Back to GetFilings.com
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 September 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 October 31, 2003 the Registrant had outstanding 2,399,021 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 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
ITEM 1. FINANCIAL STATEMENTS
AJS Bancorp, Inc.
Consolidated Statements of Financial Condition
(in thousands of dollars, except share data)
(unaudited)
September 30, December 31,
2003 2002
---- ----
ASSETS
Cash and cash equivalents
Cash and due from banks (interest-bearing: 2003 -
$11,362; 2002 - $9,955) $ 17,529 $ 16,896
Federal funds sold 4,000 6,000
--------- ---------
Total cash and cash equivalents 21,529 22,896
Securities available-for-sale 43,908 51,903
Securities held-to-maturity (fair value: 2003 -
$201; 2002 - $307) 301 360
Loans, net 151,854 136,134
Federal Home Loan Bank stock, at cost 13,377 4,477
Premises and equipment 4,842 4,595
Accrued interest receivable and other asses 3,677 2,205
--------- ---------
Total assets $ 239,488 $ 222,570
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 184,502 $ 169,008
Federal Home Loan Bank advances 18,500 16,000
Advance payments by borrowers for taxes and insurance 626 1,459
Accrued interest payable and other liabilities 2,592 2,457
--------- ---------
Total liabilities 206,220 188,924
Stockholders' equity
Preferred stock, $.01 par value, 20,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 50,000,000 shares authorized;
2,444,521 and 2,406,950 shares issued at September 30, 2003 and
December 31, 2002 24 24
Treasury stock (2003 - 44,100 shares) (914) --
Additional paid in capital 12,159 11,308
Unearned ESOP shares (425) (566)
Unearned stock awards (976) --
Retained earnings 22,978 21,864
Accumulated other comprehensive income 422 1,016
--------- ---------
Total stockholders' equity 33,268 33,646
--------- ---------
Total liabilities and stockholders' equity $ 239,488 $ 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Interest and dividend income
Loans $ 2,364 $ 2,416 $ 7,045 $ 7,365
Securities 502 746 1,773 2,216
Interest-bearing deposits and other 205 118 408 279
Federal funds sold 16 5 93 50
---------- ---------- ---------- ----------
Total interest income 3,087 3,285 9,319 9,910
Interest expense
Deposits 1,040 1,160 3,206 3,546
Federal Home Loan Bank
advances and other 217 197 644 568
---------- ---------- ---------- ----------
Total interest expense 1,257 1,357 3,850 4,114
---------- ---------- ---------- ----------
Net interest income 1,830 1,928 5,469 5,796
Provision for loan losses (10) -- (61) 20
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 1,840 1,928 5,530 5,776
Noninterest income
Service fees 149 127 406 378
Insurance commissions 72 102 228 308
Gain on sale of loans 4 -- 53 --
Correspondent fees -- 29 13 268
Other 72 154 155 332
---------- ---------- ---------- ----------
Total noninterest income 297 412 855 1,286
Noninterest expense
Compensation and employee benefits 960 810 2,679 2,456
Occupancy expense 225 181 653 621
Data processing expense 97 89 282 291
Advertising and promotion 58 74 200 219
Other 279 238 809 797
---------- ---------- ---------- ----------
Total noninterest expense 1,619 1,392 4,623 4,384
---------- ---------- ---------- ----------
Income before income taxes 518 948 1,762 2,678
Income taxes 187 372 648 1,015
---------- ---------- ---------- ----------
Net income $ 331 $ 576 $ 1,114 $ 1,663
========== ========== ========== ==========
Earnings per share
Basic and diluted $ .14 $ .25 $ .48 $ .71
Weighted average shares 2,317,516 2,343,262 2,333,488 2,338,544
---------- ---------- ---------- ----------
Comprehensive income $ 55 $ 736 $ 520 $ 1,759
========== ========== ========== ==========
See notes to consolidated financial statements.
2
AJS Bancorp, Inc.
