UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
Commission file number 000-33405
AJS BANCORP, INC.
(Exact name of registrants specified in its charter)
Federal 36-4485429
(State of incorporation) (IRS Employer Identification No.)
14757 S. Cicero Avenue, Midlothian, Illinois 60445
(Address of Principal Executive Offices)
(708) 687-7400
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
12, 13 or 15(d) of the Exchange Act during the past 12 months (or 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 checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act) Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
As of July 31, 2003 the Registrant had outstanding 2,444,521 shares of common
stock.
AJS BANCORP, INC.
Form 10-Q Quarterly Report
Index
Page
----
PART I - Financial Information
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 14
PART II - Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Securities Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
ITEM 1. FINANCIAL STATEMENTS
AJS Bancorp, Inc.
Consolidated Statements of Financial Condition
(in thousands of dollars, except share data)
(unaudited)
June 30, December 31,
2003 2002
---- ----
ASSETS
Cash and cash equivalents
Cash and due from banks (interest-bearing: 2003 -
$9,347; 2002 - $9,955) $ 16,674 $ 16,896
Federal funds sold 5,000 6,000
--------- ---------
Total cash and cash equivalents 21,674 22,896
Securities available-for-sale 55,394 51,903
Securities held-to-maturity (fair value: 2003 -
$350; 2002 - $307) 311 360
Loans, net 145,660 136,134
Loans held for sale 152 --
Federal Home Loan Bank stock, at cost 13,195 4,477
Premises and equipment 4,860 4,595
Accrued interest receivable and other assets 1,947 2,205
--------- ---------
Total assets $ 243,193 $ 222,570
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 185,205 $ 169,008
Federal Home Loan Bank advances 19,000 16,000
Advance payments by borrowers for taxes and insurance 1,681 1,459
Due to broker 1,000 --
Accrued interest payable and other liabilities 2,604 2,457
--------- ---------
Total liabilities 209,490 188,924
Stockholders' equity
Preferred stock, $.01 par value, 20,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 50,000,000 authorized;
2,406,950 shares issued 24 24
Treasury stock (2003 - 13,600 shares) (273) --
Additional paid in capital 12,109 11,308
Unearned ESOP shares (472) (566)
Unearned stock awards (1,030) --
Retained earnings 22,647 21,864
Accumulated other comprehensive income 698 1,016
--------- ---------
Total stockholders' equity 33,703 33,646
--------- ---------
Total liabilities and stockholders' equity $ 243,193 $ 222,570
========= =========
See notes to consolidated financial statements.
1
AJS Bancorp, Inc.
Consolidated Statements of Income
(in thousands of dollars, except share data)
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Interest and dividend income
Loan $ 2,327 $ 2,464 $ 4,681 $ 4,949
Securities 591 720 1,271 1,470
Interest-bearing deposits and other 120 83 203 161
Federal funds sold 41 20 77 45
----------- ----------- ----------- -----------
Total interest income 3,079 3,287 6,232 6,625
Interest expense
Deposits 1,087 1,170 2,166 2,386
Federal Home Loan Bank
Advances and other 218 182 427 371
----------- ----------- ----------- -----------
Total interest expense 1,305 1,352 2,593 2,757
----------- ----------- ----------- -----------
Net interest income 1,774 1,935 3,639 3,868
Provision for loan losses (51) -- (51) 20
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 1,825 1,935 3,690 3,848
Noninterest income
Service fees 134 120 257 251
Insurance commissions 67 99 156 206
Gain on sale of loans 26 -- 49 --
Correspondent fees 4 150 13 239
Other 41 113 83 178
----------- ----------- ----------- -----------
Total noninterest income 272 482 558 874
Noninterest expense
Compensation and employee benefits 938 857 1,719 1,646
Occupancy expense 204 223 428 440
Data processing expense 105 92 142 202
Advertising and promotion 75 88 185 145
Other 266 307 530 559
----------- ----------- ----------- -----------
Total noninterest expense 1,588 1,567 3,004 2,992
----------- ----------- ----------- -----------
Income before income taxes 509 850 1,244 1,730
Income taxes 196 334 461 643
----------- ----------- ----------- -----------
Net income $ 313 $ 516 $ 783 $ 1,087
=========== =========== =========== ===========
Earnings per share
Basic and diluted $ 0.13 $ 0.22 $ 0.33 $ 0.47
Weighted average shares 2,333,039 2,338,544 2,341,623 2,336,186
----------- ----------- ----------- -----------
Comprehensive income $ 190 $ 786 $ 465 $ 1,021
=========== =========== =========== ===========
See notes to consolidated financial statements.
2
AJS Bancorp, Inc.
