FORM 10-QSB
U. S. 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, 1998
---------------------------------
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 small business issuer 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)
Issuer's telephone number: (740) 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 9, 1998, the latest practicable date, 1,654,788 shares of the
registrant's common stock, without par value, were issued and outstanding.
Page 1 of 15 pages
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Other 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 10
PART II - OTHER INFORMATION 14
SIGNATURES 15
2
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, June 30,
ASSETS 1998 1998
Cash and due from banks $ 3,301 $ 495
Interest-bearing deposits in other financial institutions 6,931 13,395
------- -------
Cash and cash equivalents 10,232 13,890
Certificates of deposit in other financial institutions 1,518 2,004
Investment securities available for sale - at market 13,936 11,835
Mortgage-backed securities available for sale - at market 11,061 8,924
Loans receivable - net 77,608 76,550
Office premises and equipment - at depreciated cost 931 932
Real estate acquired through foreclosure - net - 157
Federal Home Loan Bank stock - at cost 739 725
Accrued interest receivable on loans 120 125
Accrued interest receivable on mortgage-backed securities 82 70
Accrued interest receivable on investments and
interest-bearing deposits 283 308
Prepaid expenses and other assets 544 665
Prepaid federal income taxes 164 222
Deferred federal income tax assets - 30
------- -------
Total assets $117,218 $116,437
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 94,893 $ 93,477
Advances from the Federal Home Loan Bank 5,346 4,354
Other borrowed money - 2,500
Advances by borrowers for taxes and insurance 94 169
Accrued interest payable 767 118
Other liabilities 1,406 1,329
Deferred federal income taxes 48 -
------- -------
Total liabilities 102,554 101,947
Shareholders' equity
Preferred stock, 1,000,000 shares authorized, no par value;
no shares issued - -
Common stock, 4,000,000 no par value shares authorized; 1,740,854
shares issued - -
Additional paid-in capital 8,304 8,304
Retained earnings, restricted 8,371 8,292
Shares acquired by stock benefit plans (1,677) (1,677)
Unrealized gains on securities designated as available for sale,
net of related tax effects 809 714
Less 86,066 shares of treasury stock - at cost (1,143) (1,143)
------- -------
Total shareholders' equity 14,664 14,490
------- -------
Total liabilities and shareholders' equity $117,218 $116,437
======= =======
3
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended September 30,
(In thousands, except share data)
1998 1997
Interest income
Loans $1,609 $1,568
Mortgage-backed securities 167 152
Investment securities 343 375
Interest-bearing deposits and other 30 69
----- -----
Total interest income 2,149 2,164
Interest expense
Deposits 1,223 1,194
Borrowings 99 55
----- -----
Total interest expense 1,322 1,249
----- -----
Net interest income 827 915
Other income 59 65
General, administrative and other expense
Employee compensation and benefits 288 334
Occupancy and equipment 29 29
Federal deposit insurance premiums 14 14
Franchise taxes 50 78
Data processing 59 49
Other operating 102 108
----- -----
Total general, administrative and other expense 542 612
----- -----
Earnings before income taxes 344 368
Federal income taxes
Current 72 136
Deferred 29 (14)
----- -----
Total federal income taxes 101 122
----- -----
NET EARNINGS $ 243 $ 246
===== =====
EARNINGS PER SHARE
Basic $.16 $.15
=== ===
Diluted $.15 $.15
=== ===
4
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended September 30,
(In thousands)
1998 1997
Net earnings $243 $246
Other comprehensive income, net of tax:
Unrealized holding gains on securities during
the period 95 12
--- ---
Comprehensive income $338 $258
=== ===
5
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30,
(In thousands)
1998 1997
Cash flows from operating activities:
Net earnings (loss) for the period $ 243 $ 246
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 4 11
Amortization of deferred loan origination fees (16) (17)
Depreciation and amortization 18 20
Federal Home Loan Bank stock dividends (14) (13)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 18 (52)
Prepaid expenses and other assets 121 59
Accrued interest payable 649 633
Other liabilities 77 109
Federal income taxes
Current 58 (36)
Deferred 29 (14)
------ -----
Net cash provided by operating activities 1,187 946
Cash flows provided by (used in) investing activities:
Proceeds from maturity of investment securities 4,560 1,650
Purchase of investment securities designated as available for sale (6,501) (468)
Principal repayments on mortgage-backed securities 743 371
Purchase of mortgage-backed securities (2,900) -
Loan principal repayments 8,179 3,083
Loan disbursements (9,221) (5,006)
Purchase of office premises and equipment (17) (3)
Decrease in certificates of deposit in other financial institutions - net 486 496
Proceeds from sale of real estate acquired through foreclosure 157 -
------ -----
Net cash provided by (used in) investing activities (4,514) 123
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 1,416 (498)