Consolidated Statements of Cash Flows
(in thousands of dollars)
(unaudited)
Nine Months Ended
September 30,
---------------------
2003 2002
---- ----
Cash flows from operating activities
Net income $ 1,114 $ 1,663
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 222 306
Provision for loan losses (61) 20
Premium amortization, net 75 (28)
Stock award compensation expense 130 --
ESOP compensation expense 270 201
Loss on disposal of equipment -- --
Federal Home Loan Bank stock dividends (400) (107)
Gain on sale of loans held for sale (53) --
Gain on sale of other real estate (142)
Changes in
Loans held for sale 53 --
Accrued interest receivable and other assets 662 4
Accrued interest payable and other liabilities 135 79
-------- --------
Net cash from operating activities 2,147 1,996
Cash flows from investing activities
Securities available-for-sale
Purchases (18,294) (15,269)
Maturities and principal payments 23,488 14,932
Securities held-to-maturity
Maturities and principal payments 59 427
Maturities of certificates of deposit -- 1,000
Loan originations, net (15,661) (3,818)
Proceeds from sale of other real estate -- 372
Purchase of equipment (469) (1,353)
Purchase of Federal Home Loan Bank stock (8,500) (3,000)
-------- --------
Net cash from investing activities (19,377) (6,709)
Cash from financing activities
Net change in deposits 15,494 (2,574)
Net change in Federal Home Loan Bank advances 2,500 3,000
Purchase of treasury stock (1,298) --
Net change in advance payments by borrowers for taxes and insurance (833) 620
-------- --------
Net cash from financing activities 15,863 1,046
-------- --------
Net change in cash and cash equivalents (1,367) (3,667)
Cash and cash equivalents at beginning of period 22,896 29,009
-------- --------
Cash and cash equivalents at end of period $ 21,529 $ 25,342
======== ========
See notes to consolidated financial statements.
3
AJS Bancorp, Inc.
Consolidated Statements of Stockholders' Equity
Nine months ended September 30, 2003
(in thousand of dollars)
(unaudited)
Accumulated
Additional Unearned Unearned Other Total
Common Paid-in Treasury Stock ESOP Retained Comprehensive Stockholders'
Stock Capital Stock Awards Shares Earnings Income (Loss) Equity
----- ------- ----- ------ ------ -------- ------------- ------
Balance at December 31, 2001 $ 24 $ 11,220 $ -- $ -- $(755) $19,749 $1,010 $ 31,248
ESOP shares earned -- 60 -- -- 141 -- -- 201
Comprehensive income
Net income -- -- -- -- -- 1,663 -- 1,663
Change in unrealized gain on securities --
available for sale, net of taxes -- -- -- -- -- -- 96 96
Total comprehensive income 1,759
----- -------- ------- ----- ----- ------- ------ --------
Balance at September 30, 2002 $ 24 $ 11,280 $ -- $ -- $(614) $21,412 $1,106 $ 33,208
===== ======== ======= ===== ===== ======= ====== ========
Accumulated
Additional Unearned Unearned Other Total
Common Paid-in Treasury Stock ESOP Retained Comprehensive Stockholders'
Stock Capital Stock Awards Shares Earnings Income (Loss) Equity
----- ------- ----- ------ ------ -------- ------------- ------
Balance at December 31, 2002 $ 24 $ 11,308 $ -- $ -- $(566) $21,864 $1,016 $ 33,646
Purchase of 65,500 shares of treasury stock -- -- (1,298) -- -- -- -- (1,298)
Allocation of stock awards -- 722 384 (1,106) -- -- -- --
ESOP shares earned -- 129 -- -- 141 -- -- 270
Stock awards earned -- -- 130 -- -- -- 130
Comprehensive income
Net income -- -- -- -- -- 1,114 -- 1,114
Change in unrealized gain on securities
available-for-sale, net of taxes -- -- -- -- -- -- (594) (594)
--------
Total comprehensive income 520
----- -------- ------- ----- ----- ------- ------ --------
Balance at September 30, 2003 $ 24 $ 12,159 $ (914) $(976) $(425) $22,978 $ 422 $ 33,268
===== ======== ======= ===== ===== ======= ====== ========
See notes to consolidated financial statements.