Consolidated Statements of Cash Flows
(in thousands of dollars)
(unaudited)
Six Months Ended
June 30,
-----------------------
2003 2002
-------- --------
Cash flows from operating activities
Net income $ 783 $ 1,087
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 147 227
Provision for loan losses (51) 20
Premium amortization, net 21 (24)
Stock award compensation expense 76 --
ESOP compensation expense 173 132
Loss on disposal of equipment -- --
Federal Home Loan Bank stock dividends (218) (58)
Gain on sale of loans held for sale (49) --
Gain on sale of other real estate (4) (50)
Changes in
Loans held for sale (103) --
Accrued interest receivable and other assets 469 (80)
Accrued interest payable and other liabilities 147 139
-------- --------
Net cash from operating activities 1,391 1,393
Cash flows from investing activities
Securities available-for-sale
Purchases (15,272) (5,027)
Maturities and principal payments 12,239 9,045
Securities held-to-maturity
Maturities and principal payments 49 404
Maturities of certificates of deposit -- 1,000
Loan originations, net (9,479) (1,332)
Proceeds from sale of other real estate -- 136
Purchase of equipment (412) (942)
Purchase of Federal Home Loan Bank stock (8,500) (3,000)
-------- --------
Net cash from investing activities (21,375) 284
Cash from financing activities
Net change in deposits 16,197 (6,939)
Net change in Federal Home Loan Bank advances 3,000 (1,000)
Purchase of treasury stock (657) --
Net change in advance payments by borrowers for taxes and insurance 222 99
-------- --------
Net cash from financing activities 18,762 (7,840)
-------- --------
Net change in cash and cash equivalents (1,222) (6,163)
Cash and cash equivalents at beginning of period 22,896 29,009
-------- --------
Cash and cash equivalents at end of period $ 21,674 $ 22,846
======== ========
See notes to consolidated financial statements.
3
AJS Bancorp, Inc.
Consolidated Statements of Stockholders' Equity
Six months ended June 30, 2003
(in thousand of dollars)
(unaudited)
Accumulated
Additional Unearned Unearned Other Total
Common Treasury Paid-in Stock ESOP Retained Comprehensive Stockholders'
Stock Stock Capital Awards Shares Earnings Income (Loss) Equity
----- ----- ------- ------ ------ -------- ------------- ------
Balance at December 31, 2001 $ 24 $ -- $ 11,220 $ -- $ (755) $ 19,749 $ 1,010 $ 31,248
ESOP shares earned -- -- 39 -- 93 -- -- 132
Comprehensive income
Net income -- -- -- -- -- 1,087 -- 1,087
Change in unrealized gain
on securities available for
sale, net of taxes -- -- -- -- -- -- (66) (66)
Total comprehensive income 1,021
------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2002 $ 24 $ -- $ 11,259 $ -- $ (662) $ 20,836 $ 944 $ 32,401
======= ======== ======== ======== ======== ======== ======== ========
Accumulated
Additional Unearned Unearned Other Total
Common Treasury Paid-in Stock ESOP Retained Comprehensive Stockholders'
Stock Stock Capital Awards Shares Earnings Income (Loss) Equity
----- ----- ------- ------ ------ -------- ------------- ------
Balance at December 31, 2002 $ 24 $ 0 $ 11,308 $ -- $ (566) $ 21,864 $ 1,016 $ 33,646
Purchase of 35,000 shares of
treasury stock -- (657) -- -- -- -- -- (657)
Allocation of stock awards -- 384 722 (1,106) -- -- -- --
ESOP shares earned -- -- 79 -- 94 -- -- 173
Stock awards earned -- -- -- 76 -- -- -- 76
Comprehensive income
Net income -- -- -- -- -- 783 -- 783
Change in unrealized gain
on securities available-for-sale,
net of taxes -- -- -- -- -- -- (318) (318)
Total comprehensive income 465
------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 2003 $ 24 $ (273) $ 12,109 $ (1,030) $ (472) $ 22,647 $ 698 $ 33,703
======= ======== ======== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
4
AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
Note 1 - Basis of Presentation
Principles of Consolidation: The accompanying consolidated interim financial
statements include the accounts of AJS Bancorp, Inc. ("the Company") and its
wholly owned subsidiaries, A. J. Smith Federal Savings Bank ("the Bank") and
A.J.S. Insurance, LLC, which provides insurance and investment services to the
public. All significant intercompany balances and transactions have been
eliminated.
The accompanying interim consolidated financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly,
certain disclosures required by accounting principles generally accepted in the
United States of America are not included herein. These interim statements
should be read in conjunction with the Company's Annual Report on Form 10-K. The
December 31, 2002 balance sheet presented herein has been derived from the
audited financial statements included in the Company's Annual Report on Form
10-K, but does not include all of the disclosures required by accounting
principles generally accepted in the United States of America.
