believes that its allowance for loan losses at December
31, 2004, was adequate based upon the available facts and circumstances,
there can be no assurance that additions to such allowance will not be
necessary in future periods, which could adversely affect the Corporation's
results of operations.
Deposits totaled $138.0 million at December 31, 2004, an increase of $1.3
million, or .9%, from June 30, 2004 levels. The increase in deposits was
due primarily to market growth.
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 December 31, 2004 (continued)
--------------------------------
Federal Home Loan Bank advances increased by $4.1 million, or 37.2%, during
the six-month period ended December 31, 2004. New borrowings amounted to
$7.9 million for the six months ended December 31, 2004, and were partially
offset by repayments of $3.8 million. The proceeds from the advances were
primarily used to fund new loan originations.
Shareholders' equity totaled $18.7 million at December 31, 2004, an increase
of $1.2 million, or 7.1%, from the June 30, 2004 level. The increase was
due to net earnings of $1.0 million, $320,000 in proceeds from the exercise
of stock options and a $294,000 net increase in unrealized gains on
securities, which were partially offset by dividends on common shares
totaling $516,000. Dividends totaled $.30 per share for the six months
ended December 31, 2004.
American is required to meet minimum regulatory capital requirements
promulgated by the Office of Thrift Supervision ("OTS"). At December 31,
2004, American's regulatory capital exceeded the minimum capital
requirements.
Comparison of Operating Results for the Six-Month Periods
---------------------------------------------------------
Ended December 31, 2004 and 2003
--------------------------------
General
-------
Net earnings totaled $1.0 million for the six months ended December 31,
2004, essentially unchanged from the same period in 2003. An increase of
$117,000 in net interest income and a decrease of $30,000 in general,
administrative and other expense were partially offset by a $67,000 increase
in the provision for losses on loans, an increase of $30,000 in the
provision for federal income taxes and a decrease of $41,000 in other
income.
Net Interest Income
-------------------
Interest income on loans increased by $286,000, or 7.2%, for the six months
ended December 31, 2004, compared to the 2003 period. This increase was due
primarily to a $14.9 million, or 12.3%, increase in the average portfolio
balance outstanding period to period, which was partially offset by a 30
basis point decrease in the weighted-average yield, to 6.28% for the 2004
six-month period. Interest income on investment securities, mortgage-backed
securities and interest-bearing deposits increased by $16,000, or 3.8%, due
primarily to a 10 basis point increase in the weighted-average yield, to
2.93% for the 2004 period and a $1.9 million, or 6.5%, increase in the
average balance of the related earning assets outstanding period to period.
Interest expense on deposits increased by $25,000, or 1.7%, for the six
months ended December 31, 2004, compared to the same period in 2003. This
increase was due primarily to a $5.8 million, or 4.4%, increase in the
average balance of deposits outstanding period to period, which was
partially offset by a 5 basis point decrease in the weighted-average cost of
deposits, to 2.11% for the six months ended December 31, 2004. Interest
expense on borrowings increased by $160,000, or 484.8%, due to a 183 basis
point increase in the average cost of borrowings during the period and a
$7.1 million, or 120.7%, increase in the average balance outstanding.
13
ASB Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six-Month Periods
---------------------------------------------------------
Ended December 31, 2004 and 2003 (continued)
--------------------------------------------
Net Interest Income (continued)
-------------------------------
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $117,000, or 4.0%, to a total of
$3.1 million for the six months ended December 31, 2004. The interest rate
spread decreased to 3.50% for the six months ended December 31, 2004, from
3.79% for the 2003 period, while the net interest margin decreased to 3.69%
in the 2004 period, compared to 3.95% in the 2003 period.