Proceeds from Federal Home Loan Bank advances 1,000 -
Repayment of Federal Home Loan Bank advances (8) (8)
Repayment of other borrowed money (2,500) -
Advances by borrowers for taxes and insurance (75) (67)
Dividends paid on common shares (164) (170)
Purchase of treasury stock - (277)
------ -----
Net cash used in financing activities (331) (1,020)
------ -----
Net increase (decrease) in cash and cash equivalents (3,658) 49
Cash and cash equivalents at beginning of period 13,890 3,850
------ -----
Cash and cash equivalents at end of period $10,232 $3,899
====== =====
6
ASB Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended September 30,
(In thousands)
1998 1997
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 10 $ -
=== ===
Interest on deposits and borrowings $673 $616
=== ===
Supplemental disclosure of noncash investing activities:
Unrealized gains on securities designated as available for
sale, net of related tax effects $ 95 $ 12
=== ===
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ASB Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended September 30, 1998 and 1997
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
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 Annual Report on Form 10-KSB for the year ended June 30,
1998. 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, 1998 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 its wholly owned subsidiary, American Savings Bank, fsb
("American" or the "Savings Bank"). All significant intercompany items have
been eliminated.
3. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period, 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 outstanding, which
gives effect to 77,756 unallocated ESOP shares, totaled 1,557,590 for the
three month period ended September 30, 1998. Weighted-average common shares
deemed outstanding, which gives effect to 93,460 unallocated ESOP shares,
totaled 1,620,820 for the three month period ended September 30, 1997.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Corporation's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share totaled
1,584,344 for the three month period ended September 30, 1998, and 1,649,229
for the three month period ended September 30, 1997.
4. Effects of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements.
SFAS No. 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements. It does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement.
8
ASB Financial Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended September 30, 1998 and 1997
4. Effects of Recent Accounting Pronouncements (continued)
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required. Management adopted SFAS No. 130 effective July 1, 1998, as
required, without material impact on the Corporation's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 significantly changes
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about reportable segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS No. 131 uses a "management approach" to disclose financial
and descriptive information about the way that management organizes the
segments within the enterprise for making operating decisions and assessing
performance. For many enterprises, the management approach will likely
result in more segments being reported. In addition, SFAS No. 131 requires
significantly more information to be disclosed for each reportable segment
than is presently being reported in annual financial statements and also
requires that selected information be reported in interim financial
statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 is not expected to have a material impact on
the Corporation's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize
all derivatives in their financial statements as either assets or
liabilities measured at fair value. SFAS No. 133 also specifies new methods
of accounting for hedging transactions, prescribes the items and
transactions that may be hedged, and specifies detailed criteria to be met
to qualify for hedge accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an
interest rate or foreign exchange rate, that is applied to a notional
amount, such as an amount of currency, to determine the settlement
amount(s). It generally requires no significant initial investment and can
be settled net or by delivery of an asset that is readily convertible to
cash. SFAS No. 133 applies to derivatives embedded in other contracts,
unless the underlying of the embedded derivative is clearly and closely
related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt
securities to the available-for-sale or trading category without calling
into question their intent to hold other debt securities to maturity in the
future. SFAS No. 133 is not expected to have a material impact on the
Corporation's financial statements.
9
ASB Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from June 30, 1998 to September 30,
1998
At September 30, 1998, the Corporation's assets totaled $117.2 million, an
increase of $781,000, or .7%, over the $116.4 million of total assets at June
30, 1998. The increase in assets was funded primarily by growth in deposits of
$1.4 million and net proceeds from Federal Home Loan Bank advances totaling $1.0
million, which were partially offset by a decrease in other borrowed money of
$2.5 million.