Interim statements are subject to possible adjustment in connection with the
annual audit of the Company for the year ending December 31, 2003. In the
opinion of management of the Company, the accompanying unaudited interim
consolidated financial statements reflect all of the adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of the
consolidated financial position and consolidated results of operations for the
periods presented. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
Note 2 - Employee Stock Ownership Plan
As part of the reorganization to a mutual holding company, the Bank established
an employee stock ownership plan ("ESOP") for the benefit of substantially all
employees. The ESOP borrowed $944,000 from the Company and used those funds to
acquire 94,352 shares of the Company's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants based on principal
and interest repayments made by the ESOP on the loan from the Company. The loan
is secured by shares purchased with the loan proceeds and will be repaid by the
ESOP with funds from the Company's discretionary contributions to the ESOP and
earnings on the ESOP's assets. Principal payments are scheduled to occur over a
ten-year period. However, in the event the Company's contributions exceed the
minimum debt service requirements, additional principal payments will be made.
Note 3 - Earnings Per Share
For purposes of per share calculations, the Company had 2,383,667 and 2,340,903
shares of common stock outstanding at June 30, 2003 and 2002. Basic earnings per
share for the three and six months ended June 30, 2003 and 2002 were computed by
dividing net income by the weighted average number of shares outstanding.
Diluted earnings per share for the three and six months ended June 30, 2003 and
2002 were computed by dividing net income by the weighted average number of
shares outstanding, adjusted for the dilutive effect of the outstanding stock
options and stock awards. Computations for basic and diluted earnings per share
are provided below.
5
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
------ ------ ------ ------
(in thousands, except per share data)
Basic
Net income $ 313 $ 516 $ 783 $1,087
====== ====== ====== ======
Weighted average common shares
outstanding 2,333 2,339 2,342 2,336
====== ====== ====== ======
Basic earnings per common share $ .13 $ .22 $ .33 $ .47
====== ====== ====== ======
Diluted
Net income $ 313 $ 516 $ 783 $1,087
====== ====== ====== ======
Weighted average common shares
outstanding 2,333 2,339 2,342 2,336
Dilutive effect of stock options -- -- -- --
Dilutive effect of stock awards -- -- -- --
====== ====== ====== ======
Diluted average common shares 2,333 2,339 2,342 2,336
====== ====== ====== ======
Diluted earnings per common share $ .13 $ .22 $ .33 $ .47
====== ====== ====== ======
Note 4 - Stock Option Plan
The Company adopted a stock-based incentive plan during May 2003 under the terms
of which 114,685 shares of the Company's common stock were reserved for
issuance. The options become exercisable in equal installments over a five-year
period from the date of grant. The options expire ten years from the date of
grant. No option may be exercised if such exercise would cause the mutual
holding company to own fewer than a majority of the total number of shares
outstanding.
A summary of the status of the Company's stock option plan and changes during
the six months ended June 30, 2003 is presented below:
Weighted-
Average
Exercise
Shares Price
------ -----
Outstanding at beginning of period -- --
Granted 114,685 $18.75
Exercised -- --
Forfeited -- --
------- ------
Outstanding at end of period 114,685 $18.75
======= ======
2003
Options exercisable at end of period --
Weighted-average fair value of options granted during period $ 2.82
Average remaining option term 10 years
6
The Company applies Accounting Principles Board ("APB") Opinion 25 and related
Interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized at the date of grant. Had compensation
cost been determined based on the fair value at the grant dates for awards under
the plan consistent with the method of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Company's
net income and earnings per share for the three and six months ended June 30,
2003 would have been reduced to the pro forma amounts in the table below. For
purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period.
For the Three Months For the Six Months
Ended June 30, 2003 Ended June 30, 2003
------------------- -------------------
(in thousands, except per share data)
Net income as reported $ 313 $ 783
Pro forma net income 310 780
Earnings per share as reported
Basic and diluted .13 .33
Pro forma earnings per share
Basic and diluted .13 .33
The Black-Scholes option pricing valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options.
Date of grant May 21, 2003
Options granted 114,685
Estimated fair value of stock options granted $2.82
Assumptions used:
Risk-free interest rate 2.37%
Expected option life 5 years
Expected stock price volatility 15.03%
Expected dividend yield 0%
Pursuant to its 2003 stock-based incentive plan, the Company awarded 58,971
shares of restricted stock in May 2003. These shares vest over a five-year
period. The unamortized cost of shares not yet earned (vested) is reported as a
reduction of stockholders' equity. Compensation expense for restricted stock
awards totaled $76,000 for the three and six-months ended June 30, 2003.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995 as amended and is including this statement for purposes of these safe
harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors that could have a material adverse
affect on the operations and future prospects of the Company and its wholly
owned subsidiaries include, but are not limited to, changes in: interest rates;
general economic conditions; legislative/regulatory provisions; monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board; the quality or composition of the loan or
investment portfolios; demand for loan products; deposit flows; competition;
demand for financial services in the Company's market area; and accounting
principles, policies, and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements, and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
The following discussion compares the financial condition of AJS Bancorp, Inc.
