Attached files
file | filename |
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EX-21 - EXHIBIT 21 - AJS BANCORP INC | ex21.htm |
EX-13 - EXHIBIT 13 - AJS BANCORP INC | ex13.htm |
EX-23 - EXHIBIT 23 - AJS BANCORP INC | ex23.htm |
EX-31.3 - EXHIBIT 31.3 - AJS BANCORP INC | ex31_3.htm |
EX-31.2 - EXHIBIT 31.2 - AJS BANCORP INC | ex31_2.htm |
EX-31.1 - EXHIBIT 31.1 - AJS BANCORP INC | ex31_1.htm |
EX-32 - EXHIBIT 32 - AJS BANCORP INC | ex32.htm |
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.)
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14757
S. Cicero Avenue
|
|
Midlothian, Illinois
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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).
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TABLE OF CONTENTS
ITEM
1.
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1
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ITEM
1A.
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28
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ITEM
1B.
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28
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ITEM
2.
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28
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ITEM
3.
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28
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ITEM
4.
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28
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ITEM
5.
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29
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ITEM
6
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30
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ITEM
7
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30
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ITEM
7A.
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41
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ITEM
8.
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41
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ITEM
9.
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42
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ITEM
9A(T).
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42
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ITEM
9B.
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43
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ITEM
10.
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43
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ITEM
11.
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43
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ITEM
12.
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43
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ITEM
13.
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43
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ITEM
14.
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43
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ITEM
15.
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44
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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
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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):
|
||||||||||||||||||||||||
Ginnie
Mae
|
702 | 1.97 | 1,014 | 1.46 | - | - | ||||||||||||||||||
Fannie
Mae
|
26,833 | 75.12 | 57,401 | 82.78 | 34,767 | 80.43 | ||||||||||||||||||
Freddie
Mac
|
8,133 | 22.80 | 10,877 | 15.69 | 8,398 | 19.43 | ||||||||||||||||||
Total
|
$ | 35,708 | 100.00 | % | $ | 69,339 | 100.00 | % | $ | 43,225 | 100.00 | % |
Carrying Values,
Yields and Maturities. The composition and maturities of our
debt securities portfolio and of our mortgage-backed securities are indicated in
the following table.
At December 31, 2009
|
||||||||||||||||||||||||
Less
Than
|
1
to 5
|
Over
5 to 10
|
Over
|
|||||||||||||||||||||
1 Year
|
Years
|
Years
|
10 Years
|
Total Securities
|
||||||||||||||||||||
Amortized
|
Amortized
|
Amortized
|
Amortized
|
Amortized
|
Fair
|
|||||||||||||||||||
Cost
|
Cost
|
Cost
|
Cost
|
Cost
|
Value
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Securities
|
$ | - | $ | 9,000 | $ | 22,346 | $ | 26,321 | $ | 57,667 | $ | 56,822 | ||||||||||||
Mortgage-backed
securities
|
197 | 10,623 | 20,115 | 3,174 | 34,109 | 35,710 | ||||||||||||||||||
Total
securities
|
$ | 197 | $ | 19,623 | $ | 42,461 | $ | 29,495 | $ | 91,776 | $ | 92,532 | ||||||||||||
Weighted
average yield
|
4.00 | % | 3.39 | % | 4.21 | % | 4.65 | % | 4.17 | % |
Sources
of Funds
General.
Deposits have been our primary source of funds for lending and other investment
purposes. In addition to deposits, we derive funds primarily from principal and
interest payments on loans. These loan repayments are a relatively stable source
of funds, while deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources, and may be used on a longer-term basis for general
business purposes.
Deposits.
Our deposits are generated primarily from residents within our primary market
area. Deposit account terms vary, with the principal differences being the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate. We are not currently using, nor have we used in
the past, brokers to obtain deposits. Our deposit products include
demand, NOW, money market, savings, and term certificate accounts. We
establish interest rates, maturity terms, service fees and withdrawal penalties
on a periodic basis. Management determines the rates and terms based on rates
paid by competitors, our need for funds or liquidity, growth goals and federal
and state regulations.
Deposit
Activity. The following table sets forth our deposit flows
during the periods indicated.
Years Ended
December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Opening
balance
|
$ | 180,291 | $ | 190,534 | $ | 202,176 | ||||||
Deposits
|
424,835 | 446,472 | 409,277 | |||||||||
Withdrawals
|
(415,323 | ) | (459,112 | ) | (428,913 | ) | ||||||
Interest
credited
|
3,372 | 2,397 | 7,994 | |||||||||
Ending
balance
|
$ | 193,175 | $ | 180,291 | $ | 190,534 | ||||||
Net
increase (decrease)
|
$ | 12,884 | $ | (10,243 | ) | $ | (11,642 | ) | ||||
Percent
increase (decrease)
|
7.15 | % | (5.38 | )% | (5.76 | )% |
Deposit
Accounts. The following table sets forth the dollar amount of
savings deposits in the various types of deposit programs we offered as of the
dates indicated.
At December 31,
|
||||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||||
Transactions and Savings
Deposits:
|
||||||||||||||||||||||||||
Checking
accounts
|
$ | 3,099 | 1.60 | % | $ | 3,118 | 1.73 | % | $ | 3,681 | 1.93 | % | ||||||||||||||
Passbook
accounts
|
45,027 | 23.31 | 38,952 | 21.61 | 38,103 | 20.00 | ||||||||||||||||||||
NOW
accounts
|
20,116 | 10.41 | 17,904 | 9.93 | 18,702 | 9.81 | ||||||||||||||||||||
Money
market accounts
|
7,002 | 3.63 | 13,006 | 7.21 | 7,291 | 3.83 | ||||||||||||||||||||
Total
non-certificates
|
75,244 | 38.95 | 72,980 | 40.48 | 67,777 | 35.57 | ||||||||||||||||||||
Certificates:
|
||||||||||||||||||||||||||
0.00 - 3.99% | 108,499 | 56.16 | 91,619 | 50.82 | 31,877 | 16.73 | ||||||||||||||||||||
4.00 - 5.99% | 8,725 | 4.52 | 15,088 | 8.37 | 90,325 | 47.41 | ||||||||||||||||||||
6.00 - 7.99% | 694 | 0.36 | 591 | 0.33 | 543 | 0.28 | ||||||||||||||||||||
8.00 - 9.99% | 13 | .01 | 13 | 0.01 | 12 | 0.01 | ||||||||||||||||||||
Total
certificates
|
117,931 | 61.05 | 107,311 | 59.52 | 122,757 | 64.43 | ||||||||||||||||||||
Total
deposits
|
$ | 193,175 | 100.00 | % | $ | 180,291 | 100.00 | % | $ | 190,534 | 100.00 | % |
Deposit Maturity
Schedule. The following table presents, by rate category, the
remaining period to maturity of time deposit accounts outstanding as of
December 31, 2009.