4
AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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. On December 26, 2001 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
Basic earnings per share for the three and nine months ended September 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 nine months
ended September 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 Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands, except per share data)
Basic
Net income $ 331 $ 576 $ 1,114 $ 1,663
======== ======== ======== ========
Weighted average common shares
outstanding 2,318 2,343 2,333 2,339
======== ======== ======== ========
Basic earnings per common share $ .14 $ .25 $ .48 $ .71
======== ======== ======== ========
Diluted
Net income $ 331 $ 576 $ 1,114 $ 1,663
======== ======== ======== ========
Weighted average common shares
outstanding 2,318 2,343 2,333 2,339
Dilutive effect of stock options 11 -- -- --
Dilutive effect of stock awards 3 -- 1 --
======== ======== ======== ========
Diluted average common shares 2,332 2,343 2,334 2,339
======== ======== ======== ========
Diluted earnings per common share $ .14 $ .25 $ .48 $ .71
======== ======== ======== ========
Note 4 - Stock Option Plan
The Company adopted a stock plan in May 2003 under the terms of which options
for 114,685 shares of the Company's common stock were granted to directors,
officers and employees. 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 nine months ended September 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 9.6 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 nine months ended September
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 Nine Months
Ended September 30, 2003 Ended September 30, 2003
------------------------ ------------------------
(in thousands, except per share data)
Net income as reported $ 331 $ 1,114
Pro forma net income 325 1,105
Earnings per share as reported
Basic and diluted .14 .48
Pro forma earnings per share
Basic and diluted .14 .47
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 $54,000 and $130,000 respectively for the three and nine-months
ended September 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 September 30, 2003 to its financial condition at December 31,
2002 and the results of operations for the three-month and nine-month periods
ended September 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 September 30, 2003 were $239.5 million compared to $222.6
million at December 31, 2002, an increase of $16.9 million, or 7.6%. The
increase in total assets primarily reflects increases in loans, and Federal Home
Loan Bank stock, partially offset by a decrease in securities. Loans receivable
increased $15.7 million to $151.9 million at September 30, 2003 due to higher
demand caused mostly by existing and new customers refinancing their mortgages
in the historically low interest rate environment. This increased demand for
mortgage refinances has moderated during the last few months as interest rates
have stabilized. Federal Home Loan Bank ("FHLB") stock increased $8.9 million to
$13.4 million at September 30, 2003 from $4.5 million at December 31, 2002. This
increase is due to the above-market yield typically generated from the quarterly
dividends paid on the stock. The second quarter FHLB annualized dividend rate
declared on July 15, 2003 and payable on August 15, 2003 was 6.50%. There is no
guarantee that dividends will continue to be paid on the FHLB stock or that they
will be paid at the same rate as they have been paid in the past. Securities
available-for-sale decreased $8.0 million, or 15.4%, to $43.9 million at
September 30, 2003 from $51.9 million at December 31, 2002. The decrease was
mostly attributable to maturities, calls and prepayments of principal on the
mortgage-backed securities during the nine months ended September 30, 2003.
The Company had non-performing assets of $680,000 at September 30, 2003 compared
to $1.1 million at December 31, 2002. The allowance for loan losses was $2.0
million at September 30, 2003 and $2.1 million at December 31, 2002. This
represents a ratio of allowance for loan losses to loans receivable of 1.37% at
September 30, 2003 and 1.51% at December 31, 2002. The allowance for loan losses
to non-performing loans was 319.49% at September 30, 2003 compared to 197.91% at
December 31, 2002. Subprime loan balances
8
decreased $10.2 million to $21.0 million at September 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 September 30, 2003 were $206.2 million compared to $188.9
million at December 31, 2002, an increase of $17.3 million, reflecting increases
in deposits and Federal Home Loan Bank advances offset by a decrease in advance
payments by borrowers for taxes and insurance. Total deposits increased $15.5
million, or 9.2%, to $184.5 million at September 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 $18.5 million at September
30, 2003 from $16.0 million at December 31, 2002. These fixed rate borrowings
were used to fund additional loan growth.. Advance payments by borrowers for
taxes and insurance decreased $833,000 to $626,000 at September 30, 2003 from
$1.5 million at December 31, 2002. This decrease was due to the timing
differences of payment for county real estate taxes.
Total stockholders' equity decreased to $33.3 million at September 30, 2003 from
$33.6 million at December 31, 2002. The decrease in stockholders' equity
reflects a decrease in other comprehensive income and the purchase of common
stock during the period offset by net income of $1.1 million for the nine months
ended September 30, 2003. The decrease in other comprehensive income was due to
a lower market value on securities held for sale for the nine months ended
September 30, 2003 as compared to the market value of these securities at
December 31, 2002. AJS Bancorp repurchased 65,500 shares of its common stock
during the nine months ended September 30, 2003. This repurchase was done as
part of a 120,000 share repurchase program announced in January 2003.
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. 21,400 treasury shares, as well as
37,571 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 SEPTEMBER 30, 2003 AND
SEPTEMBER 30, 2002
Net income decreased $245,000 to $331,000 for the quarter ended September 30,
2003 compared to the same period in 2002. The return on average assets decreased
to 0.55% from 1.04% in the prior period. The decrease in net income resulted
from decreases in net interest income and noninterest income, with an increase
in noninterest expense during the comparative periods.
