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Il-UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

x             ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal ended December 31, 2009.
or
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________.

Commission file number: 000-33405

        AJS BANCORP, INC.
        (Exact name of registrant as specified in its charter)

United States
36-4485429
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
14757 S. Cicero Avenue
 
Midlothian, Illinois
60445
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:  (708) 687-7400

Securities registered pursuant to Section 12(b) of the Act: None


Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
YES o     NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
YES o     NO x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES x     NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x     NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  x
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   YES o     NO x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on June 30, 2009, as reported by the Over The Counter Bulletin Board, was approximately $8.1 million.

As of March 18, 2010, there was issued and outstanding 2,023,282 shares of the Registrant’s Common Stock, including 1,227,544 shares owned by AJS Bancorp, MHC.

DOCUMENTS INCORPORATED BY REFERENCE:

 
(1) Proxy Statement for the 2010 Annual Meeting of Stockholders of the Registrant (Part III).
 


 
 

 

TABLE OF CONTENTS
 
 
ITEM 1.
1
ITEM 1A.
28
ITEM 1B.
28
ITEM 2.
28
ITEM 3.
28
ITEM 4.
28
ITEM 5.
29
ITEM 6
30
ITEM 7
30
ITEM 7A.
41
ITEM 8.
41
ITEM 9.
42
ITEM 9A(T).     
42
ITEM 9B.
43
ITEM 10.
43
ITEM 11.
43
ITEM 12.
43
ITEM 13.
43
ITEM 14.
43
ITEM 15.
44


  PART I

ITEM 1.                  BUSINESS

Forward Looking Statements

This Annual Report contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.”  Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates and most other statements that are not historical in nature.  These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for mortgage and other loans, real estate values, competition, changes in accounting principles, policies, or guidelines, changes in legislation or regulation, and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing products and services.

General

AJS Bancorp, Inc.

AJS Bancorp, Inc. (the “Company”) is a mid-tier stock holding company for A. J. Smith Federal Savings Bank (the “Bank” or “A. J. Smith Federal”).  The business of AJS Bancorp, Inc. consists of holding all of the outstanding common stock of A. J. Smith Federal Savings Bank.  AJS Bancorp, Inc. is chartered under federal law.  AJS Bancorp, Inc. has 1,227,544 issued and outstanding shares of common stock to our mutual holding company parent, AJS Bancorp, MHC (“MHC”), and 795,738 issued and outstanding shares to the public at December 31, 2009.  Under federal regulations, so long as AJS Bancorp, MHC exists, it will own at least 50.1% of the voting stock of AJS Bancorp, Inc.  At December 31, 2009, AJS Bancorp, Inc. had total consolidated assets of $249.3 million, total deposits of $193.2 million, and stockholders’ equity of $23.8 million.  Our executive offices are located at 14757 South Cicero Avenue, Midlothian, Illinois 60445, and our telephone number is (708) 687-7400.

A. J. Smith Federal Savings Bank

A. J. Smith Federal Savings Bank was founded in 1892 by Arthur J. Smith as a building and loan cooperative organization.  In 1924 we were chartered as an Illinois savings and loan association, and in 1934 we converted to a federal charter.  In 1984 we amended our charter to become a federally chartered savings bank.  We are a customer-oriented institution, operating from our main office in Midlothian, Illinois, and two branch offices in Orland Park, Illinois.  Our primary business activity is the origination of one- to four- family real estate loans.  To a lesser extent, we originate home equity and consumer loans.  We also invest in securities, primarily United States Government Agency securities and mortgage-backed securities.  In addition, we offer insurance and investment products and services.  During the last several years we reduced our cash and cash equivalents and purchased investment securities to provide greater yields while maintaining appropriate levels of liquidity.  During the year ended December 31, 2009, the Company’s goal has been to stabilize our operations and maintain our market share.  During the past year we have deemphasized multi-family and commercial real estate lending.  Investment securities continued to become a larger percentage of our assets, while loans have become a smaller portion of our assets than has historically been the case.  We believe that the repositioning of our assets in this manner will position A. J. Smith Federal to take advantage of the changes in long-term interest rates while reducing our interest rate and credit risk profile.


Market Area

A. J. Smith Federal has been, and continues to be, a community-oriented savings bank offering a variety of financial products and services to meet the needs of the communities we serve.  Our lending and deposit-generating area is concentrated in the neighborhoods surrounding our three offices - our main office in Midlothian, Illinois, and two branch offices in Orland Park, Illinois.  Our offices are located in Cook County.  However, we consider our market area to be the counties of Will and Cook.  Midlothian is primarily a residential community, and its largest employers are state and local governments, automobile dealerships, banking and retail shops.  Orland Park has more retail businesses, as well as light industrial companies.  Our market area economy consists primarily of the services industry, wholesalers and retailers and manufacturing.  Major employers in our market area include the Orland Park School District, the Village of Orland Park, and various retailers including J. C. Penney, Macy’s and Sears.  The economy in our market area is not dependent on any single employer or type of business.

