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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, 2004
Commission file number 000-33405
AJS BANCORP, INC.
(Exact name of registrant 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 21, 2004 the Registrant had outstanding 2,270,771 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 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
Item 4. Controls and Procedures 13
PART II - Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 13
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Securities Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
ITEM 1. FINANCIAL STATEMENTS
AJS Bancorp, Inc.
Consolidated Statements of Financial Condition
(in thousands of dollars, except share data)
(unaudited)
June 30, December 31,
2004 2003
---- ----
ASSETS
Cash and cash equivalents
Cash and due from banks (interest-earning: 2004 -
$7,699; 2003 - $9,956) $ 13,038 $ 19,801
Federal funds sold -- --
--------- ---------
Total cash and cash equivalents 13,038 19,801
Securities available-for-sale 60,850 42,475
Securities held-to-maturity (fair value: 2004 -
$153; 2003 - $179) 153 177
Loans, net 164,407 155,628
Federal Home Loan Bank stock, at cost 14,037 13,612
Premises and equipment 4,806 4,875
Accrued interest receivable 1,037 967
Other assets 945 849
--------- ---------
Total assets $ 259,273 $ 238,384
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 195,073 $ 183,847
Federal Home Loan Bank advances 28,900 17,000
Advance payments by borrowers for taxes and insurance 1,955 1,651
Accrued interest payable and other liabilities 3,813 3,781
--------- ---------
Total liabilities 229,741 206,279
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 shares issued at June 30, 2004 and December 31, 2003 24 24
Treasury stock (173,750 shares at June 30, 2004;
51,600 shares at December 31, 2003) (4,055) (1,075)
Additional paid in capital 11,033 10,972
Unearned ESOP shares (283) (377)
Unearned stock awards (783) (924)
Retained earnings 23,964 23,257
Accumulated other comprehensive income (368) 228
--------- ---------
Total stockholders' equity 29,532 32,105
--------- ---------
Total liabilities and stockholders' equity $ 259,273 $ 238,384
========= =========
See notes to consolidated financial statements.
1
AJS Bancorp, Inc.
Consolidated Statements of Income
(in thousands of dollars, except share data)
(unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Interest and dividend income
Loans $ 2,370 $ 2,327 $ 4,695 $ 4,681
Securities 560 591 1,028 1,271
Interest-earning deposits and other 217 120 451 203
Federal funds sold 13 41 26 77
---------- ---------- ---------- ----------
Total interest income 3,160 3,079 6,200 6,232
Interest expense
Deposits 1,001 1,087 1,943 2,166
Federal Home Loan Bank
advances and other 242 218 445 427
---------- ---------- ---------- ----------
Total interest expense 1,243 1,305 2,388 2,593
---------- ---------- ---------- ----------
Net interest income 1,917 1,774 3,812 3,639
Provision (recovery) for loan losses (15) (51) (15) (51)
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 1,932 1,825 3,827 3,690
Noninterest income
Service fees 116 134 218 257
Insurance commissions 41 67 89 156
Gain on sale of loans -- 26 -- 49
Other 38 45 75 96
---------- ---------- ---------- ----------
Total noninterest income 195 272 382 558
Noninterest expense
Compensation and employee benefits 907 938 1,820 1,719
Occupancy expense 217 204 370 428
Data processing expense 93 105 195 142
Advertising and promotion 91 75 178 185
Other 265 266 530 530
---------- ---------- ---------- ----------
Total noninterest expense 1,573 1,588 3,093 3,004
---------- ---------- ---------- ----------
Income before income taxes 554 509 1,116 1,244
Income taxes 206 196 409 461
---------- ---------- ---------- ----------
Net income $ 348 $ 313 $ 707 $ 783
========== ========== ========== ==========
Earnings per share
Basic $ .15 $ .13 .31 $ .33
Diluted $ .15 $ .13 .30 .33
Weighted average shares - Diluted 2,304,118 2,333,039 2,326,201 2,341,623
Comprehensive income $ (245) $ 190 $ 111 $ 465
========== ========== ========== ==========
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,
--------------------
2004 2003
---- ----
Cash flows from operating activities
Net income $ 707 $ 783
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 161 147
Provision for loan losses (15) (51)
Premium amortization, net 49 21
Stock award compensation expense 141 76
ESOP compensation expense 258 173
Federal Home Loan Bank stock dividends (425) (218)
Gain on sale of loans held for sale -- (49)
Gain on sale of other real estate -- (4)
Changes in
Loans held for sale -- (103)
Accrued interest receivable and other assets 189 469
Accrued interest payable and other liabilities (71) 147
-------- --------
Net cash from operating activities 994 1,391
Cash flows from investing activities
Securities available-for-sale
Purchases (26,721) (15,272)
Maturities and principal payments 7,323 12,239
Securities held-to-maturity
Maturities and principal payments 24 49
Loan originations, net (8,762) (9,479)
Proceeds from sale of other real estate 21 --
Purchase of equipment (92) (412)
Purchase of Federal Home Loan Bank stock -- (8,500)
-------- --------
Net cash from investing activities (28,207) (21,375)
Cash from financing activities
Net change in deposits 11,226 16,197
Net change in Federal Home Loan Bank advances 11,900 3,000
Purchase of treasury stock (2,980) (657)
Net change in advance payments by borrowers for taxes and insurance 304 222
-------- --------
Net cash from financing activities 20,450 18,762
-------- --------
Net change in cash and cash equivalents (6,763) (1,222)
Cash and cash equivalents at beginning of period 19,801 22,896
-------- --------
Cash and cash equivalents at end of period $ 13,038 $ 21,674
======== ========
See notes to consolidated financial statements.