("the Company") at June 30, 2003 to its financial condition at December 31, 2002
and the results of operations for the three-month and six -month periods ended
June 30, 2003 to the same periods in 2002. This discussion should be read in
conjunction with the interim financial statements and footnotes included herein.
FINANCIAL CONDITION
Total assets at June 30, 2003 were $243.2 million compared to $222.6 million at
December 31, 2002, an increase of $20.6 million, or 9.3%. The increase in total
assets primarily reflects increases in securities available-for-sale, loans, and
Federal Home Loan Bank stock, partially offset by a decrease in cash and cash
equivalents. Cash and cash equivalents decreased $1.2 million, or 5.3%, to $21.7
million at June 30, 2003 from $22.9 million at December 31, 2002. The decrease
in cash and cash equivalents reflects management's decision to invest in
investments and loans while seeking higher yields. Securities available-for-sale
increased $3.5 million, or 6.7%, to $55.4 million at June 30, 2003 from $51.9
million at December 31, 2002 as the Company purchased $5.0 million in
mortgage-backed securities in an attempt to lock in a spread between the
interest earned on the mortgage-backed securities and the interest paid on the
Federal Home Loan Bank advances. Loans receivable increased $9.5 million, or
7.0%, to $145.7 million at June 30, 2003 from $136.1 million at December 31,
2002. Loan volume increased due to higher demand caused mostly by customers
refinancing their mortgage in the historically low interest rate environment.
Federal Home Loan Bank ("FHLB") stock increased $8.7 million to $13.2 million at
June 30, 2003 from $4.5 million at December 31, 2002. The increase in the FHLB
stock is due to the above-market yield typically generated from the quarterly
dividends on the stock. The first quarter annualized dividend rate declared on
April 22, 2003 and payable on May 15, 2003 was 6.50%. There is no guarantee that
dividends will continue to be paid on the stock or that they will be paid at the
same rate as they have been paid in the past.
The Company had non-performing assets of $1.0 million as of June 30, 2003
compared to $1.1 million at December 31, 2002. The allowance for loan losses was
$2.0 million at June 30, 2003 and $2.1 million at December 31, 2002. This
represents a ratio of allowance for loan losses to gross loans receivable of
1.39% at
8
June 30, 2003 and 1.51% at December 31, 2002. Subprime loan balances decreased
$6.2 million to $25.1 million at June 30, 2003 from $31.2 million at December
31, 2002. The decrease in subprime loans reflects our decision to de-emphasize
this type of lending.
Total liabilities at June 30, 2003 were $209.5 million compared to $188.9
million at December 31, 2002, an increase of $20.6 million, reflecting increases
in deposits and Federal Home Loan Bank advances. Total deposits increased $16.2
million, or 9.6%, to $185.2 million at June 30, 2003 from $169.0 million at
December 31, 2002. This increase was largely due to greater marketing efforts
and promotional deposit rates associated with the opening of our new branch
facility in Orland Park, Illinois. This full service facility opened in December
2002. Federal Home Loan Bank advances increased to $19.0 million at June 30,
2003 from $16.0 million at December 31, 2002. These fixed rate borrowings were
used to fund the purchase of mortgage-backed securities.
Total stockholders' equity increased to $33.7 million at June 30, 2003 from
$33.6 million at December 31, 2002. The increase in stockholders' equity
reflects net income of $783,000 for the six months ended June 30, 2003,
partially offset by a decrease in other comprehensive income and the purchase of
common stock during the six months ended June 30, 2003. The decrease in other
comprehensive income was due to a lower market value on securities held for sale
for the six months ended June 30, 2003 as compared to the market value of these
securities at December 31, 2002. AJS Bancorp repurchased 35,000 shares of its
common stock during the six months ended June 30, 2003. This repurchase was done
as part of a 120,000 share repurchase program announced in January 2003. The
Board of Directors has extended the duration of the current buyback program.