Competition

We face significant competition in both originating loans and attracting deposits.  The Chicago metropolitan area has a high concentration of financial institutions, most of which are significantly larger institutions with greater financial resources than A. J. Smith Federal, and all of which are our competitors to varying degrees.  Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions, and other financial service companies.  Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions.  We face additional competition for deposits from non-depository competitors such as mutual funds, securities and brokerage firms, and insurance companies.  The Gramm-Leach-Bliley Act, which permits affiliation among banks, securities firms and insurance companies, continues to increase competition among financial services companies.

Lending Activities

General.  Our loan portfolio is comprised mainly of one- to four- family residential real estate loans.  The majority of these loans have fixed rates of interest.  In addition to one- to four- family residential real estate loans, our loan portfolio consists of multi-family loans and home equity lines of credit.  At December 31, 2009, our gross loans totaled $130.4 million, of which $91.7 million, or 70.3%, were secured by one- to four- family residential real estate, $25.2 million, or 19.3%, were secured by multi-family residential and commercial real estate, $13.2 million, or 10.1%, were home equity loans, and $375,000, or 0.3%, were consumer loans.  Our lending area is the Chicago metropolitan area, with an emphasis on lending in the south and southwest suburbs.  Due to credit concerns related to the asset groups, since mid-2008 we have ceased new loan originations for commercial and multi-family loans.  At December 31, 2009, 80.4% of our loans were secured by first and second mortgages on residential real estate.

We try to reduce our interest rate risk by making our loan portfolio more interest rate sensitive.  Accordingly, we offer adjustable rate mortgage loans, short-and medium-term mortgage loans, and three- and five-year balloon mortgages.  In addition, we offer shorter-term consumer loans and home equity lines of credit with adjustable interest rates.


Loan Portfolio Composition.  The following table shows the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated. We had no loans held for sale at the dates indicated.

   
At December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
                                                             
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
Real estate loans:
                                                           
One- to four- family residential
  $ 91,731       70.34 %   $ 84,411       65.41 %   $ 85,803       63.87 %   $ 86,024       61.49 %   $ 101,325       66.03 %
Multi-family and commercial
    25,152       19.29       32,064       24.84       33,888       25.22       41,194       29.45       38,317       24.97  
Total real estate loans
    116,883               116,475               119,691               127,218               139,642          
                                                                                 
Other Loans:
                                                                               
Consumer loans
    375       0.29       323       0.25       258       0.19       482       0.34       502       0.33  
Home equity
    13,154       10.08       12,261       9.50       14,406       10.72       12,198       8.72       13,279       8.67  
Total loans
    130,412       100.00 %     129,059       100.00 %     134,355       100.00 %     139,898       100.00 %     153,423       100.00 %
                                                                                 
Less:
                                                                               
Allowance for loan losses
    (3,035 )             (2,734 )             (1,539 )             (1,619 )             (1,701 )        
Deferred loan (fees) costs
    83               74               156               107               56          
Deferred gain on real estate contract
    (4 )             (4 )             (6 )             (9 )             (10 )        
                                                                                 
Total loans receivable, net
  $ 127,456             $ 126,395             $ 132,966             $ 138,377             $ 151,768          


Maturity of Loan Portfolio.  The following table sets forth certain information regarding the dollar amounts maturing and the interest rate sensitivity of our loan portfolio at December 31, 2009.  Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.

               
Multi-Family
                                     
   
One- to four- family
   
and Commercial
   
Consumer
   
Home Equity
   
Total
 
         
Weighted
         
Weighted
         
Weighted
         
Weighted
         
Weighted
 
         
Average
         
Average
         
Average
         
Average
         
Average
 
   
Amount
   
Rate
   
Amount
   
Rate
   
Amount
   
Rate
   
Amount
   
Rate
   
Amount
   
Rate
 
   
(Dollars in thousands)
 
                                                             
1 year or less
  $ 1,098       5.97 %   $ 9,154       4.90 %   $ 164       4.06 %   $ 1,746       3.15 %   $ 12,162       4.74 %
Greater than 1 to 3 years
    3,690       6.50       12,481       7.12       154       5.15       4,527       5.29       20,852       6.60  
Greater than 3 to 5 years
    3,183       5.87       1,881       6.59       57       5.02       6,881       3.42       12,002       4.57  
Greater than 5 to 10 years
    15,826       5.17       751       6.62       -               -               16,577       5.24  
Greater than 10 to 20 years
    23,762       5.03       885       7.45       -               -               24,647       5.12  
More than 20 years
    44,172       5.28       -               -               -               44,172       5.28  
                                                                                 
Total
  $ 91,731             $ 25,152             $ 375             $ 13,154             $ 130,412          

The total amount of loans due after December 31, 2010 which have predetermined interest rates is $93.4 million, while the total amount of loans due after such date which have floating or adjustable interest rates is $24.9 million.


One- to Four-Family Residential Real Estate Loans.  Our primary lending activity consists of originating one- to four-family, owner-occupied, first and second residential mortgage loans, virtually all of which are secured by properties located in our market area.  At December 31, 2009, these loans totaled $91.7 million, or 70.3% of our total loan portfolio.