Net interest income was $1.8 million for the quarter ended September 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 net interest margin and
net interest spread to 3.20% and 2.93%, respectively for the three months ended
September 30, 2003 from 3.74% and 3.41%, respectively for the three months ended
September 30, 2002. The decrease in 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 5.39% from the three months ended September 30, 2003 from 6.38% for
the same period in 2002, while the average yield on interest-bearing liabilities
decreased to 2.46% for the three months ended September 30, 2003 from 2.96% for
the same period ended 2002.
We recorded a negative provision for loan losses during the quarter ended
September 30, 2003 to reflect $10,000 in loan loss recoveries. There was no loan
loss provision during the quarter ended September 30, 2002. At September 30,
2003 and 2002, our allowance for loan losses was $2.0 million and $2.1 million
or 1.37% and 1.55% of total gross loans, respectively. Management does not feel
the additional loan loss
9
provisions are warranted at this time; however, should any unforeseen risks
present themselves, management may need to increase the provision in the future.
Non-performing assets as a percentage of total assets was 0.28% at September 30,
2003 and 0.49% at September 30, 2002. The allowance for loan losses to
non-performing loans was 319.49% and 199.13% at September 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 September 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 $115,000 to $297,000 for the quarter ended
September 30, 2003 from $412,000 for the comparable quarter in 2002. This
decrease in noninterest income was the result of decreases of $30,000 in
insurance commissions and $108,000 in other noninterest income, partially offset
by an increase in service charges of $23,000 for the September 30, 2003 quarter
compared to the quarter ended September 30, 2002. The decrease in insurance
commissions is the result of lower overall insurance and annuity sales. Other
noninterest income decreased primarily as a result of decreased profit on the
sale of real estate. In addition, the Company made a decision to cut back the
staffing in the correspondent loan department, resulting in a decrease in loan
volume and income from that department. Offsetting these decreases in other
non-interest income was an increase in the profit on the sale of mortgage-backed
securities. Service charges increased primarily due to prepayment penalties
charged on prepaid commercial loans.
Noninterest expense increased to $1.6 million from $1.4 million for the quarter
ended September 30, 2003 compared to the same period in 2002. Salaries and
benefits, occupancy and other noninterest expense increased by $235,000,
partially offset by a decrease in advertising and promotion costs of $16,000.
The increase in salaries and benefit costs was partially the result of the
implementation of the RRP. Also, contributing to this increase were increases in
compensation to employees, employee stock ownership expense, and group insurance
premiums. Occupancy costs increased $44,000 due to increases in real estate
taxes and repairs and maintenance to the buildings. Real estate taxes increased
by $32,000 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 increased due to the implementation of our
new debit card program and corresponding increased postage costs associated with
the mailing of our debit cards. Advertising and promotion costs decreased due to
lower overall radio advertisements and special promotions done in conjunction
with the opening of our new branch facility in Orland Park, Illinois.
Our federal and state taxes decreased $185,000 to $187,000 for the quarter ended
September 30, 2003 from $372,000 in the same period of 2002. This is primarily
the result of lower pre-tax income for the quarter ended 2003.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER
30, 2002
Net income decreased $549,000 to $1.1 million for the nine months ended
September 30, 2003 compared to the same period in 2002. The return on average
assets decreased to 0.62% from 1.04% in the prior period. The decrease in net
income resulted from decreases in net interest income and noninterest income and
increases in noninterest expense.
Net interest income was $5.5 million for the nine months ended September 30,
2003 compared to $5.8 million for the same period in 2002. The decrease in net
interest income was primarily a result of decreases in net
10
interest margin and net interest spread to 3.20% and 2.91% respectively for the
nine months ended September 30, 2003 from 3.86% and 3.48% respectively for the
nine months ended September 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 5.45% from the nine months ended September 30, 2003 from 6.59% for
the same period in 2002, while the average yield on interest-bearing liabilities
decreased to 2.53% for the nine months ended September 30, 2003 from 3.12% for
the same period ended 2002.