Repurchased shares are not considered outstanding and are not included when
calculating earnings per share information. In addition, at the annual meeting
on May 21, 2003, stockholders approved the implementation of a recognition and
retention plan ("RRP"). This plan will vest over five years and will cost the
Company approximately $18,000 each month. Treasury shares, as well as new shares
issued, were used to fund the RRP plan. In June of 2003, a director of the
Company retired, at which time he became immediately vested in the RRP plan. The
cost of this immediate vesting was $52,000, which was expensed in June of 2003.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
Net income decreased $203,000 to $313,000 for the quarter ended June 30, 2003
compared to the same period in 2002. The return on average assets decreased to
..52% from .98% in the prior period. The decrease in net income resulted from
decreases in net interest income and noninterest income, with a slight increase
in noninterest expense during the comparative periods.
Net interest income was $1.8 million for the quarter ended June 30, 2003
compared to $1.9 million for the same period in 2002. The decrease in net
interest income was primarily a result of decreases in the net interest margin
and net interest spread to 3.02% and 2.70%, respectively for the three months
ended June 30, 2003 from 3.90% and 3.62%, respectively for the three months
ended June 30, 2002. The decrease in the net interest margin and net interest
spread was largely due to the decrease in the yield on interest-earning assets
exceeding the decrease in the cost of funds as interest-earning assets and
interest-bearing liabilities repriced downward in reaction to the overall
decrease in market rates in 2003. The average yield on interest-earning assets
decreased to 5.25% from the three months ended June 30, 2003 from 6.62% for the
same period in 2002, while the average yield on interest-bearing liabilities
decreased to 2.55% for the three months ended June 30, 2003 from 3.00% for the
same period ended 2002.
We did not establish a provision for loan losses during the quarters ended June
30, 2003 or 2002. However, there was $51,000 in loan loss recoveries during the
three months ended June 30, 2003, as the Bank recovered monies on three previous
mortgage loan losses. At June 30, 2003 and 2002, our allowance for loan losses
was $2.0 million and $2.1 million or 1.39% and 1.51% of total gross loans,
respectively. Management does not feel the additional loan loss provisions are
warranted at this time; however, should any unforeseen risks present
9
themselves, management may need to increase the provision in the future.
Non-performing assets as a percentage of total assets was 0.41% at June 30, 2003
and 0.67% at June 30, 2002. The allowance for loan losses to non-performing
loans was 210.85% and 175.8% at June 30, 2003 and 2002, respectively.
Management assesses the allowance for loan losses on a quarterly basis and makes
provisions for loan losses as necessary in order to maintain the allowance.
While management uses available information to recognize losses on loans, future
loan loss provisions may be necessary based on changes in economic conditions.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses and may
require us to recognize additional provisions based on their judgment of
information available to them at the time of their examination. The allowance
for loan losses as of June 30, 2003 is maintained at a level that represents
management's best estimate of inherent losses in the loan portfolio, and such
losses were both probable and reasonably estimable.
Noninterest income decreased $210,000 to $272,000 for the quarter ended June 30,
2003 from $482,000 for the comparable quarter in 2002. This decrease in
noninterest income was the result of decreases of $32,000 in insurance
commissions, $146,000 in correspondent fee income, and $72,000 in other
noninterest income, partially offset by an increase in the gain on loans
designated for sale of $26,000 for the June 30, 2003 quarter compared to the
quarter ended June 30, 2002. The decrease in other noninterest income consisted
of a decrease of $48,000 in profit on the sale of real estate and a decrease of
$13,000 in rental income. The decrease in correspondent fee income was the
result of the Bank's decision to cut back the staffing in that department, which
resulted in a decrease in loan volume. The decrease in profit on the sale of
real estate owned occurred due to the sale of an apartment building during the
quarter ended June 30, 2002. The reduction of rental income occurred due to a
loan default, secured by an apartment building, resulting in the repossession
and collection of rents that subsequently took place during the quarter ended
June 30, 2002. These rents were collected until the property was sold during the
second quarter of 2002. The gain on the sale of loans designated for sale was a
result of our entry into the secondary mortgage loan market as we sought to
insulate ourselves from interest rate risk by selling designated longer term
fixed rate mortgage loans. This activity may continue in the future, but it is
not an integral part of our business at this time.
Noninterest expense remained stable at $1.6 million for the quarters ended June
30, 2003 and 2002. Although total noninterest income remained stable, salaries
and benefit expense increased $81,000, partially offset by decreases in
occupancy costs of $19,000 and other noninterest expense of $41,000. The
increase in salaries and benefit costs was the result of the implementation of
the recognition and retention plan ("RRP") approved by the stockholders at the
annual meeting in May 2003. Occupancy costs decreased $44,000 due to a group of
our assets reaching fully depreciated status during the September 2002 quarter,
partially offset by an increase in real estate taxes. Real estate taxes
increased by $30,000 due to the addition of our new branch facility in Orland
Park, Illinois as well as higher overall real estate taxes on all the Bank's
facilities. Other noninterest expense decreased due to lower telephone costs,
reduced reporting and legal fees, and lower loan expenses. Telephone costs
decreased by $15,000 due to reduced usage of our bank-by-phone toll free number,
as customers began to use the new local telephone number now offered through our
bank-by-phone service. Reporting and legal fees associated with being a public
company decreased by $11,000 mostly due to incurring higher costs to prepare
periodic reports within the six-month period ended June 2002 that were not
incurred in the Company's second year of being a public company. Loan expenses
decreased $13,000 primarily due to the cutback in staffing in the correspondent
loan department, which reduced the loan volume and related loan expenses.