We currently offer one- to four-family residential real estate loans with terms up to 30 years, although we emphasize the origination of one- to four- family residential loans with terms of 15 years or less.  We offer our one- to four-family residential loans with adjustable or fixed interest rates.  At December 31, 2009, $77.9 million, or 85.0% of our one- to four- family residential real estate loans had fixed rates of interest, and $13.8 million, or 15.0% of our one- to four-family residential real estate loans, had adjustable rates of interest.  Our fixed rate loans include loans that generally amortize on a monthly basis over periods between 7 to 30 years.  We also offer loans which generally have balloon payment features after 3 or 5 years.  Our balloon loans generally amortize over periods of 15 years or more.  One- to four-family residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers have the right to refinance or prepay their loans.

We currently offer adjustable rate mortgage loans with an initial interest rate fixed for one, three, five or seven years, and annual adjustments thereafter based on changes in a designated market index.  Our adjustable rate mortgage loans generally have an interest rate adjustment limit of 200 basis points per adjustment, with a maximum lifetime interest rate adjustment limit of 800 basis points and a floor of 500 basis points.  Our adjustable rate mortgages are priced at a level tied to the one-year United States Treasury bill rate.  We may offer discounted or teaser rates on our adjustable rate mortgages.  These loans carry initial rates that are lower than the rate would be if it were to adjust according to the adjustable rate note and rider.  We do not offer adjustable rate mortgages that offer the possibility of negative amortization.

Regulations limit the amount that a savings association may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal of the property at the time the loan is originated.  For all first lien position mortgage loans we utilize outside independent appraisers.  For second position mortgage loans, we utilize outside independent appraisers to perform a drive-by appraisal.  For borrowers who do not obtain private mortgage insurance, our lending policies limit the maximum loan to value ratio on both fixed rate and adjustable rate mortgage loans to 80% of the appraised value of the property that is collateral for the loan.  For one- to four-family residential real estate loans with loan to value ratios of between 80% and 90%, we require the borrower to obtain private mortgage insurance.  For loans in excess of $75,000, we require the borrower to obtain title insurance.  For first mortgage loan products under $75,000, we conduct a title search.  For second mortgage type products in excess of $200,000, title insurance is required.  For second mortgage type products under $200,000, we conduct a title search.  We also require homeowners’ insurance, fire and casualty, and flood insurance, if necessary, on properties securing real estate loans.

Multi-Family Loans and Commercial Lending.  At December 31, 2009, $25.2 million, or 19.3% of our total loan portfolio, consisted of loans secured by multi-family and commercial real estate properties, virtually all of which are located in the state of Illinois.  Our multi-family loans are secured by multi-family and mixed use properties.  Our commercial real estate loans are secured by improved property such as offices, small business facilities, unimproved land, warehouses and other non-residential buildings.  Due to the current economic conditions and their adverse effect on commercial real estate, we stopped offering multi-family and commercial real estate loans in mid-2008.  At December 31, 2009, the average per loan balance of our multi-family and commercial real estate loans was $297,000. In the past, we generally made multi-family and commercial real estate loans for up to 80% of the lesser of cost or the appraised value of the property securing the loan.


In the past, prior to funding a loan secured by multi-family, mixed use or commercial property, we generally obtained an environmental assessment from an independent, licensed environmental engineer to ascertain the existence of any environmental risks that may be associated with the property.  The level of the environmental consultant’s evaluation of a property depended on the facts and circumstances relating to the specific loan, but generally the environmental consultant’s actions range from a Phase I Environmental Site Assessment to a Phase II Environmental Report.  The underwriting process for multi-family and commercial real estate loans includes an analysis of the debt service coverage of the collateral property.  We typically required a debt service coverage ratio of 120% or higher.  We also required personal guarantees by the principals of the borrower and a cash flow analysis when applicable.  However, we no longer originate multi-family or commercial loans.

Loans secured by multi-family residential or commercial real estate generally have larger loan balances and more credit risk than one- to four- family residential mortgage loans.  This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans.  Furthermore, the repayment of loans secured by multi-family properties typically depends upon the successful operation of the real property securing the loan.  If the cash flow from the property is reduced, the borrower’s ability to repay the loan may be impaired.  However, multi-family and commercial real estate loans generally have higher interest rates than loans secured by one- to four- family residential real estate.

In the past, our underwriting standards for commercial business loans included a review of the applicant’s tax returns, financial statements, credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan based on cash flows generated by the applicant’s business.

Commercial business loans generally have higher interest rates and shorter terms than one- to four- family residential loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business.

Home Equity Lines of Credit.  We offer home equity lines of credit, the total of which amounted to $13.2 million, or 10.1% of our total loan portfolio, as of December 31, 2009.  Home equity lines of credit are generally made for owner-occupied homes, and are secured by first or second mortgages on residences.  During 2008, we generally offered these loans with a maximum loan to appraised value ratio of 90% (including senior liens on the collateral property), however due to the decline in real estate values, during the third quarter of 2008 we revised the maximum loan to appraised value ratio that we will originate to 80% when combined with the first lien loan amount.  We currently offer these lines of credit for a period of 5 years, and generally at rates tied to the prevailing prime interest rate.  Our home equity lines of credit are generally underwritten in the same manner as our one- to four- family residential loans.