0-3.99% |
4.00-
5.99%
|
6.00-
7.99%
|
8.00%-
or
greater
|
Total
|
Percent
of
Total
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Certificate accounts maturing
in quarter ending:
|
||||||||||||||||||||||||
March
31, 2010
|
$ | 28,379 | $ | 1,816 | $ | - | $ | - | $ | 30,195 | 25.60 | % | ||||||||||||
June
30, 2010
|
19,834 | 1,487 | 95 | - | 21,416 | 18.16 | ||||||||||||||||||
September
30, 2010
|
8,017 | 497 | - | - | 8,514 | 7.22 | ||||||||||||||||||
December 31,
2010
|
19,157 | 570 | - | - | 19,727 | 16.73 | ||||||||||||||||||
March
31, 2011
|
5,702 | 731 | 84 | 6 | 6,523 | 5.53 | ||||||||||||||||||
June
30, 2011
|
11,683 | 625 | - | - | 12,308 | 10.44 | ||||||||||||||||||
September
30, 2011
|
1,383 | 239 | - | - | 1,622 | 1.38 | ||||||||||||||||||
December 31,
2011
|
1,513 | 312 | - | - | 1,825 | 1.55 | ||||||||||||||||||
March
31, 2012
|
731 | 1,038 | - | 7 | 1,776 | 1.51 | ||||||||||||||||||
June
30, 2012
|
1,425 | 452 | - | - | 1,877 | 1.59 | ||||||||||||||||||
September
30, 2012
|
537 | 685 | - | - | 1,222 | 1.03 | ||||||||||||||||||
December 31,
2012
|
1,065 | 273 | - | - | 1,338 | 1.13 | ||||||||||||||||||
March
31, 2013
|
2,345 | - | - | - | 2,345 | 1.99 | ||||||||||||||||||
Thereafter
|
6,728 | - | 515 | - | 7,243 | 6.14 | ||||||||||||||||||
Total
|
$ | 108,499 | $ | 8,725 | $ | 694 | $ | 13 | $ | 117,931 | 100.00 | % | ||||||||||||
Percent
of total
|
92.00 | % | 7.40 | % | 0.59 | % | 0.01 | % |
Large
Certificates. The following table indicates the amount of our
certificates of deposit and other deposits by time remaining until maturity as
of December 31, 2009.
Maturity
|
||||||||||||||||||||
3
Months
or
Less
|
Over
3 to 6
Months
|
Over
6 to 12
Months
|
Over
12
Months
|
Total
|
||||||||||||||||
(In
thousands)
|
||||||||||||||||||||
Certificates
of deposit less than $100,000
|
$ | 19,271 | $ | 15,217 | $ | 17,446 | $ | 24,236 | $ | 76,170 | ||||||||||
Certificates
of deposit of $100,000 or more
|
6,196 | 5,499 | 6,895 | 13,843 | 32,433 | |||||||||||||||
Public
funds (1)
|
4,728 | 700 | 3,900 | - | 9,328 | |||||||||||||||
Total
certificates of deposit
|
$ | 30,195 | $ | 21,416 | $ | 28,241 | $ | 38,079 | $ | 117,931 |
_____________________
(1)
|
Deposits
from governmental and other public entities include deposits of
$100,000.
|
Borrowings. We
may obtain advances from the FHLB of Chicago upon the security of the common
stock we own in the FHLB and our qualifying residential mortgage loans and
mortgage-backed securities, provided certain standards related to
creditworthiness are met. These advances are made pursuant to several credit
programs, each of which has its own interest rate and range of maturities. FHLB
advances are generally available to meet seasonal and other withdrawals of
deposit accounts and to permit increased lending.
The following table sets forth the
maximum month-end balance and average balance of FHLB advances for the periods
indicated.
Years
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
(In
thousands)
|
||||||||||||
Maximum balance:
|
||||||||||||
FHLB
advances
|
$ | 33,175 | $ | 35,575 | $ | 28,750 | ||||||
Average balance:
|
||||||||||||
FHLB
advances
|
$ | 27,017 | $ | 31,692 | $ | 25,614 |
The following table sets forth the
balances of, and weighted average interest rate on, certain borrowings at the
dates indicated.
At December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
FHLB
advances
|
$ | 25,300 | $ | 30,175 | $ | 23,350 | ||||||
Weighted
average interest rate of FHLB advances
|
2.99 | % | 3.95 | % | 4.45 | % |
Employees
At December 31, 2009, we had a
total of 45 full-time and 20 part-time employees. Our employees are
not represented by any collective bargaining group. Management
believes that we have good relationships with our employees.
Regulation
Loans-to-One-Borrower. Federal savings banks
generally may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of unimpaired capital and unimpaired surplus on an
unsecured basis. An additional amount may be lent, equal to 10% of
unimpaired capital and unimpaired surplus, if the loan is secured by readily
marketable collateral, which is defined to include certain securities and
bullion, but generally does not include real estate. As of
December 31, 2009, we were in compliance with our loans-to-one-borrower
limitations.
Qualified Thrift
Lender Test. As a federal savings
bank, we are required to satisfy a qualified thrift lender test whereby we must
maintain at least 65% of our “portfolio assets” in “qualified thrift
investments.” These consist primarily of residential mortgages and
related investments, including mortgage-backed and related
securities. “Portfolio assets” generally means total assets less
specified liquid assets up to 20% of total assets, goodwill and other intangible
assets, and the value of property used to conduct business. A savings
bank that fails the qualified thrift lender test must either convert to a bank
charter or operate under specified restrictions. As of
December 31, 2009, we maintained 73.76% of our portfolio assets in
qualified thrift investments and, therefore, we met the qualified thrift lender
test.
Capital
Distributions. Office of Thrift
Supervision regulations govern capital distributions by savings institutions,
which include cash dividends, stock repurchases and other transactions charged
to the capital account of a savings institution. A savings
institution must file an application for Office of Thrift Supervision approval
of the capital distribution if either (1) the total capital distributions for
the applicable calendar year exceed the sum of the institution’s net income for
that year to date plus the institution’s retained net income for the preceding
two years that is still available for distribution, (2) the institution would
not be at least adequately capitalized following the distribution, (3) the
distribution would violate any applicable statute, regulation, agreement or
Office of Thrift Supervision-imposed condition, or (4) the institution is not
eligible for expedited review of its filings. If an application is not required
to be filed, savings institutions, which are a subsidiary of a holding company,
as well as certain other institutions, must still file a notice with the Office
of Thrift Supervision at least 30 days before the Board of Directors declares a
dividend or approves a capital distribution.
Any additional capital distributions
would require prior regulatory approval. In the event our capital
falls below the adequately capitalized requirement or the Office of Thrift
Supervision notifies us that we are in need of more than normal supervision, our
ability to make capital distributions could be restricted. In
addition, the Office of Thrift Supervision could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if it determines that the distribution would constitute an unsafe or
unsound practice.
Community
Reinvestment Act and Fair Lending Laws. Federal savings banks
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income
neighborhoods. In addition, the Equal Credit Opportunity Act and the
Fair Housing Act prohibit lenders from discriminating in their lending practices
on the basis of characteristics specified in those statutes. An
institution’s failure to comply with the provisions of the Community
Reinvestment Act could, at a minimum, result in regulatory restrictions on its
activities, and failure to comply with the Equal Credit Opportunity Act and the
Fair Housing Act could result in enforcement actions by the Office of Thrift
Supervision, as well as other federal regulatory agencies and the Department of
Justice. We received a Satisfactory Community Reinvestment Act rating
in our most recent examination by the Office of Thrift
Supervision.
Transactions with
Related Parties. Our authority to engage in transactions with
related parties or “affiliates” or to make loans to specified insiders is
limited by Sections 23A and 23B of the Federal Reserve Act and its implementing
regulations. The term “affiliate” for these purposes generally means
any company that controls or is under common control with an institution,
including AJS Bancorp, Inc. and its non-savings institution subsidiaries, if
any. The regulation limits the aggregate amount of certain “covered”
transactions with any individual affiliate to 10% of the capital and surplus of
the savings institution and also limits the aggregate amount of covered
transactions with all affiliates to 20% of the savings institution’s capital and
surplus. Covered transactions with affiliates are required to be
secured by collateral in an amount and of a type described in the regulation,
and purchasing low quality assets from affiliates is generally
prohibited. The regulation also provides that covered transactions
with affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition,
savings institutions are prohibited from lending to any affiliate that is
engaged in activities that are not permissible for bank holding companies and no
savings institution may purchase the securities of any affiliate other than a
subsidiary.