Our federal and state taxes decreased $138,000 to $196,000 for the quarter ended
June 30, 2003 from $334,000 in the same period of 2002. This is primarily the
result of lower pre-tax income for the quarter ended 2003.
10
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
Net income decreased $304,000 to $783,000 for the six months ended June 30, 2003
compared to the same period in 2002. The return on average assets decreased to
0.66% from 1.04% in the prior period. The decrease in net income resulted from
decreases in bet interest income and noninterest income.
Net interest income was $3.6 million for the six months ended June 30, 2003
compared to $3.9 million for the same period in 2002. The decrease in net
interest income was primarily a result of decreases in the net interest margin
and net interest spread to 3.20% and 2.91% respectively for the six months ended
June 30, 2003 from 3.92% and 3.61% respectively for the six months ended June
30, 2002. The decrease in the net interest margin and net interest spread was
due to the decrease in the yield on interest-earning assets exceeding the
decrease in the cost of funds as interest-earning assets and interest-bearing
liabilities repriced downward in reaction to the overall decrease in market
rates in 2003. The average yield on interest-earning assets decreased to 5.48%
from the six months ended June 30, 2003 from 6.71% for the same period in 2002,
while the average yield on interest-bearing liabilities decreased to 2.57% for
the six months ended June 30, 2003 from 3.10% for the same period ended 2002.
We did not establish a provision for loan losses during the six months ended
June 30, 2003 compared to a $20,000 provision for loan losses for the same
period in 2002. In addition, there was $51,000 in loan loss recoveries during
the six months ended June 30, 2003. During the six months ended June 30, 2003,
the Bank recovered a total of $51,000 on three separate mortgage loan losses.
Management does not feel that additional loan loss provisions are warranted at
this time, however, should any unforeseen risks present themselves, management
may need to increase the provision in the future.
Noninterest income decreased to $558,000 for the six months ended June 30, 2003
from $874,000 for the comparable period in 2002 due to decreases in insurance
commissions, correspondent fee income, and other noninterest income, partially
offset by a gain on loan sales. Insurance commissions decreased $50,000 to
$156,000 for the six months ended June 30, 2003 due to lower sales of annuity
products during the six-month period ended June 30, 2003 when compared to the
same period in 2002. Correspondent fee income decreased $226,000 to $13,000 for
the six months ended June 30, 2003 from the same period in 2002 as a result of
the Bank's decision to cut back the staffing in that department, which resulted
in a decrease in loan volume. Other noninterest income decreased $95,000 to
$83,000 for the six months ended June 30, 2003 due to a decrease of $46,000 in
profit on the sale of real estate and a decrease of $38,000 in rental income.
The decrease in profit on the sale of real estate owned occurred due to the sale
of an apartment building during the quarter ended June 30, 2002. The reduction
of rental income occurred due to a loan default, secured by an apartment
building, resulting in the repossession and collection of rents that
subsequently took place during the quarter ended June 30, 2002. These rents were
collected until the property was sold during the second quarter of 2002. During
the six months ended June 30, 2003, the Company recorded $49,000 in gains on the
sale of loans designated for sale as a result of our entry into the secondary
mortgage loan market as we sought to insulate ourselves from interest rate risk
by selling designated longer term fixed rate mortgage loans.
Noninterest expense remained stable at $3.0 million for the six-months ended
June 30, 2003 and 2002. Although total noninterest expense remained stable,
salaries and benefits increased $73,000 for the comparable periods, whereas data
processing costs decreased $60,000 and other noninterest expense decreased
$29,000 for the six-month period ended June 30, 2003 compared to the six-month
period ended June 30, 2002. The increase in salaries and benefit costs was the
result of the implementation of the recognition and retention plan ("RRP")
approved by the stockholders at the annual meeting in May 2003. Other
non-interest expense decreased due to lower telephone costs, reduced postage
fees, and reduced reporting and legal fees. These decreases were offset by
increases in security expense and insurance expense. Telephone costs decreased
by $29,000 due to reduced usage of our bank-by-phone toll free number, as
customers began to use the new local telephone number offered for our
bank-by-phone service. Postage costs dropped $19,000 due to decreases in the
volume of pamphlet mailings. Reporting and legal fees associated with being a
public company decreased by $16,000 mostly due to incurring first time filing
fees within the six-month period ended June 2002 that were not incurred in the
Bank's second year of being a
11
public company. Security expense increased $17,000 due to the hiring of a full
time security officer in response to the recent rash of bank robberies in the
area. Insurance costs increased $14,000 in 2003 due to an increase in the
premiums.