Consumer Loans.  We are authorized to make loans for a variety of personal and consumer purposes.  As of December 31, 2009, consumer loans totaled $375,000, and consisted primarily of automobile loans and loans secured by deposit accounts.  Automobile loans accounted for $211,000 of our consumer loans and loans secured by deposit accounts were $164,000 at December 31, 2009.  Our procedure for underwriting consumer loans includes an assessment of the applicant’s credit history and ability to meet existing obligations and payments of the proposed loan, as well as an evaluation of the value of the collateral security, if any.  Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of loans that are unsecured or are secured by assets that tend to depreciate in value, such as automobiles.  In these cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan, and the remaining value often does not warrant further substantial collection efforts against the borrower.


Loan Originations, Purchases, Sales and Servicing.  Although we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon borrower demand, market interest rates, borrower preference for fixed- versus adjustable-rate loans, and the interest rates offered on each type of loan by other lenders in our market area.  These lenders include commercial banks, savings institutions, credit unions, and mortgage banking companies, as well as Wall Street conduits that also actively compete for local real estate loans.  Our loan originations come from a number of sources, including real estate broker referrals, existing customers, borrowers, builders, attorneys, and “walk-in” customers.

Our loan origination activity may be affected adversely by a rising interest rate environment that typically results in decreased loan demand.  Historically, a declining interest rate environment generally would result in increased loan demand, however, in the case of declining real estate values, our loan origination activity may also decline as fewer home purchases occur.  Accordingly, the volume of loan originations and the profitability of this activity may vary from period to period.  Historically, we have originated mortgage loans for sale in the secondary market, and we may do so in the future, although this is not a significant part of our business at this time.

The following table shows our loan origination and repayment activities for the periods indicated.  We did not purchase or sell any loans during the periods indicated.

   
Years Ended December 31,
 
   
2009
   
2008
   
2007
 
   
(In thousands)
 
Loans receivable, beginning of period
  $ 129,059     $ 134,355     $ 139,898  
Originations by type:
                       
Real estate- one- to four-family
    26,096       16,542       14,730  
Multi-family and commercial
    -       5,145       8,120  
Non-real estate -consumer
    160       186       319  
Home equity
    4,167       3,934       8,991  
Total loans originated
    30,423       25,807       32,160  
Transfer to other real estate owned
    (3,417 )     (179 )     (261 )
Charge-offs
    (2,652 )     (3,200 )     (280 )
Principal repayments:
    (23,001 )     (27,724 )     (37,162 )
                         
Loans receivable, at end of period
  $ 130,412     $ 129,059     $ 134,355  

Loan Approval Procedures and Authority.  Our lending activities are subject to written, non-discriminatory underwriting standards and loan origination procedures adopted by management and the Board of Directors.  A loan officer initially reviews all loans, regardless of size or type.  Loans up to the Fannie Mae single family loan limit, currently $417,000, must be reviewed and approved by a loan underwriter or a Vice President of the loan department.  All loans of $417,000 or less that do not meet our standard underwriting ratios and credit criteria must be reviewed by the Vice President or in their absence, the President or the Officers’ Loan Committee.  The Officers’ Loan Committee, which consists of Raymond Blake, Edward Milen, Lyn G. Rupich, and Donna Manuel, has the authority to approve all loans up to $750,000.  The Chief Executive Officer and the Board of Directors must approve loans in excess of $750,000.

Loans-to-One-Borrower.  Federal savings banks are subject to the same loans-to-one-borrower limits as those applicable to national banks, which restrict loans to one borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate).  At December 31, 2009, our lending limit was $4.0 million.  At December 31, 2009, our largest lending relationship to one borrower totaled $4.0 million, which was secured by partially improved land.  This lending relationship was not performing in accordance with its terms and will be discussed in further detail in the asset quality section below.  At December 31, 2009, we had 16 lending relationships in which the total amount outstanding


exceeded $500,000.   Four of these lending relationships totaling $6.6 million are impaired, while two lending relationships totaling $692,000 are on the Company’s watch list as of December 31, 2009.  The Company’s watch list includes any commercial loan that has for the past twelve months been late paying three times or more.

Asset Quality

Loan Delinquencies and Collection Procedures.  When a borrower fails to make required payments on a loan, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to a current status.  In the case of mortgage loans, a reminder notice is sent 15 days after an account becomes delinquent.  After 15 days, we attempt to establish telephone contact with the borrower.  If the borrower does not remit the entire payment due by the end of the month, then a letter that includes information regarding home-ownership counseling organizations is sent.  During the first 15 days of the following month, a second letter is sent, and we also attempt to establish telephone contact with the borrower.  At this time, and after reviewing the cause of the delinquency and the borrower’s previous loan payment history, we may agree to accept repayment over a period of time, which will generally not exceed 60 days.  However, should a loan become delinquent by two or more payments, and the borrower is either unwilling or unable to repay the delinquency over a period of time acceptable to us, we send a notice of default by both regular and certified mail.  This notice will provide the borrower with the terms which must be met to cure the default, and will again include information regarding home-ownership counseling.  In the case of commercial mortgage loans, attempts will be made to work out a repayment plan that will preserve the current ownership of the property while allowing the Company to retain a performing lending relationship.  Loan modifications that meet the definition of troubled debt restructures are accounted for accordingly.