Our authority to extend credit to
executive officers, directors and 10% stockholders, as well as entities
controlled by these persons, is currently governed by Sections 22(g) and
22(h) of the Federal Reserve Act, and its implementing regulation,
Regulation O. Among other things, this regulation generally
requires these loans to be made on terms substantially the same as those offered
to unaffiliated individuals and do not involve more than the normal risk of
repayment. However, the regulation permits executive officers and
directors to receive the same terms through benefit or compensation plans that
are widely available to other employees, as long as the director or executive
officer is not given preferential treatment compared to other participating
employees. Regulation O also places individual and aggregate limits on the
amount of loans we may make to these persons based, in part, on our capital
position, and requires approval procedures to be followed. At
December 31, 2009, we were in compliance with these
regulations.
Enforcement. The
Office of Thrift Supervision has primary enforcement responsibility over savings
institutions and has the authority to bring enforcement action against all
“institution-related parties,” including stockholders, attorneys, appraisers and
accountants who knowingly or recklessly participate in wrongful action likely to
have an adverse effect on an insured institution. Formal enforcement
action may range from the issuance of a capital directive or cease and desist
order to removal of officers and/or directors of the institution, receivership,
conservatorship or the termination of deposit insurance. Civil
penalties cover a wide range of violations and actions, and range up to $25,000
per day, unless a finding of reckless disregard is made, in which case penalties
may be as high as $1.0 million per day. The Federal Deposit
Insurance Corporation also has the authority to recommend to the Director of the
Office of Thrift Supervision that enforcement action be taken with respect to a
particular savings institution. If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take action
under specified circumstances.
Standards for
Safety and Soundness. Federal law requires
each federal banking agency to prescribe for all insured depository institutions
standards relating to, among other things, internal controls, information
systems and audit systems, loan documentation, credit underwriting, interest
rate risk exposure, asset growth, compensation, and other operational and
managerial standards as the agency deems appropriate. The federal
banking agencies adopted Interagency Guidelines Prescribing Standards for Safety
and Soundness to implement the safety and soundness standards required under the
federal law. The guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes
impaired. The guidelines address internal controls and information
systems, internal audit systems, credit underwriting,
loan
documentation, interest rate risk exposure, asset growth, compensation, fees and
benefits. If the appropriate federal banking agency determines that
an institution fails to meet any standard prescribed by the guidelines, the
agency may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard. If an institution fails to meet
these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan.
Capital
Requirements
Office of Thrift Supervision capital
regulations require savings institutions to meet three minimum capital
standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for
institutions receiving the highest rating on the CAMELS rating system) and an 8%
risk-based capital ratio. In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
capital standard, a 4% leverage ratio (3% for institutions receiving the highest
rating on the CAMELS financial institution rating system), and, together with
the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard.
Office of Thrift Supervision regulations also require that in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for
savings institutions requires the maintenance of Tier 1 (core) and total capital
(which is defined as core capital and supplementary capital) to risk-weighted
assets of at least 4% and 8%, respectively. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of
Thrift Supervision capital regulation based on the risks believed inherent in
the type of asset. Core capital is defined as common stockholders’ equity
(including retained earnings), certain noncumulative perpetual preferred stock
and related surplus and minority interests in equity accounts of consolidated
subsidiaries, less intangibles other than certain mortgage servicing rights and
credit card relationships. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock, the allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets, and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of core capital. At December 31, 2009, A.J. Smith Federal
exceeded each of its capital requirements.
Prompt
Corrective Regulatory Action
Under its Prompt Corrective Action
regulations, the Office of Thrift Supervision is required to take supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution’s level of capital. Generally, a savings
institution that has total risk-based capital of less than 8.0%, or a leverage
ratio or a Tier 1 core capital ratio that is less than 4.0%, is considered
to be undercapitalized. A savings institution that has total
risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio
of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
“significantly undercapitalized.” A savings institution that has a
tangible capital to assets ratio equal to or less than 2.0% is deemed to be
“critically undercapitalized”. Generally, the banking regulator is
required to appoint a receiver or conservator for an institution that is
“critically undercapitalized.” The regulation also provides that a
capital restoration plan must be filed with the Office of Thrift Supervision
within 45 days of the date an institution receives notice that it is
“undercapitalized,” “significantly undercapitalized” or “critically
undercapitalized.” In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The Office of Thrift Supervision may also
take any one of a number of discretionary supervisory actions against
undercapitalized institutions, including the issuance of a capital directive and
the replacement of senior executive officers and directors.
Insurance
of Deposit Accounts
Deposit
accounts in A. J. Smith Federal are insured by the Federal Deposit Insurance
Corporation, generally up to a maximum of $100,000 per separately insured
depositor and up to a maximum of $250,000 for self-directed retirement
accounts. However, pursuant to its statutory authority, the Board of
the Federal Deposit Insurance Corporation increased the deposit insurance
available on deposit accounts to $250,000 effective until December 31,
2013. A. J. Smith Federal’s deposits are subject to Federal Deposit
Insurance Corporation deposit insurance assessments.
The
Federal Deposit Insurance Corporation imposes a risk-based assessment on
institutions for deposit insurance. On February 27, 2009, the FDIC:
(1) adopted a final rule modifying the risk-based assessment system and setting
initial base assessment rates beginning April 1, 2009, at 12 to 45 basis points;
and (2) due to extraordinary circumstances, extended the time within which the
FDIC reserve ratio must be returned to 1.15% from five to seven
years.
On May
22, 2009, the FDIC adopted a final rule imposing a 5 basis point special
assessment on each insured depository institution’s assets minus Tier 1 capital
as of June 30, 2009. The Bank’s FDIC special assessment was
$108,000. On November 12, 2009, the FDIC adopted a final rule
imposing a 13-quarter prepayment of FDIC premiums. The prepayment
amount is an estimated prepayment for the fourth quarter of 2009 through the
fourth quarter of 2012. The prepayment amount will be used to offset
future FDIC premiums beginning with the March 2010 invoice; however,
institutions will still be billed for the FICO assessment and, if applicable,
the Transaction Account Guarantee Program. The Bank’s prepaid FDIC
premium as of December 31, 2009 was $1.1 million.
On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
(TLG Program) to strengthen confidence and encourage liquidity in the banking
system. The TLG Program consists of two components: a temporary
guarantee of newly-issued senior unsecured debt (the Debt Guarantee Program) and
a temporary unlimited guarantee of funds in non-interest-bearing transaction
accounts at FDIC-insured institutions (the Transaction Account Guarantee Program
or “TAG”). Under the TAG program, through June 30, 2010, all
non-interest-bearing transaction accounts and NOW accounts with an interest rate
of 0.5% or less are fully guaranteed by the FDIC for the entire amount in the
account. Coverage under the TAG Program is in addition to and
separate from the coverage available under the FDIC’s general deposit insurance
rules. The annual assessment rate for the TAG program after December
31, 2009, will be raised to either 15 basis points, 20 basis points or 25 basis
points, depending on the Risk Category assigned to an institution in the FDIC’s
risk-based premium system. All institutions participating in the
extended TAG program that are assigned to Risk Category I of the risk-based
premium system will be charged an annualized fee of 15 basis points on their
deposits in noninterest-bearing transaction accounts for the portion of the
quarter in which they are assigned to Risk Category I. Institutions
in Risk Category II will be charged an annualized fee of 20 basis points on
deposits in non-interest-bearing transaction accounts for the portion of the
quarter in which they are assigned to Risk Category II. Institutions
in either Risk Category III or Risk Category IV will be charged an annualized
fee of 25 basis points on deposits in non-interest-bearing transaction accounts
for the portion of the quarter in which they are assigned to either Risk
Category III or Risk Category IV. The Company participates in the TAG
portion of the Temporary Liquidity Guarantee Program and is currently in Risk
Category I.