3
AJS Bancorp, Inc.
Consolidated Statements of Stockholders' Equity
Six months ended June 30, 2004
(in thousand of dollars)
(unaudited)
Additional Unearned Unearned
Common Paid-in Treasury Stock ESOP
Stock Capital Stock Awards Shares
----- ------- ----- ------ ------
Balance at December 31, 2002 $ 24 $ 11,308 $ -- $ -- $ (566)
Purchase of 35,000 shares of treasury stock -- -- (657) -- --
Allocation of stock awards -- 722 384 (1,106) --
ESOP shares earned -- 79 -- -- 94
Stock awards earned -- -- -- 76 --
Comprehensive income
Net income -- -- -- -- --
Change in unrealized gain on securities --
available for sale, net of taxes -- -- -- -- --
Total comprehensive income
-------- -------- -------- -------- --------
Balance at June 30, 2003 $ 24 $ 12,109 $ (273) $ (1,030) $ (472)
======== ======== ======== ======== ========
Accumulated
Other Total
Retained Comprehensive Stockholders'
Earnings Income (Loss) Equity
-------- ------------- ------
Balance at December 31, 2002 $ 21,864 $ 1,016 $ 33,646
Purchase of 35,000 shares of treasury stock -- -- (657)
Allocation of stock awards -- -- --
ESOP shares earned -- -- 173
Stock awards earned -- -- 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 $ 22,647 $ 698 $ 33,703
======== ======== ========
Additional Unearned Unearned
Common Paid-in Treasury Stock ESOP
Stock Capital Stock Awards Shares
----- ------- ----- ------ ------
Balance at December 31, 2003 $ 24 $ 10,972 $ (1,075) $ (924) $ (377)
Purchase of 122,150 shares of treasury stock -- -- (2,980) -- --
ESOP shares earned -- 164 -- -- 94
Stock awards earned -- -- -- 141 --
ESOP put option -- (103) -- -- --
Comprehensive income
Net income -- -- -- -- --
Change in unrealized gain on securities
available-for-sale, net of taxes -- -- -- -- --
Total comprehensive income
-------- -------- -------- -------- --------
Balance at June 30, 2004 $ 24 $ 11,033 $ (4,055) $ (783) $ (283)
======== ======== ======== ======== ========
Accumulated
Other Total
Retained Comprehensive Stockholders'
Earnings Income (Loss) Equity
-------- ------------- ------
Balance at December 31, 2003 $ 23,257 $ 228 $ 32,105
Purchase of 122,150 shares of treasury stock -- -- (2,980)
ESOP shares earned -- -- 258
Stock awards earned -- -- 141
ESOP put option -- -- (103)
Comprehensive income
Net income 707 -- 707
Change in unrealized gain on securities
available-for-sale, net of taxes -- (596) (596)
--------
Total comprehensive income 111
-------- -------- --------
Balance at June 30, 2004 $ 23,964 $ (368) $ 29,532
======== ======== ========
See notes to consolidated financial statements.