We recorded a negative loss provision of $61,000 for the nine months ended
September 30, 2003 compared to a $20,000 provision for loan losses for the same
period in 2002. During the nine months ended September 30, 2003, the Bank
recovered a total of $61,000 on four 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 $855,000 for the nine months ended September 30,
2003 from $1.3 million for the comparable period in 2002 due to decreases in
insurance commissions and other noninterest income, Insurance commissions
decreased $80,000 to $228,000 for the nine months ended September 30, 2003 due
to lower sales of annuity products during the nine month period ended September
30, 2003 when compared to the same period in 2002. The decrease in other
noninterest income was primarily due to a decrease in correspondent lending fees
as a result of the Bank's decision to cut back the staffing in that department,
which resulted in a decrease in loan volume. A decrease of $142,000 in profit on
the sale of real estate and a decrease of $51,000 in rental income also
contributed to lower other noninterest 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. Offsetting these decreases in other
noninterest income was a $53,000 increase 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 increased by $239,000 to $4.6 million for the nine-months
ended September 30, 2003 from $4.4 million for the comparable period in 2002.
Salaries and benefits increased $223,000 for the comparable periods, occupancy
costs increased $32,000, whereas advertising and promotion expense decreased
$19,000 for the nine-month period ended September 30, 2003 compared to the
nine-month period ended September 30, 2002. The increase in salaries and benefit
costs was partially the result of the implementation of the recognition and
retention plan ("RRP") approved by the stockholders at the annual meeting in May
2003. Also contributing to higher salary and benefit costs were increases in
overall compensation and employee stock ownership plan expenses. Occupancy
expenses increased due to increased real estate taxes and costs of repairs and
maintenance to the office buildings offset somewhat by decreases in depreciation
expenses. Advertising and promotion costs decreased due to a reduction in radio
and television promotions.
Our federal and state taxes decreased $367,000 to $648,000 for the nine months
ended September 30, 2003 from $1.0 million in the same period of 2002. This is
primarily the result of lower pre-tax income for the period ended September 30,
2003.
11
NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others", an interpretation of SFAS No. 5, 57, and 107 and Rescission of FIN 34.
This Interpretation clarifies the requirements of SFAS No. 5, "Accounting for
Contingencies," relating to the guarantor's accounting for and disclosure of the
issuance of certain types of guarantees. The disclosure provisions of the
Interpretation are effective for financial statements in interim or annual
reports for periods that end after December 15, 2002. However, the provisions
for initial recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002, irrespective of
the guarantor's year-end. The application of this Interpretation did not have a
material impact on the Company's consolidated statement of financial condition
or consolidated statement of income.
In January 2003, FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 requires a company to consolidate a variable interest entity
("VIE") if the company has variable interests that give it a majority of the
expected losses or a majority of the expected residual returns of the entity.
FIN 46 is effective immediately for VIEs created after January 31, 2003. For
VIEs created prior to February 1, 2003, FIN 46 would apply in the first interim
period or fiscal year beginning after June 15, 2003, however this has been
deferred by FASB until December 31, 2003. The implementation of FIN 46 did not
have an impact on the Company's consolidated statement of financial condition or
consolidated statement of income.
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 became 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
September 30, 2003, cash and cash equivalents totaled $21.5 million. At
September 30, 2003, the Bank had commitments to fund loans of $17.6 million. At
September 30, 2003, certificates of deposit represented 55.6% of total deposits.
The Bank expects to retain these deposit accounts. In addition, the Bank has
borrowing capacity for an additional $50.3 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 September 30, 2003:
ACTUAL REQUIRED EXCESS
------ -------- ------
(Dollars in thousands) AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
Core capital
(to adjusted total assets) $28,500 11.9% $ 9,600 4.0% $18,900 7.9%
Risk-based capital
to (risk-weighted assets) 30,100 23.7 10,200 8.0 19,900 15.7
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 some of 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 June 30, 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 September 30, 2003 Net Portfolio
Value to be similar to the June 30, 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 $27,340 -7,107 -21% 11.29% -229bp
200 30,154 -4,293 -12 12.24 -134bp
100 32,647 -1,800 -5 13.04 -54bp
Static 34,447 13.58
-100 33,963 -484 -1 13.31 -27bp
-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 June 30, 2003, in the event of a 200 basis
point increase in interest rates, we would experience a 12% 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 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.
None
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 September 30, 2003 financial results
by press release. The press release was included as an exhibit and
filed on October 23, 2003 on Form 8-K.
15
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: 11/12/03 /s/ Thomas R. Butkus
------------------------------------------------
Thomas R. Butkus
Chief Executive Officer and Chairman of the Board
Date: 11/12/03 /s/ Lyn G. Rupich
------------------------------------------------
Lyn G. Rupich
President and Chief Operating Officer
16