In addition to the Federal Deposit
Insurance Corporation assessments, the Financing Corporation (“FICO”) is
authorized to impose and collect, with the approval of the Federal Deposit
Insurance Corporation, assessments for anticipated payments, issuance costs and
custodial fees on bonds issued by the FICO in the 1980s to recapitalize the
former Federal Savings and Loan Insurance Corporation. The bonds
issued by the FICO are due to mature in 2017 through 2019. For the
year ended December 31, 2009, the annualized FICO assessment was equal to
1.06 basis points for each $100 in domestic deposits maintained at an
institution.
Federal
Home Loan Bank System
We are a member of the Federal Home
Loan Bank System, which consists of 12 regional Federal Home Loan
Banks. The Federal Home Loan Bank System provides a central credit
facility primarily for member institutions. As a member of the
Federal Home Loan Bank of Chicago (FHLB), we are required to acquire and hold
shares of capital stock in the Federal Home Loan Bank in an amount equal to at
least 1% of the aggregate principal amount of our unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 1/20 of our
borrowings from the FHLB, whichever is greater. As of
December 31, 2009, we were in compliance with this requirement. The Federal
Home Loan Banks are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing
programs. These requirements could reduce the amount of dividends
that the Federal Home Loan Banks pay to their members and could also result in
the Federal Home Loan Banks imposing a higher rate of interest on advances to
their members. On October 18, 2005 the Federal Home Loan Bank of
Chicago announced a policy to discontinue excess capital stock redemptions or
“voluntary” stock redemptions. Voluntary stock is stock held by
members beyond the amount required as a condition of membership or to support
advance borrowings. The FHLB has not paid a dividend on the FHLB
stock since the third quarter of 2008 and there are no plans to do so in the
near future. The Company holds $2.5 million of FHLB stock as of
December 31, 2009.
Federal
Reserve System
Federal Reserve Board regulations
require savings institutions to maintain non-interest-earning reserves against
their transaction accounts, such as negotiable order of withdrawal and regular
checking accounts. At December 31, 2009, we were in compliance
with these reserve requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the Office of Thrift Supervision.
Holding
Company Regulation
General. AJS
Bancorp, MHC and AJS Bancorp, Inc. are non-diversified savings and loan holding
companies within the meaning of the Home Owners’ Loan Act. As such,
AJS Bancorp, MHC and AJS Bancorp, Inc. are registered with the Office of Thrift
Supervision and are subject to Office of Thrift Supervision regulations,
examinations, supervision and reporting requirements. In addition,
the Office of Thrift Supervision has enforcement authority over AJS Bancorp,
Inc. and AJS Bancorp, MHC and their subsidiaries. Among other things,
this authority permits the Office of Thrift Supervision to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution. As federal corporations, AJS Bancorp, Inc. and AJS
Bancorp, MHC are generally not subject to state business organization
laws.
Permitted
Activities. Pursuant to Section 10(o) of the Home Owners’
Loan Act and Office of Thrift Supervision regulations and policy, a mutual
holding company, such as AJS Bancorp, MHC, and a federally chartered mid-tier
holding company such as AJS Bancorp, Inc. may engage in the following
activities: (i) investing in the stock of a savings association;
(ii) acquiring a mutual association through the merger of such association
into a savings association subsidiary of such holding company or an interim
savings association subsidiary of such holding company; (iii) merging with
or acquiring another holding company, one of whose subsidiaries is a savings
association; (iv) investing in a corporation, the capital stock of which is
available for purchase by a savings association under federal law or under the
law of any state where the subsidiary savings association or associations share
their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings
association subsidiary of
such
company; (viii) acting as trustee under deeds of trust; (ix) any other
activity (A) that the Federal Reserve Board, by regulation, has determined
to be permissible for bank holding companies under Section 4(c) of the Bank
Holding Company Act of 1956, unless the Director, by regulation, prohibits or
limits any such activity for savings and loan holding companies; or (B) in
which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; (x) any activity
permissible for financial holding companies under Section 4(k) of the Bank
Holding Company Act, including securities and insurance underwriting; and
(xi) purchasing, holding, or disposing of stock acquired in connection with
a qualified stock issuance if the purchase of such stock by such savings and
loan holding company is approved by the Director. If a mutual holding
company acquires or merges with another holding company, the holding company
acquired or the holding company resulting from such merger or acquisition may
only invest in assets and engage in activities listed in (i) through
(xi) above, and has a period of two years to cease any nonconforming
activities and divest of any nonconforming investments.
The Home Owners’ Loan Act prohibits a
savings and loan holding company, including AJS Bancorp, Inc. and AJS Bancorp,
MHC, directly or indirectly, or through one or more subsidiaries, from acquiring
another savings institution or holding company thereof, without prior written
approval of the Office of Thrift Supervision. It also prohibits the
acquisition or retention of, with certain exceptions, more than 5% of a
non-subsidiary savings institution, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
Home Owners’ Loan Act; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding
companies to acquire savings institutions, the Office of Thrift Supervision must
consider the financial and managerial resources, future prospects of the company
and institution involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.
The Office of Thrift Supervision is
prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws
of the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit
interstate savings and loan holding company acquisitions.
Waivers of
Dividends by AJS Bancorp, MHC. Office of Thrift Supervision
regulations require AJS Bancorp, MHC to notify the Office of Thrift Supervision
of any proposed waiver of its receipt of dividends from AJS Bancorp,
Inc. The Office of Thrift Supervision reviews dividend waiver notices
on a case-by-case basis, and, in general, does not object to any such waiver if:
(i) the mutual holding company’s board of directors determines that such waiver
is consistent with such directors’ fiduciary duties to the mutual holding
company’s members; (ii) for as long as the savings association subsidiary is
controlled by the mutual holding company, the dollar amount of dividends waived
by the mutual holding company are considered as a restriction on the retained
earnings of the savings association, which restriction, if material, is
disclosed in the public financial statements of the savings association as a
note to the financial statements; (iii) the amount of any dividend waived by the
mutual holding company is available for declaration as a dividend solely to the
mutual holding company where the savings association determines that the payment
of such dividend to the mutual holding company is probable, an appropriate
dollar amount is recorded as a liability; and (iv) the amount of any waived
dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under Office of Thrift Supervision capital
distribution regulations. AJS Bancorp, MHC may waive dividends paid
by AJS Bancorp, Inc. Under Office of Thrift Supervision regulations, our public
stockholders would not be diluted because of any dividends waived by AJS
Bancorp, MHC (and waived dividends would not be considered in determining an
appropriate exchange ratio) in the event AJS Bancorp, MHC converts
to
stock
form. During the twelve months ended 2009 the Company paid four
regular quarterly dividends of $0.11 per share to stockholders of
record. In conjunction with the Office of Thrift Supervision
approval, AJS Bancorp, MHC waived 100% of the dividends due on its 1,227,544
shares. The Company anticipates that AJS Bancorp, MHC will waive 100%
of dividends in the foreseeable future.