In the event the borrower does not cure the default within 30 days of the postmark of the notice of default, we may instruct our attorneys to institute foreclosure proceedings depending on the loan-to-value ratio or our relationship with the borrower.  We hold property foreclosed upon as real estate owned.  We carry foreclosed real estate at its fair value less estimated selling costs or carrying value, whichever is less.  If a foreclosure action begins and the loan is not brought current or paid in full before the foreclosure sale, we will either sell the real property securing the loan at the foreclosure sale or sell the property as soon thereafter as practical.

In the case of consumer loans, customers are mailed delinquency notices when the loan is 15 days past due.  We also attempt to establish telephone contact with the borrower.  If collection efforts are unsuccessful, we may instruct our attorneys to take further action.

Our policies require that management continuously monitor the status of the loan portfolio and report to the Board of Directors on a monthly basis.  These reports include information on delinquent loans and foreclosed real estate and our actions and plans to cure the delinquent status of the loans and to dispose of any real estate acquired through foreclosure.

Impaired and Non-Performing Loans.  A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  A loan is non-performing when it is greater than ninety days past due.  Some loans may be included in both categories, whereas other loans may only be included in one category. Specific allocations are made for loans that are determined to be impaired. Our policy requires that all non-homogeneous loans past due greater than ninety days be classified as impaired and non-performing.  However, loans past due less than 90 days may also be classified as impaired when management does not expect to collect all amounts due according to the contractual terms of the loan agreement.  Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses as compared to the loan carrying value.


We have not originated, nor have we invested in, interest-only, negative amortization or payment option ARM loans.  Furthermore, we have not originated or invested in sub-prime or Alt-A loans.

As of December 31, 2009, our total non-accrual loans were $6.5 million, compared to $3.7 million at December 31, 2008.  Included in total non-accrual loans is a $2.9 million impaired commercial loan that is not delinquent at December 31, 2009.

The following table sets forth our loan delinquencies by type, amount and percentage at December 31, 2009.

   
Loans Delinquent For:
 
   
60-90 Days
   
Over 90 Days
   
Total Delinquent Loans
 
   
Number
   
Amount
   
Percent
of Loan
Category
   
Number
   
Amount
   
Percent
of Loan
Category
   
Number
   
Amount
   
Percent
of Loan
Category
 
   
(Dollars in thousands)
 
                                                       
One- to four- family
    6     $ 292       0.32 %     2     $ 30       0.03 %     8     $ 322       0.35 %
Multi-family and commercial
    -       -       -       10       3,552       14.12       10       3,552       14.12  
Consumer and other
    -       -       -       -       -       -       -       -       -  
Home equity
    1       79       0.60       2       17       0.13       3       96       0.73  
                                                                         
Total loans
    7     $ 371       0.28 %     14     $ 3,599       2.76 %     21     $ 3,970       3.04 %

The table below sets forth the amounts and categories of non-performing assets in our loan portfolio.  During 2009 we restructured one loan totaling $198,000, which is classified as a watch list loan at December 31, 2009.  During 2008 we restructured two loans totaling $3.2 million, which are classified as impaired loans at December 31, 2008 and 2009.  For the previous years presented of 2005, 2006 and 2007, we had no troubled debt restructurings.  For the periods presented, we had no accruing loans delinquent greater than 90 days.  Foreclosed assets include assets acquired in settlement of loans.

   
At December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(Dollars in thousands)
 
Non-performing loans:
                             
One- to four- family
  $ 30     $ 322     $ 774     $ 132     $ 326  
Multi-family and commercial
    6,466       3,368       68       278       -  
Consumer and other
    -       -       -       1       12  
Home equity
    17       46       92       129       67  
Total non-performing loans
    6,513       3,736       934       540       394  
                                         
Other real estate owned
    2,768       -       -       -       -  
                                         
Total non-performing assets
  $ 9,281     $ 3,736     $ 934     $ 540     $ 394  
                                         
Total as a percentage of total assets
    3.72 %     1.53 %     0.38 %     0.20 %     0.15 %
                                         
Non-performing loans as percentage of
                                       
  gross loans receivable
    4.99 %     2.89 %     0.70 %     0.39 %     0.26 %

For the year ended December 31, 2009, gross interest income which would have been recorded had the non-performing loans been current in accordance with their original terms amounted to $318,000.  The amount that was included in interest income on such loans totaled $148,000 for the year ended December 31, 2009.

As of December 31, 2009 we have four single-family loans on non-accrual status.  We have two multi-family and commercial lending relationships with principal balances in excess of $500,000 that are impaired and on non-accrual as of December 31, 2009.  Additionally, we have one commercial lending relationship that is impaired, but is not more than 90 days delinquent at December 31, 2009, with a principal balances in excess of $500,000.  The following table represents the contractual principal balance less previous historical charge-offs and specific reserves, at December 31, 2009, which indicate the net carrying balance at year-end 2009.