Our federal and state taxes decreased $182,000 to $461,000 for the six months
ended June 30, 2003 from $643,000 in the same period of 2002. This is primarily
the result of lower pre-tax income for the period ended June 30, 2003.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) recently issued two new
accounting standards, Statement 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, and Statement 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equities,
both of which generally become effective in the quarter beginning July 1, 2003.
Management determined that, upon adopting the new standards, they will not
materially affect the Company's operating results or financial condition because
the Company does not have these instruments or engage in these activities.
LIQUIDITY
The Bank must maintain an adequate level of liquidity to ensure the availability
of sufficient funds to fund loan originations and deposit withdrawals, to
satisfy other financial commitments, and to take advantage of investment
opportunities. The Bank invests excess funds in overnight deposits and other
short-term interest-bearing assets to provide liquidity to meet these needs. At
June 30, 2003, cash and cash equivalents totaled $21.7 million. At June 30,
2003, the Bank had commitments to fund loans of $21.0 million. At June 30, 2003,
certificates of deposit represented 56.2% of total deposits. The Bank expects to
retain these deposit accounts. In addition, the Bank could borrow an additional
$48.2 million from the Federal Home Loan Bank without providing additional
collateral. The Bank considers its liquidity and capital resources sufficient to
meet its outstanding short-term and long-term needs.
CAPITAL RESOURCES
The Bank is subject to capital-to-asset requirements in accordance with bank
regulations. The following table summarizes the Bank's regulatory capital
requirements versus actual capital as of June 30, 2003:
ACTUAL REQUIRED EXCESS
(Dollars in thousands) AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
Core capital
(to adjusted total assets) $28,000 11.6% $ 9,700 4.0% $ 18,300 7.6%
Risk-based capital
to (risk-weighted assets) 29,600 24.0 9,900 8.0 19,700 16.0
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUALITATIVE ASPECTS OF MARKET RISK
The majority of our assets and liabilities are monetary in nature. Consequently,
our most significant form of market risk is interest rate risk. Our assets,
consisting primarily of mortgage loans, have longer maturities than our
liabilities, consisting primarily of deposits. As a result, a principal part of
our business strategy is to manage interest rate risk and reduce the exposure of
our net interest income to changes in market interest rates. Accordingly, our
Board of Directors has established an Asset/Liability Management Committee,
which is responsible for evaluating the interest rate risk inherent in our
assets and liabilities, for determining the level of risk that is appropriate
given our business strategy, operating environment, capital, liquidity and
performance objectives; and for managing this risk consistent with the
guidelines approved by the Board of Directors. Senior management monitors the
level of interest rate risk on a regular basis, and the Asset/Liability
Management Committee, which consists of senior management operating under a
policy adopted by the Board of Directors, meets as needed to review our
asset/liability policies and interest rate risk position.
We have sought to manage our interest rate risk by more closely matching the
maturities of our interest rate sensitive assets and liabilities. In particular,
we offer one-, three- and five-year adjustable rate mortgage loans, and three-
and five-year balloon loans. Furthermore, our experience with subprime loans has
been that these loans remain a part of our portfolio for a significantly shorter
period of time than other one-to-four-family loans. In a low interest rate
environment, borrowers typically prefer fixed-rate loans to adjustable-rate
mortgages. We intend to sell into the secondary market our originations of
longer-term fixed-rate loans. We do not solicit high-rate jumbo certificates of
deposit or brokered funds.
In past years, many savings associations have measured interest rate sensitivity
by computing the "gap" between the assets and liabilities that are expected to
mature or reprice within certain time periods based on assumptions regarding
loan prepayment and deposit decay rates formerly provided by the Office of
Thrift Supervision. However, the Office of Thrift Supervision now requires the
computation of amounts by which the net present value of an institution's cash
flow from assets, liabilities, and off-balance-sheet items (the institution's
net portfolio value or "NPV") would change in the event of a range of assumed
changes in market interest rates. The Office of Thrift Supervision provides all
institutions that file a Consolidated Maturity/Rate Schedule as a part of their
quarterly Thrift Financial Report with an interest rate sensitivity report of
net portfolio value. The Office of Thrift Supervision simulation model uses a
discounted cash flow analysis and an option-based pricing approach to measuring
the interest rate sensitivity of net portfolio value. The Office of Thrift
Supervision model estimates the economic value of each type of asset, liability,
and off-balance-sheet contract under the assumption that the United States
Treasury yield curve increases or decreases instantaneously by 100 to 300 basis
points in 100 basis point increments. A basis point equals one-hundredth of one
percent, and 100 basis points equals one percent. An increase in interest rates
from 7% to 8% would mean, for example, a 100 basis point increase in the "Change
in Interest Rates" column below. The Office of Thrift Supervision provides us
the results of the interest rate sensitivity model, which is based on
information we provide to the Office of Thrift Supervision to estimate the
sensitivity of our net portfolio value.