Conversion of AJS
Bancorp, MHC to Stock Form. Office of Thrift Supervision
regulations permit AJS Bancorp, MHC to convert from the mutual form of
organization to the capital stock form of organization (a “Conversion
Transaction”). There can be no assurance when, if ever, a Conversion
Transaction will occur, and the Board of Directors has no current intention or
plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to AJS
Bancorp, Inc. (the “New Holding Company”), AJS Bancorp, MHC’s corporate
existence would end, and certain depositors of A. J. Smith Federal would receive
the right to subscribe for additional shares of the New Holding
Company. In a Conversion Transaction, each share of common stock held
by stockholders other than AJS Bancorp, MHC (“Minority Stockholders”) would be
automatically converted into a number of shares of common stock of the New
Holding Company determined pursuant to an exchange ratio that ensures that
Minority Stockholders own the same percentage of common stock in the New Holding
Company as they owned in AJS Bancorp, Inc. immediately prior to the Conversion
Transaction. Under Office of Thrift Supervision regulations, Minority
Stockholders would not be diluted because of any dividends waived by AJS
Bancorp, MHC (and waived dividends would not be considered in determining an
appropriate exchange ratio), in the event AJS Bancorp, MHC converts to stock
form. There can be no assurance that a successor agency to the Office
of Thrift Supervision would take the same position with respect to the impact of
waived dividends on the exchange ratio applicable to shares held by minority
shareholders. The total number of shares held by Minority
Stockholders after a Conversion Transaction also would be increased by any
purchases by Minority Stockholders in the stock offering conducted as part of
the Conversion Transaction.
The
USA PATRIOT Act
In
response to the events of September 11, 2001, the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on October
26, 2001. The USA PATRIOT Act gave the Federal Government new powers
to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing and broadened
anti-money laundering requirements. The USA PATRIOT Act has no
material impact on the Bank’s operations.
Sarbanes-Oxley
Act of 2002
The Sarbanes-Oxley Act of 2002 was
enacted in response to public concerns regarding corporate accountability in
connection with accounting scandals. The stated goals of the Sarbanes-Oxley Act
are to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies, and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally
applies to all companies that file or are required to file periodic reports with
the SEC, under the Securities Exchange Act of 1934.
The
Sarbanes-Oxley Act includes very specific additional disclosure requirements and
new corporate governance rules requiring the SEC and securities exchanges to
adopt extensive additional disclosure, corporate governance and other related
rules, and mandates further studies of certain issues by the SEC. The
Sarbanes-Oxley Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law,
such as
the relationship between a board of directors and management and between a board
of directors and its committees. The SEC created a committee to
evaluate Sarbanes-Oxley issues that may affect small public
companies. Specifically being reviewed are the requirements under
Sarbanes-Oxley section 404, which require significant oversight of a public
company’s internal control over the financial statements. The Company
will be subject to complete Section 404 compliance for the year ending
December 31, 2010, therefore, costs for compliance with the Sarbanes-Oxley
Act will increase. At this time the Company cannot accurately predict
what additional expenses may be incurred in complying with all of the provisions
of the Sarbanes-Oxley Act.
Taxation
Federal
Taxation For
federal income tax purposes, AJS Bancorp, Inc. and A. J. Smith Federal file
separate federal income tax returns on a calendar year basis using the accrual
method of accounting.
As a result of the enactment of the
Small Business Job Protection Act of 1996, all savings banks and savings
associations may convert to a commercial bank charter, diversify their lending,
or merge into a commercial bank without having to recapture any of their
pre-1988 tax bad debt reserve accumulations. However, transactions
which would require recapture of the pre-1988 tax bad debt reserve include
redemption of A. J. Smith Federal’s stock, payment of dividends or distributions
in excess of earnings and profits, or failure by the institution to qualify as a
bank for federal income tax purposes. At December 31, 2009, A.
J. Smith Federal had approximately $2.4 million of pre-1988 tax bad debt
reserves. A deferred tax liability has not been provided on this amount, as
management does not intend to make distributions, redeem stock or fail certain
bank tests that would result in recapture of the reserve.
Deferred income taxes arise from the
recognition of items of income and expense for tax purposes in years different
from those in which they are recognized in the consolidated financial
statements. AJS Bancorp, Inc. will account for deferred income taxes
by the asset and liability method, applying the enacted statutory rates in
effect at the balance sheet date to differences between the book basis and the
tax basis of assets and liabilities. The resulting deferred tax
liabilities and assets will be adjusted to reflect changes in the tax
laws. A valuation allowance, if needed, reduces deferred tax assets
to the amount expected to be realized.
AJS Bancorp, Inc. is subject to the
corporate alternative minimum tax to the extent it exceeds AJS Bancorp, Inc.’s
regular income tax for the year. The alternative minimum tax will be imposed at
the rate of 20% of a specially computed tax base. Included in this base are a
number of preference items, including interest on certain tax-exempt bonds
issued after August 7, 1986, and an “adjusted current earnings” computation
which is similar to a tax earnings and profits computation. In
addition, for purposes of the alternative minimum tax, the amount of alternative
minimum taxable income that may be offset by net operating losses is limited to
90% of alternative minimum taxable income.
A. J. Smith Federal’s income tax
returns have not been audited by the Internal Revenue Service within the past
five years.
Illinois State
Taxation. AJS Bancorp, Inc. is required to file Illinois
income tax returns and pay tax at an effective tax rate of 7.3% of Illinois
taxable income. For these purposes, Illinois taxable income generally means
federal taxable income subject to certain modifications, primarily the exclusion
of interest income on United States obligations.
MANAGEMENT
Executive
Officers of AJS Bancorp, Inc. The following individuals hold the
following executive officer positions of AJS Bancorp, Inc.
Name
|
Age
|
Position
|
||
Thomas
R. Butkus
|
62
|
Chairman
of the Board and Chief Executive Officer
|
||
Lyn
G. Rupich
|
47
|
President
|
||
Pamela
N. Favero
|
46
|
Chief
Financial Officer
|
Availability
of Annual Report on Form 10-K
Our Annual Report on Form 10-K may be
accessed on our website at www.ajsmithbank.com.
ITEM
1A. RISK
FACTORS
Not applicable.
ITEM
1B. UNRESOLVED STAFF
COMMENTS
Not applicable.
ITEM
2. PROPERTIES
Properties
At December 31, 2009, we conducted
our business from our main office at 14757 South Cicero, Midlothian, Illinois, a
branch office located at 8000 West 159th
Street, Orland Park, Illinois and a branch office located at 11275 W. 143rd
Street, Orland Park, Illinois. We own all of our branch
locations. At December 31, 2009, the net book value of our
office locations was approximately $4.0 million.
ITEM
3. LEGAL
PROCEEDINGS
We are involved, from time to time, as
plaintiff or defendant in various legal actions arising in the normal course of
our business. At December 31, 2009, we were not involved in any
legal proceedings, the outcome of which would be material to our financial
condition or results of operations.
ITEM
4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
None.
PART
II
ITEM
5.
MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The Company’s Common Stock is quoted on
the electronic bulletin board under the symbol “AJSB”.
The following table sets forth the
range of the high and low bid prices of the Company’s Common Stock for the prior
eight calendar quarters and is based upon information set forth on the over the
counter bulletin board. During the twelve months ended December 31, 2009
the Company paid four regular quarterly dividends of $0.11 cents per share to
stockholders of record. During the twelve months ended
December 31, 2008 the Company paid four regular quarterly dividends of
$0.11 per share, and one special dividend on August 19, 2009 of $0.50 per share,
to stockholders of record. In conjunction with Office of Thrift
Supervision non-objection, AJS Bancorp, MHC (the “MHC”) waived 100% of the
quarterly dividends due on its 1,227,544 shares.
Prices of Common
Stock
|
|||
High
|
Low
|
||
Calendar
Quarter Ended
|
|||
March
31, 2008
|
29.90
|
19.25
|
|
June
30, 2008
|
21.50
|
18.45
|
|
September
30, 2008
|
19.00
|
14.28
|
|
December 31,
2008
|
18.00
|
11.70
|
|
March
31, 2009
|
15.99
|
10.10
|
|
June
30, 2009
|
16.00
|
13.25
|
|
September
30, 2009
|
20.00
|
13.60
|
|
December 31,
2009
|
15.00
|
13.00
|
As of
December 31, 2009, the Company had 324 stockholders of record.