Property Type
 
Contractual
principal
balance
   
Previous
charge-offs
recognized
   
Specific
 allocation
reserve
   
Net carrying
amount as of
December 31,
 2009
 
  (Dollars in thousands)  
One- to four-family
  $ 150     $ 20     $ -     $ 130  
Multi-family and commercial
    10,929       4,463       1,313       6,466  
Consumer and other
    -       -       -       -  
Home Equity
    86       80       -       6  
                                 
Total
  $ 11,165     $ 4,563     $ 1,313     $ 6,602  

While these properties are in the midst of foreclosure or possible restructuring there is no guarantee that the fair value will not decline further.  Therefore, although we recorded our best estimate of incurred probable losses at December 31, 2009, there may be additional losses on these properties in the future.

Real Estate Owned. Real estate owned consists of property acquired through formal foreclosure, in-substance foreclosure or by deed in lieu of foreclosure, and is recorded at the lower of recorded investment or fair value less estimated costs to sell.  Write-downs from recorded investment to fair value, which are required at the time of foreclosure, are charged to the allowance for loan losses.  After transfer adjustments to the carrying value of the properties that result from subsequent declines in value are charged to operations in the period in which the declines occur.  During 2009, five commercial loan relationships representing ten real estate properties were transferred into real estate owned.  The Company had $2.8 million in real estate owned at December 31, 2009.  There were no properties classified as real estate owned at December 31, 2008.

Classification of Assets.  Consistent with regulatory guidelines, we provide for the classification of loans and other assets, such as securities, that are considered to be of lesser credit quality as substandard, special mention, doubtful or loss assets.  An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Substandard assets include those characterized by the distinct possibility that the savings institution will sustain some loss if the deficiencies are not corrected.  Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted.  Doubtful assets are those that are past maturity and therefore require additional steps to protect our collateral.  Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated as special mention by management.

When we classify assets as substandard, we allocate for analytical purposes a portion of our general valuation allowances or loss reserves as we consider prudent.  General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which have not been allocated to particular problem assets.  When we classify problem assets as loss, we establish a specific allowance for losses equal to 100% of the amount of the assets so classified, or we charge-off the amount.  Our determination as to the classification of assets and the amount of valuation allowances is subject to review by regulatory agencies, which can order the establishment of additional loss allowances.  Management regularly reviews our assets to determine whether any require reclassification.

On the basis of management’s review of our assets at December 31, 2009, we had classified assets of $9.4 million as substandard.


Allowance for Loan Losses.  The following table sets forth information regarding our allowance for loan losses and other ratios at or for the dates indicated.

   
Years Ended December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(Dollars in thousands)
 
Balance at beginning of period
  $ 2,734     $ 1,539     $ 1,619     $ 1,701     $ 1,847  
                                         
Charge-offs:
                                       
One- to four- family
    (45 )     (80 )     -       (7 )     (70 )
Multi-family and commercial
    (2,606 )     (3,120 )     (228 )     (75 )     -  
Consumer and other
    (1 )     -       (2 )     -       (1 )
Home equity
    -       -       (50 )     -       -  
Total charge-offs
    (2,652 )     (3,200 )     (280 )     (82 )     (71 )
Recoveries:
                                       
One- to four- family loans
    11       40       21       28       55  
Multi-family and commercial
    25       27       -       -       -  
Total recoveries
    36       67       21       28       55  
                                         
Net charge-offs
    (2,616 )     (3,133 )     (259 )     (54 )     (16 )
Provisions (recoveries) for loan losses
    2,917       4,328       179       (28 )     (130 )
                                         
Balance at end of period
  $ 3,035     $ 2,734     $ 1,539     $ 1,619     $ 1,701  
                                         
Net charge-offs during
                                       
  the period to average loans
                                       
  outstanding during the period
    1.97 %     2.33 %     0.19 %     0.04 %     0.01 %
                                         
Net charge-offs during
                                       
  the period to non-performing loans
    72.69       83.86       27.73       10.00       4.06  
                                         
Non-performing assets to total
                                       
  assets at end of period
    3.72       1.53       0.38       0.20       0.15  
                                         
Allowance for loan losses to
                                       
  non-performing loans
    46.60       73.18       164.78       299.81       431.73  
                                         
Allowance for loan losses to
                                       
  loans receivable, gross
    2.33       2.12       1.15       1.16       1.11  

The allowance for loan losses is a valuation account that reflects our evaluation of the losses known and inherent in our loan portfolio that are both probable and reasonable to estimate.  We maintain the allowance through provisions for loan losses that we charge to income.  We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely.

Our evaluation of risk in maintaining the allowance for loan losses includes the review of all loans in which the collectability of principal may not be reasonably assured.  We consider the following factors as part of this evaluation: our historical loan loss experience, known and inherent risks in the loan portfolio, the estimated value of the underlying collateral and current economic and market trends.  There may be other factors that may warrant our consideration in maintaining an allowance at a level sufficient to provide for probable losses.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revisions as more information becomes available or as future events change.  Although we believe that we have established and maintained the allowance for loan losses at adequate levels, future additions may be necessary if economic and other conditions in the future differ substantially from the current operating environment.

In addition, the Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate.  The Office of Thrift Supervision may require us to increase the allowance for loan losses or the valuation allowance for foreclosed real estate based on its review of information available at the time of the examination, thereby adversely affecting our results of operations.


