FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________ Commission File No. 0-25906 ASB FINANCIAL CORP. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio 31-1429488 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 503 Chillicothe Street Portsmouth, Ohio 45662 - ---------------------- ---------- (Address of principal (Zip Code) executive office) Registrant's telephone number, including area code: (614) 354-3177 Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 _____ As of November 8, 1996, the latest practicable date, 1,713,960 shares of the registrant's common stock, without par value, were issued and outstanding. Page 1 of 13 pages INDEX Page ------ PART I - FINANCIAL INFORMATION Consolidated Statements of Financial Condition 3 Consolidated Statements of Operations 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II - OTHER INFORMATION 12 SIGNATURES 13 2 ASB Financial Corp. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except share data) September 30, June 30, ASSETS 1996 1996 ------------- -------- Cash and due from banks $ 963 $ 411 Interest-bearing deposits in other financial institutions 3,504 3,425 --------- --------- Cash and cash equivalents 4,467 3,836 Certificates of deposit in other financial institutions 6,205 6,702 Investment securities available for sale - at market 19,784 19,284 Mortgage-backed securities available for sale - at market 10,283 10,728 Loans receivable - net 69,610 68,455 Office premises and equipment - at depreciated cost 919 940 Real estate acquired through foreclosure - net 663 663 Federal Home Loan Bank stock - at cost 679 667 Accrued interest receivable on loans 94 120 Accrued interest receivable on mortgage-backed securities 94 110 Accrued interest receivable on investments and interest- bearing deposits 475 479 Prepaid expenses and other assets 520 586 Prepaid federal income taxes 212 -- Deferred federal income taxes 293 352 --------- --------- Total assets $ 114,298 $ 112,922 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ 83,903 $ 83,395 Advances from the Federal Home Loan Bank 2,406 2,413 Advances by borrowers for taxes and insurance 93 162 Accrued interest payable 655 115 Other liabilities 1,888 1,219 Accrued federal income taxes -- 5 --------- --------- Total liabilities 88,945 87,309 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; 1,713,960 shares issued and outstanding at September 30, 1996 and June 30, 1996 -- -- Additional paid-in capital 16,496 16,496 Retained earnings 10,824 11,173 Shares acquired by stock benefit plans (2,180) (2,180) Unrealized gain on securities designated as available for sale, net of related tax effects 213 124 --------- --------- Total shareholders' equity 25,353 25,613 --------- --------- Total liabilities and shareholders' equity $ 114,298 $ 112,922 ========= ========= 3 ASB Financial Corp. CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended September 30, (In thousands, except share data) 1996 1995 ------- ------ Interest income Loans $ 1,434 $1,349 Mortgage-backed securities 187 169 Investment securities 348 411 Interest-bearing deposits and other 96 97 ------- ------ Total interest income 2,065 2,026 Interest expense Deposits 1,111 1,056 Borrowings 32 5 ------- ------ Total interest expense 1,143 1,061 ------- ------ Net interest income 922 965 Provision for losses on loans 22 -- ------- ------ Net interest income after provision for losses on loans 900 965 Other income 52 42 General, administrative and other expense Employee compensation and benefits 338 303 Occupancy and equipment 28 29 Federal deposit insurance premiums 599 48 Franchise taxes 70 34 Other operating 184 145 ------- ------ Total general, administrative and other expense 1,219 559 ------- ------ Earnings (loss) before income taxes (credits) (267) 448 Federal income taxes (credits) Current (104) 141 Deferred 13 9 ------- ------ Total federal income taxes (credits) (91) 150 ------- ------ NET EARNINGS (LOSS) $ (176) $ 298 ======= ====== EARNINGS (LOSS) PER SHARE $ (.11) $ .19 ======= ====== 4 ASB Financial Corp. CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended September 30, (In thousands) 1996 1995 -------- -------- Cash flows from operating activities: Net earnings (loss) for the period $ (176) $ 298 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Amortization of discounts and premiums on loans, investments and mortgage-backed securities - net (7) 34 Amortization of deferred loan origination fees (13) (14) Depreciation and amortization 28 20 Provision for losses on loans 22 -- Federal Home Loan Bank stock dividends (12) (11) Increase (decrease) in cash due to changes in: Accrued interest receivable 46 (128) Prepaid expenses and other assets 66 20 Accrued interest payable 540 487 Other liabilities 669 28 Federal income taxes Current (217) 119 Deferred 13 9 ------- ------- Net cash provided by operating activities 959 862 Cash flows provided by (used in) investing activities: Proceeds from maturity of investment securities 1,480 1,333 Purchase of investment securities designated as available for sale (1,850) (996) Purchase of investment securities designated as held to maturity -- (749) Purchase of mortgage-backed securities designated as held to maturity -- (1,280) Principal repayments on mortgage-backed securities 457 585 Loan principal repayments 3,816 3,847 Loan disbursements (4,980) (4,086) Purchase of office premises and equipment (7) (12) Decrease in certificates of deposit in other financial institutions - net 497 1,232 ------- ------- Net cash used in investing activities (587) (126) ------- ------- Net cash provided by operating and investing activities (subtotal carried forward) 372 736 ------- ------- 5 ASB Financial Corp. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the three months ended September 30, (In thousands) 1996 1995 ------ ------ Net cash provided by operating and investing activities (subtotal brought forward) $ 372 $ 736 Cash flows provided by (used in) financing activities: Net increase in deposit accounts 508 1,205 Repayment of Federal Home Loan Bank advances (7) (8) Advances by borrowers for taxes and insurance (69) (67) Dividends paid on common shares (173) (127) ------- ------- Net cash provided by financing activities 259 1,003 Net increase in cash and cash equivalents 631 1,739 Cash and cash equivalents at beginning of period 3,836 5,926 ------- ------- Cash and cash equivalents at end of period $ 4,467 $ 7,665 ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for: Federal income taxes $ 155 $ 30 ======= ======= Interest on deposits and borrowings $ 603 $ 574 ======= ======= Supplemental disclosure of noncash investing activities: Unrealized gain on securities designated as available for sale, net of related tax effects $ 89 $ 300 ======= ======= 6 ASB Financial Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the three months ended September 30, 1996 and 1995 1. Basis of Presentation The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-QSB and, therefore, do not include information or footnotes necessary for a complete presentation of consolidated financial position, results of operations and cash flows in conformity with generally accepted accounting principles. 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 1996 Annual Report to Shareholders for the year ended June 30, 1996. 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 three month period ended September 30, 1996 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 the accounts of the Corporation and American Savings Bank, fsb (the "Savings Bank"). All significant intercompany items have been eliminated. 3. Earnings Per Share Earnings per share for the three months ended September 30, 1996 and 1995 is based upon the weighted-average shares outstanding during the period plus those stock options that are dilutive, less shares in the ASB Financial Corp. Employee Stock Ownership Plan (the "ESOP") that are unallocated and not committed to be released. Weighted-average common shares deemed outstanding totaled 1,602,200 and 1,587,000 for the three months ended September 30, 1996 and 1995, respectively. There is no dilutive effect associated with the Corporation's stock option plan. 4. Effects of Recent Accounting Pronouncements In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", establishing financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 encourages all entities to adopt a new method of accounting to measure compensation cost of all employee stock compensation plans based on the estimated fair value of the award at the date it is granted. Companies are, however, allowed to continue to measure compensation cost for those plans using the intrinsic value based method of accounting, which generally does not result in compensation expense recognition for most plans. Companies that elect to remain with the existing accounting are required to disclose in a footnote to the financial statements pro forma net earnings and, if presented, earnings per share, as if SFAS No. 123 had been adopted. The accounting requirements of SFAS No. 123 are effective for transactions entered into during fiscal years 7 ASB Financial Corp. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the three months ended September 30, 1996 and 1995 4. Effects of Recent Accounting Pronouncements (continued) that begin after December 15, 1995; however, companies are required to disclose information for awards granted in their first fiscal year beginning after December 15, 1994. Management has determined that the Corporation will continue to account for stock-based compensation pursuant to Accounting Principles Board Opinion No. 25, and therefore SFAS No. 123 will have no effect on its consolidated financial condition or results of operations. In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of Financial Assets, Servicing Rights, and Extinguishment of Liabilities", that provides accounting guidance on transfers of financial assets, servicing of financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an approach to accounting for transfers of financial assets that provides a means of dealing with more complex transactions in which the seller disposes of only a partial interest in the assets, retains rights or obligations, makes use of special purpose entities in the transaction, or otherwise has continuing involvement with the transferred assets. The new accounting method, referred to as the financial components approach, provides that the carrying amount of the financial assets transferred be allocated to components of the transaction based on their relative fair values. SFAS No. 125 provides criteria for determining whether control of assets has been relinquished and whether a sale has occurred. If the transfer does not qualify as a sale, it is accounted for as a secured borrowing. Transactions