The
Company’s second repurchase plan was announced on May 18, 2004 and allowed for
the repurchase of 117,000 shares of the Company’s stock, which represented
approximately 5% of the Company’s outstanding shares. Subsequently,
the Company announced increases in the repurchase plan of 100,000, 50,000,
50,000 and 50,000 shares on March 22, 2005, October 18, 2005, August 21, 2007,
and February 26, 2008, respectively. As of December 31, 2009
there are 50,951 shares remaining to be purchased under the current repurchase
plan.
The
following table sets forth the issuer purchases of equity securities during the
prior three months.
Total
number
shares
purchased
|
Average
price
paid
per share
|
Total
number of shares
purchased
under publicly
announced
plan
|
Maximum
number of
shares
that may be
purchased
under the
repurchase
plan
|
|||||||||||||
October
1– October 31
|
- | $ | - | 316,049 | 367,000 | |||||||||||
November
1- November 30
|
- | - | 316,049 | 367,000 | ||||||||||||
December
1- December 31
|
- | - | 316,049 | 367,000 |
Set forth
below is certain information as of December 31, 2009 regarding equity
compensation to directors and executive officers of the Company approved by
stockholders. Other than the employee stock ownership plan, the
Company did not have any equity plans in place that were not approved by
stockholders.
Plan
|
Number
of securities to be
issued
upon exercise of
outstanding
options and
rights
|
Weighted
average
exercise price
|
Number
of securities remaining
available for issuance under
plan
|
|||
Equity
compensation plans approved by stockholders
|
90,485 options
|
$
18.82
(1)
|
17,456
(options)/900 (restricted stock)
|
(1)
Represents the exercise price of options awarded under the stock option
plan.
ITEM
6
SELECTED FINANCIAL
DATA
Not applicable.
ITEM
7
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Our results of operations typically
depend primarily on our net interest income. Net interest income is
the difference between the interest income we earn on our interest-earning
assets, consisting primarily of loans, investment securities and
interest-earnings deposits with other financial institutions, and the interest
we pay on our interest-bearing liabilities, consisting primarily of savings
accounts, time deposits and borrowings. Our results of operations are
also affected by our provisions for loans losses, other income and other
expense. Other income consists primarily of insurance commissions and
service charges on deposit accounts. Other expense consists primarily
of noninterest expense, including salaries and employee benefits, occupancy,
equipment, data processing and deposit insurance premiums. Our
results of operations may also be affected significantly by general and local
economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory authorities. Our exposure to
credit risk is significantly affected by changes in the economy of Chicago and
its suburban areas.
Business
Strategy
Our business strategy is to operate as
a well-capitalized, profitable, community-oriented savings bank dedicated to
providing quality customer service. In the past, we implemented our
business strategy by emphasizing the origination of one- to four- family loans
and other loans secured by real estate. We will continue to be
primarily a one- to four- family lender with the ability to originate FHA
loans. In the past, we broadened the scope of our loan products and
services to include commercial real estate based loans, however, in light of the
recent economic conditions and their impact on commercial real estate in
particular, we have discontinued our commercial lending services. There can be
no assurances that we will successfully implement our strategy.
Highlights of our business strategy are
as follows:
|
•
|
Continuing One- to Four-
Family Residential Real Estate Lending. Historically, we
have emphasized one- to four- family residential lending within our market
area. As of December 31, 2009, $91.7 million, or 70.3%, of
our total loan portfolio consisted of
one-
|
to four-
family residential real estate loans. During the year ended
December 31, 2009, we originated $26.1 million of one- to four- family
residential real estate loans. We intend to continue to originate
one- to four- family loans because of our expertise with this type of
lending.
|
•
|
Providing an outlet for
Federal Housing Authority (“FHA”) loans. We are
committed to meeting the financial needs of the communities in which we
operate. In particular, we have begun accepting applications
for FHA loans. We compile all the necessary underwriting documents for FHA
loans and then forward those documents to an unaffiliated third party for
underwriting and funding. We do not carry any FHA loans in our
loan portfolio. Our objective is to actively market our FHA loan services
to our existing customers, as well as new customers within our market
area.
|
Comparison
of Financial Condition at December 31, 2009 and December 31,
2008
Total
consolidated assets at December 31, 2009 were $249.3 million, an increase
of $5.3 million or 2.2% from $244.0 million at December 31,
2008. The increase was primarily due to an increase in the Company’s
due from broker receivable for the sale of available for sale securities, an
increase in securities, partially offset by decreases in certificates of
deposits at other financial institutions and cash and cash
equivalents. The broker receivable, totaling $4.7 million, represents
proceeds from the sale of securities in 2009 that are scheduled to settle in
2010. Securities increased $2.7 million or 3.0% to $92.6 million at
December 31, 2009 from $89.9 million at December 31, 2008 representing
purchases of $73.2 million of fixed-rate government-backed notes and bonds, of
which $65.4 million had call features, and $791,000 in mortgage-backed
securities. The purchases of the securities were offset by principal
pay downs, maturities, calls and sales. Certificates of deposit
decreased $5.1 million or 75.0% to $1.7 million at December 31, 2009 from
$6.8 million at December 31, 2008. Cash and cash equivalents
decreased $909,000 or 12.3% to $6.5 million as of December 31, 2009 compared to
$7.4 million as of December 31, 2008.
Other
assets increased $57,000 to $2.6 million at December 31, 2009 and
2008. Other assets include a net income tax receivable due of $1.1
million and a prepaid FDIC assessment of $1.0 million at December 31,
2009. The Company did not have a prepaid FDIC assessment at December
31, 2008. The net income tax receivable was $2.0 million at December
31, 2008. The Company has a deferred tax asset of $2.0 million prior
to a valuation allowance at December 31, 2009. The Company recorded a
deferred tax asset valuation allowance of $1.5 million as of December 31, 2009
due to concerns regarding the timing and ability to collect the entire tax asset
in the foreseeable future. The ability to utilize the deferred tax
asset is based in part on the Company’s ability to forecast net income to absorb
the deferred tax asset within a reasonable timeframe. At this time,
the Company cannot reasonably predict net income sufficient to absorb the
deferred tax asset. Please see the paragraphs above under “Insurance
of Deposit Accounts” for a discussion regarding the FDIC insurance premium
assessment.
Total
deposits increased $12.9 million or 7.2% to $193.2 million at December 31,
2009 from $180.3 million at December 31, 2008. The increase in
deposits occurred primarily in the certificates of deposit and passbook savings
categories, while the balances of demand deposit accounts
decreased. Certificates of deposit increased $10.6 million to $117.9
million at December 31, 2009 from $107.3 million at December 31,
2008. Passbook savings accounts increased $6.0 million to $45.0
million at December 31, 2009 compared to $39.0 million at December 31,
2008. Demand deposit accounts decreased to $30.2 million at
December 31, 2009 from $34.0 million at December 31,
2008. FHLB advances decreased $4.9 million or 16.2% to $25.3 million
at December 31, 2009 from $30.2 million at December 31,
2008.
The
Company had non-performing assets of $9.2 million as of December 31, 2009
and $3.7 million as of December 31, 2008. The increase in
non-performing assets resulted mainly from an increase in non-performing
commercial real estate loans. As of December 31, 2009, the Company
had ten non-performing loans compared to five non-performing commercial loans at
December 31, 2008. The Company foreclosed on seven commercial real
estate properties and three residential condos during 2009. The
Company did not have any other real estate owned at December 31,
2008.