4
AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
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, 2003 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, 2004. In the
opinion of the 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 - Earnings Per Share
Basic earnings per share for the three and six months ended June 30, 2004 and
2003 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, 2004 and 2003 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.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
(in thousands, except (in thousands, except
per share data) per share data)
Basic
Net income $ 348 $ 313 $ 707 $ 783
======= ======= ======= =======
Weighted average common shares
outstanding 2,276 2,333 2,293 2,342
======= ======= ======= =======
Basic earnings per common share $ .15 $ .13 $ .31 $ .33
======= ======= ======= =======
5
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands, except (in thousands, except
per share data) per share data)
Diluted
Net income $ 348 $ 313 $ 707 $ 783
======= ======= ======= =======
Weighted average common shares
outstanding 2,276 2,333 2,293 2,342
Dilutive effect of stock options 6 -- 7 --
Dilutive effect of stock awards 22 -- 26 --
======= ======= ======= =======
Diluted average common shares 2,304 2,333 2,326 2,342
======= ======= ======= =======
Diluted earnings per common share $ .15 $ .13 $ .30 $ .33
======= ======= ======= =======
Note 3 - 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 six months ended June 30, 2004 and 2003 is presented below:
For the Six Months
Ended June 30,
---------------------------------------
2004 2003
---- ----
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of period 114,685 $ 18.75 -- $ --
Granted -- -- 114,685 18.75
Exercised -- -- -- --
Forfeited 2,000 18.75 -- --
------- ------- ------- -------
Outstanding at end of period 112,685 $ 18.75 114,685 $ 18.75
======= ======= ======= =======
2004 2003
---- ----
Options exercisable at end of period 27,337 --
Weighted-average fair value of options granted during period $ -- $ 2.82
Average remaining option term 9 years 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,
2004 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, Ended June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
(in thousands, except (in thousands, except
per share data) per share data)
Net income as reported $ 348 $ 313 $ 707 $ 783
Pro forma net income 342 310 695 780
Earnings per share as reported
Basic .15 .13 .31 .33
Diluted .15 .13 .30 .33
Pro forma earnings per share
Basic and diluted .15 .13 .30 .33
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 $141 and $76 for the six months ended June 30, 2004 and
2003,respectively.
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 Litigation 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.
7
The following discussion compares the financial condition of the Company at June
30, 2004 to its financial condition at December 31, 2003 and the results of
operations for the three- and six-month periods ended June 30, 2004 to the same
period in 2003. This discussion should be read in conjunction with the interim
financial statements and footnotes included herein.
FINANCIAL CONDITION
Total assets at June 30, 2004 were $259.3 million compared to $238.4 million at
December 31, 2003, an increase of $20.9 million, or 8.8%. The increase in total
assets primarily reflects increases in securities, and loans, partially offset
by a decrease in cash and cash equivalents. Loans receivable increased $8.8
million to $164.4 million at June 30, 2004 from $155.6 million at December 31,
2003. The increase in loans reflects new and refinanced commercial and
multifamily mortgage loans and, to a lesser extent, single-family loans. The
Company has focused on originating more commercial and multifamily loans as
these products generally carry higher interest rates with shorter terms than the
traditional single-family loans. Securities increased $18.4 million, or 43.0%,
to $61.0 million at June 30, 2004 from $42.7 million at December 31, 2003. The
increase was due to an arrangement whereby the Company purchased $19.5 million
in mortgage-backed securities funded by cash and Federal Home Loan Bank ("FHLB")
advances. The mortgage-backed securities purchased represent the Company's
attempt to lock in a spread between the interest earned on the asset and the
lower interest paid on the FHLB advances.
The Company had non-performing assets of $1.2 million at June 30, 2004 and
December 31, 2003. The allowance for loan losses was $1.9 million at June 30,
2004 and $2.0 million at December 31, 2003. This represents a ratio of allowance
for loan losses to gross loans receivable of 1.14% at June 30, 2004 and 1.24% at
December 31, 2003. The allowance for loan losses to non-performing loans was
153.11% at June 30, 2004 compared to 172.71% at December 31, 2003. Subprime loan
balances decreased $2.3 million to $16.0 million at June 30, 2004 from $18.3
million at December 31, 2003. The decrease in subprime loans reflects our
decision to de-emphasize this type of lending.