Provision for Losses on Loans
-----------------------------
American charges a provision for losses on loans to earnings to bring the
total allowance for loan losses to a level considered appropriate by
management based on historical experience, the volume and type of lending
conducted by American, the status of past due principal and interest
payments, general economic conditions, particularly as such conditions
relate to American's market area, and other factors related to the
collectibility of American's loan portfolio. The Corporation recorded a
provision for losses on loans totaling $117,000 during the six months ended
December 31, 2004, an increase of $67,000, or 134.0%, from the comparable
six-month period in 2003. The increase in the provision during the 2004
period was primarily influenced by an increase in the balance of commercial
loans outstanding and an 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 $340,000 for the six months ended December 31, 2004, a
decrease of $41,000, or 10.8%, from the same period in 2003. The decrease
was due to a reductions of $58,000 in gain on sale of office premises and
$10,000 in gain on sale of investment securities, which were partially
offset by a $27,000, or 8.6%, increase in other operating income, primarily
derived from increased ATM transaction fees and other charges.
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense totaled $1.9 million for the six
months ended December 31, 2004, a decrease of $30,000, or 1.6%, over the
same period in 2003. This decrease was comprised of decreases of $83,000,
or 16.2%, in other operating expense and $1,000 or .9%, in occupancy and
equipment, which were partially offset by increases of $45,000, or 4.5%, in
employee compensation and benefits and $12,000, or 5.7%, 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 $376,000 for the six months
ended December 31, 2004, an increase of $30,000, or 8.7%, compared to the
same period in 2003. This increase was due to an increase in earnings
before taxes of $39,000, or 2.9%, which was partially offset by the effects
of New Markets Tax Credits which were awarded to ASB Community Development
Corp. in fiscal 2003. The effective tax rates were 26.9% and 25.5% for the
six-month periods ended December 31, 2004 and 2003, 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 December 31, 2004 and 2003
--------------------------------
General
-------
Net earnings totaled $520,000 for the three months ended December 31, 2004,
an increase of $9,000, or 1.8% from the $511,000 in earnings reported for
the same quarter in 2003. An increase of $73,000 in net interest income and
a decrease of $49,000 in general, administrative and other expense were
partially offset by an increase of $68,000 in provision for losses on loans
and $8,000 in other income and an increase of $37,000 in the provision for
federal income taxes.
Net Interest Income
-------------------
Interest income on loans increased by $184,000, or 9.2%, for the three
months ended December 31, 2004, compared to the 2003 period. This increase
was due primarily to a $14.8 million, or 11.9%, increase in the average
portfolio balance outstanding period to period, which was partially offset
by a 16 basis point decrease in the weighted-average yield, to 6.31% for the
2004 three-month period. Interest income on investment securities,
mortgage-backed securities and interest-bearing deposits increased by
$6,000, or 2.7%, due primarily to a $2.9 million, or 10.3%, increase in the
average balance of the related assets outstanding period to period, which
was offset by a 30 basis point decrease in the weighted-average yield, to
2.9% for the 2004 period.
Interest expense on deposits increased by $32,000, or 4.5%, for the three
months ended December 31, 2004, compared to the same period in 2003. This
increase was due primarily to a $5.9 million, or 4.5%, increase in the
average balance of deposits outstanding period to period. The weighted
average cost of deposits was 2.12% for 2004 and 2003. Interest expense on
borrowings increased by $85,000, or 472.2%, due to a 194 basis point
increase in the average cost of borrowings during the period and a $6.7
million, or 90.9%, increase in the average balance outstanding.
As a result of the foregoing changes in interest income and interest
expense, net interest income increased by $73,000, or 4.9%, to a total of
$1.6 million for the three months ended December 31, 2004. The interest
rate spread decreased to 3.50% for the three months ended December 31, 2004,
from 3.80% for the 2003 period, while the net interest margin decreased to
3.71% in the 2004 period, compared to 3.95% in the 2003 period.
Provision for Losses on Loans
-----------------------------
The Corporation recorded a provision for losses on loans totaling $96,000
during the three months ended December 31, 2004, an increase of $68,000, or
242.9%, from the comparable three-month period in 2003. The increase in
the provision during the 2004 period was primarily influenced by an increase
in the balance of commercial loans outstanding, as well as the deterioration
of a specific commercial credit with an approximate $100,000 principal
balance. 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 $162,000 for the three months ended December 31, 2004,
a decrease of $8,000, or 4.7%, from the same period in 2003. The decrease
was due to a decrease of $10,000 in gain on sale of investment securities,
which was partially offset by a $2,000, or 1.3%, increase in other operating
income, primarily derived from increased ATM transaction fees and other
charges.