The
Company has four single-family loans on non-accrual status, three of which are
also impaired, as of December 31, 2009 compared to six single-family loans
on non-accrual status, one of which was also impaired, as of December 31,
2008. The Company has six commercial lending relationships that are
impaired and on non-accrual as of December 31,
2009. Additionally, the Company has one commercial lending
relationship that is impaired, but not more than 90 days delinquent at
December 31, 2009.
The
allowance for loan losses totaled $3.0 million at December 31, 2009 and
$2.7 million at December 31, 2008. This represents a ratio of
the allowance for loan losses to gross loans receivable of 2.33% at
December 31, 2009 and 2.12% at December 31, 2008. The
allowance for loan losses to non-performing loans was 46.6% at December 31,
2009 and 73.2% at December 31, 2008.
Total
stockholders’ equity decreased $3.3 million to $23.8 million at
December 31, 2009 from $27.1 million at December 31,
2008. The decrease in stockholders’ equity primarily resulted from
the net loss of $2.4 million during the twelve months ended December 31,
2009, a decrease in other comprehensive income due to the lower fair value of
the available for sale securities portfolio and the repurchase of shares of the
Company’s stock during the twelve months ended December 31,
2009. The Company repurchased 2,351 shares of its common stock at a
cost of $29,000 during the twelve months ended December 31,
2009. In addition, during the year the Company declared and paid four
quarterly dividends of $0.11 cents per share. With the non-objection
of the Office of Thrift Supervision (“OTS”) AJS Bancorp, MHC (the “MHC”) waived
100% of the dividends due on its 1,227,544 shares. The fair value,
net of taxes, of the available for sale securities portfolio decreased $916,000
at December 31, 2009 compared to a tax effective increase in fair value of
$1.5 million at December 31, 2008.
Comparison
of Operating Results for the Years Ended December 31, 2009 and
December 31, 2008
General. We
recorded a net loss of $2.4 million for the year ended December 31, 2009
compared to a net loss of $2.1 million for the year ended December 31,
2008. The net loss before income taxes was $1.7 million for the year
ended December 31, 2009 compared to a net loss before income taxes of $3.5
million for the same period in 2008. The Company’s net loss in 2009
compared with net loss in 2008 primarily reflects increases in the income tax
expense due to the deferred tax asset valuation allowance, and in non-interest
income expense, offset by an increase in net interest income, a decrease in the
provision for loan losses and an increase in non-interest income.
Interest
Income. Total interest income decreased to $10.5 million for
the twelve months ended December 31, 2009, a decrease of $1.5 million or
12.5% from $12.0 million for the same period in 2008. The decrease in
our interest income is primarily due to a lower average yield earned on all
categories of our interest-earning assets.
Interest
income from loans decreased by $800,000 to $6.9 million for the year ended
December 31, 2009, from $7.7 million for the year ended December 31,
2008. The decrease in interest income from loans reflects decreases
in average loan balances as well as a lower yield earned on average loan
balances during the year. The average yield on loans decreased to
5.23% during 2009 from 5.75% during 2008. Average loan balances
decreased to $132.7 million during the year ended December 31, 2009 from
$134.7 million for the same period in 2008.
Interest
income from securities decreased by $349,000 to $3.4 million for the year ended
December 31, 2009 compared to $3.8 million for the year ended
December 31, 2008. The decrease was primarily due to a decrease
in interest rates earned on the securities during the year and, to a lesser
extent lower average securities balances during the year. The average
yield on securities decreased to 4.29% during 2009 from 4.66% during
2008. Average securities balances were $79.5 million during the year
ended December 31, 2009 compared to average securities balances of $80.7
million during the year ended December 31, 2008.
Interest
income from interest-earning deposits decreased $295,000, or 66.0%, to $152,000
for the year ended December 31, 2009 from $447,000 for the year ended
December 31, 2008. The decrease resulted from decreases in the
interest rate earned on the deposits and lower average
balances. Average balances decreased to $10.4 million from $17.7
million, while the average yield decreased to 1.46% from 2.53% for the
comparable twelve-month periods. The decrease in the average balance
of interest earning deposits was caused primarily by a decrease in demand
account balances at other financial institutions and the FHLB. As a
result of the low interest rates paid on cash balances that occurred during 2009
the Company repositioned itself to reduce cash balances by paying down maturing
FHLB advances.
Interest
income from federal funds sold decreased $52,000, or 98.1%, to $1,000 for the
year ended December 31, 2009, from $53,000 for the year ended
December 31, 2008. The decrease resulted from reductions in the
average balances and in the average yield earned on federal funds
sold. The Company decreased its federal fund balances as interest
rates earned on federal funds continue to remain at record lows during
2009.
Interest
Expense. Interest expense on deposits decreased by $1.4
million, or 30.2% to $3.2 million for the year ended December 31, 2009,
from $4.6 million for 2008. The decrease in our cost of deposits
reflected continued low market interest rates during 2009, resulting in
certificates of deposit maturing and renewing at lower rates during
2009. Average deposits decreased to $179.4 million for the year ended
December 31, 2009, from $181.9 million for 2008. Our average
cost of deposits decreased to 1.80% from 2.55% for the respective
periods. Interest expense on borrowings decreased to $978,000 for the
twelve months ended December 31, 2009 from $1.3 million for the same period
during 2008, which was due to decreases in average FHLB borrowings and in
average interest rates.
Net Interest
Income. Net interest income increased by $225,000 or 3.7% to
$6.3 million for the year ended December 31, 2009 from $6.1 million for the
same period in 2008. Average interest earning assets were $222.8
million and $234.7 million during the comparative 2009 and 2008 twelve-month
periods while the average yield was 4.71% and 5.11% respectively. Our
net interest rate spread increased 33 basis points to 2.67% from 2.34% while our
net interest margin increased 23 basis points to 2.82% from 2.59% reflecting a
more pronounced downward repricing of our interest-bearing liabilities as
compared to our interest-earning assets. The ratio of average
interest-earning assets to average interest-bearing liabilities decreased to
107.96% for the year ended 2009 from 109.88% for the year ended
December 31, 2008. The increase in our net interest rate spread
and net interest margin reflects the fact that during the year ended
December 31, 2009 the cost of average interest-bearing liabilities
decreased at a faster pace than the yield earned on average interest-earning
assets.
Provision for Loan
Losses. We established a provision for loan losses, which is
charged to operations, at a level management believes is appropriate to absorb
probable incurred credit losses in the loan portfolio. In evaluating
the level of the allowance for loan losses, management considers historical loss
experience, the types of loans and the amount of loans in the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral, and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available or as future events change. Based upon
our
evaluation,
a provision for loan losses of $2.9 million was necessary for the twelve months
ended December 31, 2009 compared to loan loss provisions of $4.3 million
for the twelve months ended December 31, 2008. The loan loss
provision for the twelve months ended December 31, 2009 was based, in part,
on the continuation of negative economic trends, as well as, charge-offs and
impairment reserves recorded on commercial loan properties. We
recorded net charge offs of $2.6 million during the twelve months ended
December 31, 2009 compared to $3.1 million in the prior
period. At December 31, 2009 the general reserve portion of the
allowance was 1.32% of gross loans receivable, whereas at December 31, 2008
the general reserve portion of the allowance was 1.08% of gross loans
receivable. Based on economic and real estate downturns and an
increase in our commercial real estate based non-performing and impaired loans,
we have increased our general reserve allocations. The loan loss
provision and allowance for loan loss recorded as of December 31, 2009 reflect
management’s estimate of known and inherent losses in our loan
portfolio.