Total liabilities at June 30, 2004 were $229.7 million compared to $206.3
million at December 31, 2003, an increase of $23.4 million, reflecting increases
in deposits, FHLB advances and advance payments by borrowers for taxes and
insurance. Total deposits increased $11.2 million, or 6.1%, to $195.1 million at
June 30, 2004 from $183.8 million at December 31, 2003. This increase was
largely due to greater marketing efforts and promotional deposit rates designed
to attract deposits for specific time frames. FHLB advances increased to $28.9
million at June 30, 2004 from $17.0 million at December 31, 2003. The additional
fixed rate borrowings were used to fund the purchase of mortgage-backed
securities. Advance payments by borrowers for taxes and insurance increased
$304,000 to $2.0 million at June 30, 2004 from $1.7 million at December 31,
2003. This increase was due to the timing differences of payments for county
real estate taxes.
Total stockholders' equity decreased to $29.5 million at June 30, 2004 from
$32.1 million at December 31, 2003. The decrease in stockholders' equity during
the past six months was primarily due to the repurchase of 122,150 shares of the
Company's stock at an average price of $23.86 per share. This decrease was
offset by net income of $707,000. Repurchased shares are not considered
outstanding and are not included when calculating earnings per share or book
value information.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003
Net income increased $35,000 to $348,000 for the quarter ended June 30, 2004
compared to the same period in 2003. The return on average assets increased to
..54% for the quarter ended June 30, 2004 from .52% for the same period in 2003.
The increase was primarily due to an increase in net interest income, offset in
part by a decrease in the non-interest income. Total interest income increased
by $81,000 or 2.6% to $3.2 million for the quarter ended June 30, 2004 as
compared to $3.1 million for the same quarter in 2003. The increase was
primarily due to a $97,000 increase in income earned on interest earning
deposits, offset by a $28,000 reduction in income on federal funds sold.
Interest income on interest earning deposits increased to $217,000
8
or 80.8% for the quarter ended June 30, 2004 compared to $120,000 for the same
period in 2003. The increase was due to a higher investment in federal home loan
bank (FHLB) stock during the quarter ended June 30, 2004 when compared to the
same quarter in 2003. The FHLB stock had an average annual dividend rate of
6.00% for the quarter ended June 30, 2004. This increased the average yield on
interest earning deposits to 4.6% for the quarter ended June 30, 2004 compared
to 2.1% for the same quarter in 2003. Interest on federal funds sold declined
$28,000 or 68.3% to $13,000 for the quarter ended June 30, 2004 compared to
$41,000 earned for the same period in 2003. This decrease was due to lower
average balances held during the 2004 quarter when compared to the 2003 quarter.
Average interest earning assets were $249.2 million and $234.6 million during
the comparative 2004 and 2003 quarters while the average yield was 5.07% and
5.25%, respectively.
Interest expense on deposits decreased by $62,000 or 4.8% to $1.2 million for
the quarter ended June 30, 2004 from $1.3 million for the same quarter in 2003.
This was due to a decrease in interest expense on deposits of $86,000 or 7.9% to
$1.0 million for the quarter ended June 30, 2004 from $1.1 million for the same
quarter in 2003, partially offset by an increase in interest expense on FHLB
advances of $24,000 or 11.0% to $242,000 from $218,000 for the same quarter in
2003. The decrease in the cost of our deposits was primarily due to the general
decline in market interest rates and certificates of deposit maturing and
renewing at lower rates. The increase in the interest expense on FHLB advances
is due to higher average balances during the quarter ended June 30, 2004 when
compared to the same quarter in 2003. The average cost of deposits at June 30,
2004 was 2.03% as compared to 2.35% at June 30, 2003. The average cost on
interest-bearing liabilities decreased to 2.25% for the three months ended June
30, 2004 from 2.55% for the same period ended 2003.
Our net interest rate spread increased 12 basis points to 2.82% for the quarter
ended June 30, 2004 from 2.70% for the same period in 2003, while our net
interest margin increased 6 basis points to 3.08% for the quarter ended June 30,
2004 from 3.02% for the same period in June 30, 2003. The ratio of average
interest-earning assets to average interest-bearing liabilities declined to
112.89% for the three months ended June 30, 2004 from 114.65% for the same
period in 2003.
There was no increase to the provision for loan losses for the three months
ended June 30, 2004 or June 30, 2003. However, there were $15,000 in loan loss
recoveries during the three months ended June 30, 2004, and $51,000 in
recoveries during the three months ended June 30, 2003. Any loan provisions made
are to maintain the allowance to reflect management's estimates of losses
inherent in our loan portfolio. At this time, management felt no additional
provisions were necessary. Should any unforeseen risks present themselves
however, management may need to increase this provision in the future. At June
30, 2004 and December 31, 2003, our allowance for loan losses was $1.9 million
and $2.0 million or 1.14% and 1.24% of total loans, respectively. Non-performing
assets as a percentage of total assets was .48% at June 30, 2004 and .49% at
December 31, 2003. The allowance for loan losses to non-performing loans was
153.11% and 172.71% at June 30, 2004 and December 31, 2003, respectively.