Liquid assets (i.e. cash, interest-bearing deposits and certificates of deposit)
decreased by $4.1 million from June 30, 1998 levels, to a total of $11.8 million
at September 30, 1998. Investment securities totaled $13.9 million at September
30, 1998, an increase of $2.1 million, or 17.8%, from June 30, 1998 levels.
During the three months ended September 30, 1998, purchases of investment
securities totaled $6.5 million which were partially offset by maturities of
$4.6 million.
Mortgage-backed securities totaled $11.1 million at September 30, 1998, an
increase of $2.1 million, or 23.9%, over the total at June 30, 1998. The
increase was due primarily to purchases of $2.9 million during the quarter,
which were partially offset by principal repayments of $743,000.
Loans receivable increased by $1.1 million, or 1.4%, during the three month
period ended September 30, 1998, to a total of $77.6 million. Loan disbursements
amounted to $9.2 million and were partially offset by principal repayments of
$8.2 million. The allowance for loan losses totaled $746,000 at September 30,
1998, a decrease of $13,000 from the $759,000 total at June 30, 1998.
Nonperforming loans totaled $179,000 and $240,000 at September 30, 1998 and June
30, 1998, respectively. The allowance for loan losses represented 416.8% and
316.3% of nonperforming loans as of September 30, 1998 and June 30, 1998,
respectively. Although management believes that its allowance for loan losses at
September 30, 1998, is 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 $94.9 million at September 30, 1998, an increase of $1.4
million, or 1.5%, over June 30, 1998 levels. The growth in deposits can be
primarily attributed to management's efforts to maintain a moderate rate of
deposit growth through marketing strategies.
Borrowings decreased by $1.5 million during the three months ended September 30,
1998, to a total of $5.3 million, due to principal repayments of $2.5 million of
other borrowed money, which were partially offset by proceeds from $1.0 million
in new Federal Home Loan Bank advances.
Shareholders' equity totaled $14.7 million at September 30, 1998, an increase of
$174,000, or 1.2%, from June 30, 1998 levels. The increase resulted primarily
from undistributed net earnings of $79,000 and an increase in unrealized gains
on securities designated as available for sale of $95,000.
American is required to meet minimum capital standards promulgated by the Office
of Thrift Supervision ("OTS"). At September 30, 1998, American's regulatory
capital was well in excess of the minimum capital requirements.
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,
1998 and 1997
General
Net earnings amounted to $243,000 for the three months ended September 30, 1998,
a decrease of $3,000, or 1.2%, from the $246,000 of net earnings reported for
the same period in 1997. The decrease in earnings resulted primarily from an
$88,000 decrease in net interest income and a $6,000 decrease in other income
which were partially offset by a $70,000 decrease in general, administrative and
other expense and a $21,000 decrease in the provision for federal income taxes.
Net Interest Income
Net interest income decreased by $88,000, or 9.6%, for the three months ended
September 30, 1998, compared to the 1997 period. Interest income on loans
increased by $41,000, or 2.6%, due primarily to a $2.0 million increase in the
average balance of loans outstanding year to year. Interest income on investment
and mortgage-backed securities and interest-bearing deposits and other decreased
by $56,000, or 9.4%, due primarily to a decrease in yields available on such
investments year to year.
Interest expense on deposits increased by $29,000, or 2.4%, due primarily to a
$4.7 million increase in the average balance of deposits outstanding. Interest
expense on borrowings increased by $44,000, or 80.0%, due primarily to an
increase in the average balance of 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 elected
not to record any provision for loan losses for the three month periods ended
September 30, 1998 and 1997. There can be no assurance that the allowance for
loan losses of the Savings Bank will be adequate to cover losses on
nonperforming assets in the future.
11
ASB Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended September 30,
1998 and 1997 (continued)
Other Income
Other income decreased by $6,000, or 9.2%, for the three months ended September
30, 1998, compared to the same period in 1997. Other income consists generally
of fees on deposit accounts and revenues from an agreement with a third-party
vendor of alternative investment products.
General, Administrative and Other Expense
General, administrative and other expense decreased by $70,000, or 11.4%, during
the three months ended September 30, 1998, compared to the same period in 1997.