Allocation of the Allowance for Loan Losses.  The following table presents our allocation of the allowance for loan losses by loan category and the percentage of loans in each category to total loans at the periods indicated. Management believes that the allowance can be allocated by category only on an approximate basis.  The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

   
At December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
Amount of Loan Loss Allowance
   
Loan Amounts by Category
   
Percent of Loans in Each Category to Total Loans
   
Amount of Loan Loss Allowance
   
Loan Amounts by Category
   
Percent of Loans in Each Category to Total Loans
   
Amount of Loan Loss Allowance
   
Loan Amounts by Category
   
Percent of Loans in Each Category to Total Loans
   
Amount of Loan Loss Allowance
   
Loan Amounts by Category
   
Percent of Loans in Each Category to Total Loans
   
Amount of Loan Loss Allowance
   
Loan Amounts by Category
   
Percent of Loans in Each Category to Total Loans
 
   
(Dollars in thousands)
 
                                                                                           
One- to four- family
  $ 829     $ 91,731       70.34 %   $ 765     $ 84,411       65.41 %   $ 778     $ 85,803       63.87 %   $ 786     $ 86,024       61.49 %   $ 949     $ 101,325       66.04 %
Multi-family and commercial
    1,955       25,152       19.29       1,725       32,064       24.84       456       33,888       25.22       561       41,194       29.45       538       38,317       24.97  
Consumer and other
    4       375       0.29       3       323       0.25       2       258       0.19       5       482       0.34       8       502       .33  
Home equity
    147       13,154       10.08       115       12,261       9.50       155       14,406       10.72       125       12,198       8.72       145       13,279       8.66  
Unallocated
    100       -       -       126       -       -       148       -       -       142       -       -       61       -       -  
                                                                                                                         
Total loans
  $ 3,035     $ 130,412       100.00 %   $ 2,734     $ 129,059       100.00 %   $ 1,539     $ 134,355       100.00 %   $ 1,619     $ 139,898       100.00 %   $ 1,701     $ 153,423       100.00 %


Management evaluates the total balance of the allowance for loan losses based on several factors that are not loan specific but are reflective of the probable, incurred losses inherent in the loan portfolio.  This includes management’s periodic review of loan collectability in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions such as housing trends, inflation rates and unemployment rates, geographic concentrations of loans within our immediate market area, and levels of allowance for loan losses.  Generally, small balance, homogenous type loans, such as consumer and home equity loans are evaluated for impairment in total.  The allowance related to these loans is established primarily by using loss experience data by general loan type.  Nonperforming loans are evaluated individually, based primarily on the value of the underlying collateral securing the loan.  Larger loans, such as multi-family mortgages, are also generally evaluated for impairment individually.  The allowance is allocated to each loan type based on the results of the evaluation described above.  Inherent credit risks that cannot be allocated to specific loan groups are presented as “unallocated” in the table.

Investment Activities

We are permitted under federal law to invest in various types of liquid assets, including United States Government obligations, securities of various federal agencies and of state and municipal governments, deposits at the Federal Home Loan Bank of Chicago (FHLB), certificates of deposit at federally insured institutions, certain bankers’ acceptances and federal funds.  Within certain regulatory limits, we may also invest a portion of our assets in commercial paper and corporate debt securities.  We are also required to maintain an investment in FHLB stock.

Securities are categorized as “held to maturity,” “trading securities” or “available for sale,” based on management’s intent as to the ultimate disposition of each security.  Debt securities are classified as “held to maturity” and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold these securities to maturity.  Securities that might be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand, or other similar factors cannot be classified as “held to maturity.”

Trading securities are carried at fair value with unrealized gains and losses recorded through earnings.  We typically do not use a trading account with the intent to purchase and sell securities. Debt and equity securities not classified as “held to maturity” are classified as “available for sale.”  These securities are reported at fair value, and unrealized gains and losses on the securities are excluded from earnings and reported, net of deferred taxes, as a separate component of equity.  Our trading securities are not a material portion of our investment portfolio.

All of our securities carry market risk insofar as increases in market rates of interest may cause a decrease in their fair value.  Investments in securities are made based on certain considerations, which include the interest rate, tax considerations, yield, settlement date and maturity of the security, our liquidity position, and anticipated cash needs and sources.  The effect that the proposed security would have on our credit and interest rate risk and risk-based capital is also considered.  We purchase securities to provide necessary liquidity for day-to-day operations, and when investable funds exceed loan demand.

Generally, our investment policy is to invest funds in various categories of securities and maturities based upon our liquidity needs, asset/liability management policies, investment quality, marketability and performance objectives.  The Board of Directors reviews our securities portfolio on a monthly basis.


Securities classified as held to maturity, excluding mortgage-backed securities, totaled $320,000 at December 31, 2009. Our securities classified as available-for-sale, other than mortgage-backed securities, totaled $56.5 million at December 31, 2009, and consisted of Federal agency obligations, primarily Federal Farm Credit Bank (FFCB) notes, Federal Home Loan Bank (FHLB), Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) obligations with maturities of one to twenty years.  Mortgage backed securities are discussed in the next section.