subject to the provisions of SFAS No. 125 include, among others, transfers involving repurchase agreements, securitizations of financial assets, loan participations, factoring arrangements, and transfers of receivables with recourse. An entity that undertakes an obligation to service financial assets recognizes either a servicing asset or liability for the servicing contract (unless related to a securitization of assets, and all the securitized assets are retained and classified as held-to-maturity). A servicing asset or liability that is purchased or assumed is initially recognized at its fair value. Servicing assets and liabilities are amortized in proportion to and over the period of estimated net servicing income or net servicing loss and are subject to subsequent assessments for impairment based on fair value. SFAS No. 125 provides that a liability is removed from the balance sheet only if the debtor either pays the creditor and is relieved of its obligation for the liability or is legally released from being the primary obligor. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. Management does not believe that adoption of SFAS No. 125 will have a material adverse effect on the Corporation's consolidated financial position or results of operations. 8 ASB Financial Corp. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Discussion of Financial Condition Changes from June 30, 1996 to September 30, 1996 At September 30, 1996, the Corporation's assets totaled $114.3 million, an increase of $1.4 million, or 1.2%, over the $112.9 million of total assets at June 30, 1996. The increase in assets was attributable to growth in the deposit portfolio of $508,000 and by a temporary increase in other liabilities. Liquid assets (i.e. cash, interest-bearing deposits, certificates of deposit and investment securities) increased by $634,000 over the three month period, to a total of $30.5 million at September 30, 1996. Regulatory liquidity amounted to $13.1 million, or 16.7%, at September 30, 1996. Loans receivable increased by $1.2 million, or 1.7%, during the three month period, to a total of $69.6 million at September 30, 1996. Loan disbursements amounted to $5.0 million and were partially offset by principal repayments of $3.8 million. The allowance for loan losses totaled $884,000 at September 30, 1996 and June 30, 1996. At both September 30, 1996 and June 30, 1996, the allowance for loan losses represented 266.3% of nonperforming loans, which totaled $1.9 million at both dates. Although management believes that its allowance for loan losses at September 30, 1996, is adequate based upon facts and circumstances available to it, 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 $83.9 million at September 30, 1996, an increase of $508,000, or 0.6%, over June 30, 1996 levels. Management continued its conservative pricing strategy with respect to deposit accounts during the current interest rate environment. The Savings Bank is required to meet each of three minimum capital standards promulgated by the Office of Thrift Supervision ("OTS"), hereinafter described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement mandates maintenance of shareholders' equity less all intangible assets equal to 1.5% of adjusted total assets. The core capital requirement provides for the maintenance of tangible capital plus certain forms of supervisory goodwill equal to 3% of adjusted total assets, while the risk-based capital requirement mandates maintenance of core capital plus general loan loss allowances equal to 8% of risk-weighted assets as defined by OTS regulations. At September 30, 1996, the Savings Bank's tangible and core capital totaled $17.2 million, or 15.9% of adjusted total assets, which exceeded the minimum requirements of $1.6 million and $3.3 million by $15.6 million and $13.9 million, respectively. The Savings Bank's risk-based capital of $17.8 million, or 36.4% of risk-weighted assets, exceeded the current 8% requirement by $13.9 million. 9 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 September 30, 1996 and 1995 General The Corporation recorded a net loss totaling $176,000 for the three months ended September 30, 1996, a decrease of $474,000, or 159.1%, from the $298,000 of net earnings reported for the same period in 1995. The decline in earnings resulted primarily from a $551,000 charge recorded in the current quarter reflecting the assessment to recapitalize the Savings Association Insurance Fund ("SAIF"), coupled with a $109,000 increase in general, administrative and other expense and a $43,000 decrease in net interest income, which were partially offset by a $241,000 decrease in the provision for federal income taxes. Net Interest Income Net interest income declined by $43,000, or 4.5%, for the three months ended September 30, 1996, compared to the 1995 period. Interest income on loans increased by $85,000, or 6.3%, due primarily to a $6.6 million increase in the average balance of loans outstanding year to year. Interest income on investment securities and interest-bearing deposits declined by $64,000, or 12.6%, due primarily to a decrease in the average portfolio yield during the year. Interest expense on deposits increased by $55,000, or 5.2%, due to a $2.8 million increase in the weighted-average deposit balance outstanding, coupled with an increase in the cost of deposits year to year. Interest expense on borrowings