This decrease resulted primarily from a $46,000, or 13.8%, decrease in employee
compensation and benefits, a $28,000, or 35.9%, decrease in franchise taxes and
a $6,000, or 5.6%, decrease in other operating expenses. The decrease in
employee compensation and benefits resulted from the retirement of an officer,
increased deferrals of loan origination costs under SFAS No. 91 and a reduction
of stock benefit plan expense. The decrease in franchise taxes reflects the
effects of the reduction in equity year to year.
Federal Income Taxes
The provision for federal income taxes totaled $101,000 for the three months
ended September 30, 1998, a decrease of $21,000, or 17.2%, compared to the same
period in 1997. This decrease resulted primarily from the decrease in net
earnings before taxes of $24,000, or 6.5%, coupled with the effects of tax
credits from the Savings Bank's investment in a low income housing partnership.
The effective tax rates were 29.4% and 33.2% for the three months ended
September 30, 1998 and 1997, respectively.
Year 2000 Compliance Matters
As with most providers of financial services, American's operations are heavily
dependent on information technology systems. American is addressing the
potential problems associated with the possibility that the computers that
control or operate American's information technology system and infrastructure
may not be programmed to read four-digit date codes and, upon arrival of the
year 2000, may recognize the two-digit code "00" as the year 1900, causing
systems to fail to function or to generate erroneous data. American is working
with the companies that supply or service its information technology systems to
identify and remedy any year 2000 related problems.
12
ASB Financial Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Compliance Matters (continued)
American's primary data processing applications are handled by a third-party
service bureau. The service bureau has advised American that it has shifted to a
fully Year 2000 compliant processing system that will be fully tested by January
1, 1999. Management has also reviewed American's ancillary equipment and is in
the process of providing the appropriate remedial measures without material
cost.
As of the date of this Form 10-QSB, American has developed an estimate of
specific expenses that are reasonably likely to be incurred by American in
connection with this issue, however American does not expect to incur
significant expense to implement the necessary corrective measures. No assurance
can be given, however, that significant expense will not be incurred in future
periods. In the unlikely event that the Savings Bank is ultimately required to
purchase replacement computer systems, programs and equipment, or incur
substantial expense to make the Savings Bank's current systems, programs and
equipment year 2000 compliant, the Savings Bank's net earnings and financial
condition could be adversely affected.
In addition to possible expense related to its own systems, American could incur
losses if loan payments are delayed due to year 2000 problems affecting any
major borrowers in American's primary market area. Because American's loan
portfolio is highly diversified with regard to individual borrowers and types of
businesses and American's primary market area is not significantly dependent
upon one employer or industry, American does not expect any significant or
prolonged difficulties that will affect net earnings or cash flow.
The Savings Bank has developed a contingency plan in case systems are not
successfully renovated in a timely manner or if they actually fail at Year 2000
critical dates. The contingency plan states that the Savings Bank deems the
likelihood of failure of the service provider's efforts to renovate Year 2000
changes to the on-line core account processing system to be remote; however, a
more likely scenario is that the service provider's system will be down for
several days or weeks upon arrival of Year 2000. The plan, therefore, primarily
addresses action to deal with the latter possibility rather than with a
catastrophic event, and includes the potential to conduct and record
transactions manually until the service provider is operational. The Savings
Bank does not consider contingency planning to be a static process; therefore,
the plan will be amended to address a catastrophic event if testing results
indicate greater concern.
13
ASB Financial Corp.
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in 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 28, 1998, the Corporation held its Annual Meeting of
Shareholders. In connection therewith, two matters were submitted to
the shareholders for a vote. First, shareholders elected two directors
by the following votes:
For: 1,330,374 Against: 3,047 Abstain: none
For: 1,330,374 Against: 3,047 Abstain: none
The shareholders also ratified the selection of Grant Thornton LLP as
the Corporation's auditors for the 1999 fiscal year by the following
vote:
For: 1,331,134 Against: 1,000 Abstain: 1,287
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
Form 8-K: None.
Exhibits:
27.1 Financial data schedule for the three months ended
September 30, 1998.
27.2 Restated financial data schedule for the three
months ended September 30, 1997.
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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 9, 1998 By: /s/Robert M. Smith
--------------------- ---------------------------------
Robert M. Smith
President, Chief Executive Officer
and Chief Financial Officer
15