13
The table below sets forth, as of March 31, 2003 (the latest date for which
information is available), the estimated changes in our net portfolio value that
would result from the designated instantaneous changes in the United States
Treasury yield curve. The company expects the June 30, 2003 Net Portfolio Value
to be similar to the March 31, 2003 table shown below.
NPV as % of
Change in Portfolio Value of Assets
Interest Rates Net Portfolio Value -------------------------
in Basis Points ------------------- NPV Basis Point
(Rate Shock) Amount $ Change % Change Ratio Change
------------ ------ -------- -------- ----- ------
(Dollars in thousands)
300 $ 28,802 -6,546 -19% 12.01% -204bp
200 31,434 -3,914 -11 12.88 -117bp
100 33,714 -1,634 -5 13.59 -46bp
Static 35,348 14.05 bp
-100 35,137 -211 -1 13.86 -19bp
-200 N/A N/A N/A N/A N/A
-300 N/A N/A N/A N/A N/A
The table above indicates that at March 31, 2003, in the event of a 200 basis
point increase in interest rates, we would experience a 11% decrease in net
portfolio value. A 100 basis point decrease in interest rate would result in a
1% decrease in net portfolio value. All model outputs associated with the -300
and -200 basis point scenarios are not applicable because of the abnormally low
prevailing interest rate environment.
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurement. Modeling changes in net portfolio value require making
certain assumptions that may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the net portfolio value table presented assumes that the composition of our
interest-sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration or repricing of specific assets and liabilities.
Accordingly, although the net portfolio value table provides an indication of
our interest rate risk exposure at a particular point in time, such measurements
are not intended to and do not provide a precise forecast of the effect of
changes in market interest rates on its net interest income, and will differ
from actual results.
ITEM 4. CONTORLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including the Chief Executive Officer, President and Chief Financial Officer,
the Company has evaluated the effectiveness of the design and operation of it's
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15(d)-15(e)
under the Exchange Act) as of the end of the period covered by this quarterly
report. Based upon that evaluation, the Chief Executive Officer, President and
Chief Financial Officer concluded that, as of the end of the period covered by
this quarterly report, the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports
that the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange commission's rules and forms. There has been no
change in the Company's internal control over financial reporting during the
most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
14
PART II - - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Periodically, there have been various claims and lawsuits involving
the Company, such as claims to enforce liens, condemnation
proceedings on properties in which the Company holds security
interest, claims involving the making and servicing of real property
loans, and other issues incident to the Company's business. In the
opinion of management, after consultation with the Company's legal
counsel, no significant loss is expected from any such pending
claims or lawsuits. The Company is not a party to any material
pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
At the Company's Annual meeting of Stockholders held on May 21,
2003, stockholders voted on the election of directors, approval of the 2003
Stock Option Plan, approval of the 2003 Recognition and Retention Plan, and the
radification of auditors. The number of shares outstanding and entitled to vote
was 2,388,550, and the number of shares present at the meeting in person or by
proxy was 2,215,169.
1. The vote with respect to the Election of Directors was
as follows:
For Withheld
Thomas R. Butkus 2,211,473 3,696
Raymond J. Blake 2,211,573 3,596
2. Ratification and Approval of 2003 Stock Option Plan
For Against Abstain
1,749,608 53,568 3,330
3. Ratification and Approval of 2003 Recognition and
Retention Plan
For Against Abstain
1,749,608 61,099 2,930
4. Ratification of appointment of Crowe Chizek and Company
LLC as auditors
For Against Abstain
2,202,773 10,510 1,886
15
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K.
The Company announced its June 30, 2003 financial
results by press release. The press release was included as an
exhibit and filed on Form 8-K.
16
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.
AJS BANCORP, INC.
Date: 8/12/03 /s/ Thomas R. Butkus
---------------------------------
Thomas R. Butkus
Chief Executive Officer and
Chairman of the Board
Date: 8/12/03 /s/ Lyn G. Rupich
---------------------------------
Lyn G. Rupich
President