increased by $27,000 due to a $1.5 million increase in borrowings outstanding. Provision for Losses on Loans A provision for losses on loans is charged 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 the Savings Bank, the status of past due principal and interest payments, general economic conditions, particularly as such conditions relate to the Savings Bank's market area, and other factors related to the collectibility of the Savings Bank's loan portfolio. As a result of such analysis, management recorded a $22,000 provision for losses on loans during the three month period ended September 30, 1996. There can be no assurance that the allowance for loan losses of the Savings Bank will be adequate to absorb losses on known nonperforming assets or that the allowance will be adequate to cover losses on nonperforming assets in the future. Other Income Other income increased by $10,000, or 23.8%, for the three months ended September 30, 1996, compared to the same period in 1995, due primarily an increase in rental income on real estate acquired through foreclosure and an increase in miscellaneous non-operating income. 10 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 September 30, 1996 and 1995 (continued) General, Administrative and Other Expense General, administrative and other expense increased by $660,000, or 118.1%, during the three months ended September 30, 1996, compared to the same period in 1995. This increase resulted primarily from the $551,000 charge recorded in 1996 in connection with the SAIF recapitalization, coupled with a $35,000, or 11.6%, increase in employee compensation and benefits, a $36,000, or 105.9%, increase in franchise taxes and a $39,000, or 26.9%, increase in other operating expenses. The increase in employee compensation generally reflects normal merit increases and increased costs attendant to the Corporation's stock benefit plans implemented in conjunction with the mutual-to-stock conversion of the Savings Bank. Legislation to recapitalize the SAIF provides for a special assessment of $.657 per $100 of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to the level required by law. The Savings Bank had $83.9 million in SAIF deposits at March 31, 1995, resulting in an assessment of approximately $551,000, or $364,000 after tax, which was recorded as a charge in the quarter ended September 30, 1996, and will be paid in November 1996. In connection with the recapitalization, it is anticipated that the FDIC will refund a portion of the premium for the calendar fourth quarter equal to approximately five basis points of SAIF insured deposits. The legislation also provides for reduced premium rates for healthy savings associations beginning in 1997, estimated to be a rate of $.064 per $100 of SAIF insured deposits. A component of the recapitalization plan provides for the merger of the SAIF and BIF on January 1, 1999, assuming all savings associations have become banks. Pending legislation introduced in late September 1996 proposes the elimination of the thrift charter or of the separate federal regulation of thrifts. As a result, the Savings Bank would be regulated as a bank under federal laws which would subject it to the more restrictive activity limits imposed on national banks. Under separate legislation recently enacted into law, the Savings Bank is required to recapture as taxable income approximately $780,000 of its bad debt reserve, which represents the post-1987 additions to the reserve, and will be unable to utilize the percentage of earnings method to compute its reserve in the future. The Savings Bank has provided deferred taxes for this amount and will be permitted by such legislation to amortize the recapture of its bad debt reserve over six years. Federal Income Taxes The provision for federal income taxes declined by $241,000, or 160.7%, for the three months ended September 30, 1996, as compared to the same period in 1995. This decrease resulted primarily from the decline in net earnings before taxes of $713,000, or 159.2%. The effective tax rates were 34.1% and 33.5% for the three months ended September 30, 1996 and 1995, respectively. 11 ASB Financial Corp. PART II ITEM 1. Legal Proceedings Not applicable ITEM 2. Changes in Securities Not applicable ITEM 3. Defaults Upon Senior Securities Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders On October 23, 1996, the Corporation held its Annual Meeting of Shareholders. In connection therewith, two matters were submitted to the shareholders for a vote. First, shareholders elected three directors by the following votes: Victor W. Morgan: For: 1,346,046 Against: 4,500 Abstain: 5,050 Robert M. Smith: For: 1,346,046 Against: 4,500 Abstain: 5,050 Louis M. Schoettle: For: 1,346,046 Against: 4,500 Abstain: 5,050 The shareholders also ratified the selection of Grant Thornton LLP as the Corporation's auditors for the 1997 fiscal year by the following vote: For: 1,337,696 Against: 7,800 Abstain: 5,050 ITEM 5. Other Information None ITEM 6. Exhibits and Reports on Form 8-K Financial Data Schedule for three months ended September 30, 1996. 12 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. Date: November 8, 1996 By: Gerald R. Jenkins ________________________ Gerald R. Jenkins President and Chief Executive Officer Date: November 8, 1996 By: Robert M. Smith ________________________ Robert M. Smith Vice President and Chief Financial Officer 13