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 December 31, 2004 and 2003 (continued)
--------------------------------------------
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense totaled $932,000 for the three
months ended December 31, 2004, a decrease of $49,000, or 5.0%, over the
same period in 2003. This reduction was comprised of decreases of $5,000,
or 7.9%, in occupancy and equipment, $67,000, or 24.0%, in other operating
expense and $2,000, or 4.7%, in franchise tax, which were offset by
increases of $23,000, or 4.7%, in employee compensation and benefits and
$2,000, or 1.9%, 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 reduction in other operating expense was due to
decreases in legal, accounting and compliance costs.
Federal Income Taxes
--------------------
The provision for federal income taxes totaled $186,000 for the three months
ended December 31, 2004, an increase of $37,000, or 2.5%, compared to the
same period in 2003. This increase was due to an increase in earnings
before taxes of $46,000, or 7.0%, which was partially offset by the effects
of New Markets Tax Credits which were awarded to ASB Community Development
Corp. in fiscal 2003. The effective tax rates were 26.3% and 22.6% for the
three-month periods ended December 31, 2004 and 2003, respectively.
Subsequent Event
----------------
The Corporation's third-part data processor is Intrieve of Cincinnati, Ohio.
Pursuant to the terms of the original third-party data processing agreement,
the Corporation was required to purchase Intrieve common shares. In 2004,
the Corporation purchased additional shares in a secondary offering of
Intrieve common stock. On February 1, 2005, Intrieve announced that it had
entered into an agreement to be acquired by John H. Harland Company. The
agreement is subject to shareholder approval. Pursuant to the terms of
transaction, the Corporation will recognize an approximate $400,000 after-
tax gain if the business combination is consummated.
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
-----------------------
Management reviews its control system with respect to results of operations
with a view toward continuous improvement. In this regard, a post-closing
review of interest income for the quarter ended December 31, 2004 revealed
input errors with respect to the set-up of certain commercial loan types.
These input errors were discovered prior to the issuance of this report but
subsequent to closing of the Corporation's books. The Corporation's
external auditors have advised the Audit Committee that the failure to
timely review and approve changes to loan input fields constitutes a
material weakness as defined in the auditing literature. The Corporation
immediately corrected this weakness by instituting a timely review and
approval of data input changes.
The Corporation's Chief Executive Officer and Chief Financial Officer have
evaluated the Corporation's disclosure controls and procedures (as defined
under 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
that evaluation and the corrective actions discussed above, the Chief
Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures are effective. There were
no changes in the Corporation's internal controls which materially affected,
or are reasonably likely to materially affect, the Corporation's internal
controls over financial reporting.
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
---------------------------------------------------
On October 27, 2004, the Corporation held its 2004 Annual
Meeting of Shareholders. The shareholders elected six directors
to terms expiring in 2005 by the following votes:
For Withheld
William J. Burke 1,476,100 5,500
Gerald R. Jenkins 1,461,519 20,081
Christopher H. Lute 1,476,100 5,000
Larry F. Meredith 1,458,969 22,631
Louis M. Schoettle 1,476,000 5,600
Robert M. Smith 1,476,100 5,500
The shareholders also ratified the selection of Grant Thornton
LLP as the Corporation's auditors for the 2005 fiscal year by
the following vote:
For: Against: Abstain:
1,474,088 2,300 5,212
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits
10.1 ASB Financial Corp. Supplemental Employee Retirement
Plan
10.2 Form of Participation Agreement for the ASB Financial
Corp. Supplemental Employee Retirement Plan.
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
31.2 CFO Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
18
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: February 14, 2005 By: /s/ Robert M. Smith
----------------- --------------------------------
Robert M. Smith
President
Date: February 14, 2005 By: /s/ Michael L. Gampp
----------------- --------------------------------
Michael L. Gampp
Chief Financial Officer
19