Noninterest income decreased $77,000 to $195,000 for the quarter ended June 30,
2004 from $272,000 for the comparable quarter in 2003. This decrease in
noninterest income was the result of a $26,000 decline in insurance commissions,
an $18,000 decrease in service charges on accounts, and a $33,000 decrease in
other noninterest income. The decrease in insurance commissions reflects lower
sales of variable- and fixed-rate annuities due to customer's reluctance to
enter the market at a time of historically low interest rates, as well as
reduced staffing in the department. The decrease in service charges on accounts
is primarily due to a decrease in late fees charged and a decrease in loan
closing fees. The decrease in other noninterest income was primarily due to a
decrease in gains from the sale of loans.
Noninterest expense decreased by $15,000 to $1.6 million at June 30, 2004 when
compared to expense for the comparable quarter in 2003. Salaries and benefits
decreased $31,000, data processing costs decreased $12,000, offset by
advertising and promotion costs, which increased $16,000. The decrease in
salaries and benefits was primarily due to a decrease in the recognition and
retention plan (RRP) cost for the June 30, 2004 quarter when compared to the
June 30, 2003 quarter. Data processing expenses decreased due to lower
9
expected costs during the quarter ended June 30, 2004. The increase in
advertising and promotion costs occurred due to various deposit program specials
offered during the quarter ended June 30, 2004
Our federal and state taxes decreased $10,000 to $206,000 for the quarter ended
June 30, 2004 from $196,000 in the same period of 2003. This is primarily the
result of lower pretax income for the quarter ended June 30, 2004.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003
Net income increased $173,000 to $3.8 million for the six months ended June 30,
2004 compared to the same period in 2003. The return on average assets decreased
to 5.07% for the six months ended June 30, 2004 from 5.48% for the comparable
period in 2003. The decrease in net income resulted from a decrease in
noninterest income and an increase noninterest expense.
Net interest income was $3.8 million for the six months ended June 30, 2004
compared to $3.6 million for the same period in 2003. The increase in net
interest income was primarily a result of the decrease in total interest expense
exceeding the decrease in total interest income as both interest-earning assets
and interest-bearing liabilities continued to reprice downward even as interest
rates stabilized. The net interest rate spread decreased to 2.82% for the six
months ended June 30, 2004 from 2.91% for the comparable period ended June 30,
2003, while the net interest margin decreased to 3.12% for the six months ended
June 30 ,2004 from 3.20% for the six months ended June 30, 2003. The decrease in
the net interest rate spread and net interest margin was due to the decrease in
the yield on interest-earning assets exceeding the decrease in the cost of
funds. The average yield in interest-earning assets decreased to 5.07% for the
six months ended June 30, 2004 from 5.48% for the same period in 2003, while the
average yield on interest-bearing liabilities decreased to 2.25% for the six
months ended June 30, 2004 from 2.57% for the same period ended 2003.
We did not increase the provision for loan losses during the six months ended
June 30, 2004 or 2003. However, there were $15,000 in loan loss recoveries
during the six months ended June 30, 2004, and $51,000 in recoveries during the
six months ended June 30, 2003. 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 $382,000 for the six months ended June 30, 2004
from $558,000 for the comparable period in 2003. The $176,000 decrease was the
result of a $67,000 reduction in insurance commission income, a $39,000
reduction in service charge income, and a $70,000 reduction in other
non-interest income at June 30, 2004. The decrease in insurance commissions
reflects lower sales of variable- and fixed-rate annuities due to customer's
reluctance to enter the market at a time of historically low interest rates, as
well as reduced staffing in the department during the six-month period ended
June 30, 2004 when compared to the same period in 2003. The decrease in service
charges on accounts is primarily due a decrease in late fees charged and a
decrease in loan closing fees. The decrease in other noninterest income was
primarily due to a decrease in gains from the sale of loans.
Noninterest expense increased $89,000 to $3.1 million for the six months ended
June 30, 2004 from $3.0 million for the six months ended 2003. Salaries and
benefits increased $101,000 and advertising and promotion increased $36,000 for
the comparable periods, offset by a decrease of $58,000 in occupancy costs for
the six-month period ended June 30, 2004 compared to the same period in 2003.