We also have a $2.5 million investment in FHLB stock at December 31, 2009, which is classified separately from securities due to the restrictions on sale or transfer.  For further information regarding our securities portfolio, see Note 2 to the Consolidated Financial Statements.


The following table sets forth the composition of our securities portfolio (excluding mortgage-backed securities) and other interest earning assets at the dates indicated.
 
   
At December 31,
 
   
2009
   
2008
   
2007
 
   
Carrying Value
   
% of 
Total
   
Fair
Value
   
% of
 Total
   
Carrying Value
   
% of 
Total
   
Fair
Value
   
% of
 Total
   
Carrying
 Value
   
% of 
Total
   
Fair
Value
   
% of
 Total
 
   
(Dollars in thousands)
 
Trading securities
  $ 25       0.04 %   $ 25       0.04 %   $ 18       0.08 %   $ 18       0.08 %   $ -       - %   $ -       - %
Securities classified as held to maturity (at amortized cost):
                                                                                               
State and municipal bonds
    320       0.54       323       0.54       320       1.39       311       1.35       65       0.16 %     65       0.16  
Securities classified as available for sale (at fair value):
                                                                                               
Mutual fund
    -       -       -       -       -       -       -       -       11,437       28.12       11,437       28.12  
U.S. Treasury
    1,925       3.25       1,925       3.25       -       -       -       -       -       -       -       -  
FHLB
    9,066       15.29       9,066       15.29       12,160       52.90       12,160       52.92       23,120       56.85       23,120       56.85  
FFCB
    2,082       3.51       2,082       3.51       4,015       17.47       4,015       17.47       3,524       8.66       3,524       8.66  
FNMA and FHLMC
    43,426       73.24       43,426       73.24       4,023       17.50       4,023       17.51       -       -       -       -  
Equity investments
    -       -       -       -       -       -       -       -       76       0.19       76       0.19  
Subtotal
    56,844       95.87       56,847       95.87       20,536       89.34       20,527       89.34       38,222       93.98       38,222       93.98  
FHLB stock
    2,450       4.13       2,450       4.13       2,450       10.66       2,450       10.66       2,450       6.02       2,450       6.02  
                                                                                                 
Total securities and FHLB stock
  $ 59,294       100.00 %   $ 59,297       100.00 %   $ 22,986       100.00 %   $ 22,977       100.00 %   $ 40,672       100.00 %   $ 40,672       100.00 %
                                                                                                 
Average remaining life of securities
 
130.1 months
                   
51.1 months
                     
9.8 months
   
 
         
Other interest-earning assets:
                                                                                               
Interest-earning deposits with banks
  $ 3,663       100.00 %   $ 3,663       100.00 %   $ 8,874       99.35 %   $ 8,874       99.35 %   $ 6,622       98.85 %   $ 6,622       98.85 %
Federal funds sold
    -       -       -       -       58       0.65       58       0.65       77       1.15       77       1.15  
                                                                                                 
Total
  $ 3,663       100.00 %   $ 3,663       100.00 %   $ 8,932       100.00 %   $ 8,932       100.00 %   $ 6,699       100.00 %   $ 6,714       100.00


Mortgage-Backed Securities

Mortgage-backed securities represent a participation interest in a pool of one- to four- family or multi-family mortgages.  The mortgage originators use intermediaries (generally United States government agencies and government-sponsored enterprises) to pool and repackage the participation interests in the form of securities, with investors such as A. J. Smith Federal receiving the principal and interest payments on the mortgages.  Such United States government agencies and government sponsored enterprises guarantee the payment of principal and interest to investors.

Mortgage-backed securities are typically issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a specific range and have varying maturities.  The characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder.  The life of a mortgage-backed pass-through security thus approximates the life of the underlying mortgages.  Our mortgage-backed securities consist of Fannie Mae, Freddie Mac and Ginnie Mae securities.

At December 31, 2009, our mortgage-backed securities totaled $35.7 million, which represented 14.3% of our total assets at that date.  At December 31, 2009, virtually all of our mortgage-backed securities were classified as available-for-sale.  At that date, 93.8% of our mortgage-backed securities had fixed rates of interest.  We purchased $1.8 million of mortgage-backed securities during the year ended December 31, 2009, and $36.2 million during the year ended December 31, 2008.

Mortgage-backed securities generally yield less than the mortgage loans underlying such securities because of their payment guarantees or credit enhancements, which offer nominal credit risk to the security holder.  In addition, mortgage-backed securities are more liquid than individual mortgage loans and we may use them to collateralize borrowings or other obligations of A. J. Smith Federal.

The following table sets forth the composition of our mortgage-backed securities at the dates indicated.

   
At December 31,
 
   
2009
   
2008
   
2007
 
   
Carrying
   
% of
   
Carrying
   
% of
   
Carrying
   
% of
 
   
Value
   
Total
   
Value
   
Total
   
Value
   
Total
 
   
(Dollars in thousands)
 
Mortgage-backed securities
                                   
  classified as held to maturity
                                   
(at amortized cost):
                                   
Ginnie Mae
  $ 40       0.11 %   $ 47       0.07 %   $ 60       0.14 %
Mortgage-backed securities
                                               
  classified as available for sale
                                               
(at fair value):
                                     </