The increase in salaries and benefits was due to increases in the ESOP cost, in
the recognition and retention plan (RRP) cost and in group insurance costs. The
increase in the cost of the ESOP was due to a higher per share market value
during the six months ended June 30, 2004 as compared to the six months ended
June 30, 2003. The increase in the RRP cost was due to the implementation of the
RRP in May of 2003, and group insurance costs increased as a result of normal
annual policy expense increases. The increase in advertising and promotion costs
occurred due to various deposit program specials offered during the six months
ended June 30, 2004 as compared to the six months ended June 30, 2003. Occupancy
costs decreased during the six months ended
10
June 30, 2004 when compared to the same period in 2003 due to a revision of the
estimation of real estate taxes on our new facility in Orland Park.
NEW ACCOUNTING PRONOUNCEMENTS
None
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, 2004, cash and cash equivalents totaled $13.0 million. At June 30,
2004, the Bank had commitments to fund loans of $4.4 million, available lines of
credit of $13.8 million, and standby letters of credit of $208,000. At June 30,
2004, certificates of deposit represented 57.9% of total deposits. The Bank
expects to retain these deposit accounts. In addition, the Bank has borrowing
capacity for an additional $55.2 million from the FHLB 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, 2004:
ACTUAL REQUIRED EXCESS
------ -------- ------
(Dollars in thousands) AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ -----
Core capital
(to adjusted total assets) $ 30,131 11.6% $ 10,405 4.0% $ 19,726 7.6%
Risk-based capital
to (risk-weighted assets) 31,800 23.8 10,700 8.0 21,100 15.8
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
11
loans, and three- and five-year balloon loans. In a low interest rate
environment, borrowers typically prefer fixed-rate loans rather than
adjustable-rate mortgages. We may sell some of our originations of longer-term
fixed-rate loans into the secondary market. 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.
The table below sets forth as of March 31, 2004 (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, 2004 Net Portfolio Value
to be similar to the March 31, 2004 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 28,532 -8,665 -23% 11.76% -274 bp
200 31,731 -5,466 -15% 12.82% -167 bp
100 34,823 -2,374 -6% 13.80% -70 bp
Static 37,197 -- -- 14.50% --
-100 37,525 328 1% 14.49% -1 bp
-200 -- -- -- --
-300 -- -- -- --
The table above indicates that at March 31, 2004, in the event of a 200 basis
point increase in interest rates, we would experience a 15.0% decrease in net
portfolio value. A 100 basis point decrease in interest rate would result in a
1.0% increase 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
12
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. CONTROLS 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.
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, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY
SECURITIES.
During the quarter ended June 30, 2004, the Company completed the
repurchase of 120,000 shares approved under the first repurchase
plan announced January 22, 2003. The Company's second repurchase
plan was announced on May 18, 2004 and allows for the repurchase of
117,000 shares of the Company's stock, which represented
approximately 5% of the Company's outstanding shares.
13
Issuer purchases of equity securities during the prior three months:
Maximum
Total number number of
of shares shares that may
purchased be purchased
Total Average under publicly under the
number shares price paid announced repurchase
purchased per share plan plan
--------- --------- ---- ----
April 1 - April 30 4,900 $ 23.86 82,250 120,000
May 1 - May 27 37,750 24.03 120,000 120,000
May 27 - May 31 4,250 23.95 4,250 117,000
June 1 - June 30 70,900 23.61 75,150 117,000
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 19,
2004, stockholders voted on the election of directors and the ratification of
auditors. The number of shares outstanding and entitled to vote was 2,392,921,
and the number of shares present at the meeting in person or by proxy was
2,222,896.
1. The vote with respect to the Election of Directors was
as follows:
For Withheld
--- --------
Richard J. Nogal 2,204,410 18,486
Edward S. Milen 2,203,760 19,136
2. Ratification of appointment of Crowe Chizek and Company
LLC as auditors
For Against Abstain
--- ------- -------
2,211,548 9,313 2,035
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 March 31, 2004 financial
results by press release. The press release was included as an
exhibit and filed on April 27, 2004 on Form 8-K.
14
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: August 11, 2004 /s/ Thomas R. Butkus
-------------------------------------------------
Thomas R. Butkus
Chief Executive Officer and Chairman of the Board
Date: August 11, 2004 /s/ Lyn G. Rupich
-------------------------------------------------
Lyn G. Rupich
President and Chief Operating Officer
15