Management
assesses the allowance for loan losses on a quarterly basis and makes provisions
for loan losses as necessary in order to maintain the adequacy of the
allowance. While management uses available information to recognize
losses on loans, future loan loss provisions may be necessary based on changes
in economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the allowance
for loan losses and may require us to recognize additional provisions based on
their judgment of information available at the time of their
examination. The allowance for loan losses as of December 31,
2009 is maintained at a level that represents management’s best estimate of
inherent losses in the loan portfolio, and such losses were both probable and
reasonably estimable.
Non-interest
Income. Non-interest income increased $947,000 or 169.1% to
$1.5 million for the year ended December 31, 2009 from $560,000 for the
year ended 2008. The increase was primarily due to a $816,000
increase in gain on securities sales, a $192,000 reduction in the realized loss
on the sale of trading securities and a $73,000 increase in other non-interest
income items, partially offset by a $168,000 increase in the loss on
correspondent bank investment.
Gain on
securities sales increased $816,000 to $833,000 for the year ended December 31,
2009 from $17,000 for the same period in 2008. The Company sold $16.2
million of available for sale securities during the year ended December 31,
2009. Due to historically low interest rates paid on cash balances
during 2009 the Company has reduced its liquidity position to increase
revenues. The securities sales were primarily the result of
addressing liquidity needs as they arose.
The
Company realized a loss on the sale of trading securities of $192,000 during the
year ended December 31, 2008. This loss represented the sale of 100%
of our investment in the Shay AMF Ultra Short Mortgage fund (“mutual
fund”). We sold the mutual fund to avoid expected further declines in
fair value, which did occur.
Other
non-interest income increased $73,000 or 74.5% to $171,000 for the year ended
December 31, 2009 when compared to the year ended December 31,
2008. The increase was due to a $90,000 increase in correspondent
fees generated primarily by the Company’s FHA program. The Company
began offering FHA loans during the fourth quarter of 2008. We do not
underwrite, service, or hold FHA loans within our portfolio.
The
Company recorded a $168,000 impairment loss during the year ended December 31,
2009 on stock held in Independent Banker’s Bank (“IBB”). IBB was a
correspondent bank primarily serving the banking industry, however, it was not
the Company’s correspondent bank. IBB was put into receivership by
its primary federal regulator during the fourth quarter of 2009. The
Company had recorded an other temporary impairment of $126,000 during the third
quarter of 2009 while IBB tried to raise capital by issuing additional
stock. IBB’s stock offering was unsuccessful and the Company was
placed into receivership shortly thereafter. The IBB stock was
purchased in 2004.
Non-interest
Expense. Non-interest expense increased $827,000 or 14.3% to
$6.6 million for the year ended December 31, 2009 compared to $5.8 million
for the same period in 2008. The increase primarily reflects
increases in loss on real estate owned, federal deposit insurance premiums and
professional fees, partially offset by decreases in salaries and employee
benefits and advertising and promotion costs.
Loss on
real estate owned increased to $649,000 for the year ended December 31, 2009 due
to additional write-downs recorded on other real estate owned. The
Company did not have any other real estate owned during 2008.
Federal
deposit insurance premiums increased $334,000 to $376,000 for the year ended
December 31, 2009 compared to $42,000 for the same period in
2008. The increase was due to increases in the deposit insurance
assessment rates as well as a special assessment levied during
2009. On December 22, 2008, the Federal Deposit Insurance Corporation
(“FDIC”) published a final rule raising the current deposit insurance assessment
rates uniformly for all institutions by 7 basis points (to a range from 12 to 50
basis points) for the first quarter of 2009 and
thereafter. Additionally, on May 22, 2009, the FDIC adopted a final
rule imposing a 5 basis point special assessment on each insured depository
institution’s assets minus Tier 1 capital as of June 30, 2009. The
amount of the special assessment for the Company was $108,000. During
2009, the Company was in FDIC risk category one. The risk category is based upon
capital status and confidential regulator examination ratings. If the
Company’s capital declines or its examiner rating declines, the FDIC assessment
will increase. There can be no assurances that the Company’s FDIC
risk category will not change in the future.
Professional
fees increased $56,000 or 24.2% to $287,000 during the year ended December 31,
2009 compared to $231,000 for the same period in 2008. The increase
was primarily due to costs associated with complying with Sarbanes-Oxley Section
404 and increased legal fees related to foreclosure activity during the
year.
Salaries
and employee benefits decreased $216,000 or 7.0% to $2.9 million for the year
ended December 31, 2009 compared to $3.1 million for the same period last
year. Salaries and employee benefits decreased primarily due to a
reduction in the cost of the recognition and retention and stock option
plans. The awards under these plans were fully vested as of May 21,
2008, and accordingly, the benefit expense decreased $99,000 for the comparable
periods. Salaries and employee benefits also decreased due to the
reduction of full time equivalent employees which included the elimination of
the commercial loan department. The Company had 55 full time
equivalent employees at December 31, 2009 compared to 58 full time equivalent
employees at December 31, 2008.
Advertising
and promotion costs declined $55,000 or 19.5% to $227,000 for the year ended
December 31, 2009 compared to $282,000 for the same period in
2008. The reduction was due to a planned decrease in advertising and
promotion expenses.
Provision for Income
Taxes. The Company recorded a federal and state income tax
expense of $713,000 for the twelve months ended December 31, 2009 on a pre-tax
loss of $1.7 million compared to a $1.4 tax benefit recorded on a pre-tax loss
of $3.5 million for the same period in 2008. The increase in tax
expense for the comparable periods is due to a $1.5 million valuation allowance
recorded against the Company’s deferred tax asset. The Company’s
deferred tax asset consists primarily of timing differences in the tax
deductibility of bad debt expense and deferred compensation. Future
realization of a deferred tax asset ultimately depends on the existence of
sufficient taxable income of the appropriate character within the carry-back and
carry-forward periods available under the tax law. In considering all
available factors to determine the likelihood that the Company’s deferred tax
asset of $2.0 million could be realized, the Company concluded that it is more
likely than not that $1.5 million of this asset may not be
realized. In coming to this conclusion, the Company considered that
the realization of the deferred tax asset was based primarily on forecasted, but
not yet demonstrated, operating profitability. Since the Company has been in a
cumulative net loss position for the past three calendar years, the presumption
of income in the future cannot be adequately substantiated at this
time.
Average Balance Sheets
The following tables present for the
periods indicated the total dollar amount of interest income on average
interest-earning assets and the resultant yields, the interest expense on
average interest-bearing liabilities, expressed both in dollars and rates, as
well as yields and costs for the years ended December 31, 2009, 2008 and
2007. No tax equivalent adjustments were made. All average
balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
Years Ended
December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Average
|
Interest
|
Average
|
Interest
|
|||||||||||||||||||||
Outstanding
|
Earned/
|
|
Outstanding
|
Earned/
|
||||||||||||||||||||
Balance
|
Paid
|
Yield/Rate
|
Balance
|
Paid
|
Yield/Rate
|
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning
assets:
|
||||||||||||||||||||||||
Loans
receivable
|
$ | 132,705 | $ | 6,937 | 5.23 | % | $ | 134,654 | $ | 7,737 | 5.75 | % | ||||||||||||
Securities
|
79,534 | 3,413 | 4.29 | 80,689 | 3,762 | 4.66 | ||||||||||||||||||
Interest-earning
deposits
|
||||||||||||||||||||||||
and
other
|
10,432 | 152 | 1.46 | 17,688 | 447 | 2.53 | ||||||||||||||||||
Federal
funds
|
132 | 1 | 0.76 | 1,625 | 53 | 3.26 | ||||||||||||||||||
Total
interest-earning
|
||||||||||||||||||||||||
assets
|
$ | 222,803 | 10,503 | 4.71 | $ | 234,656 | 11,999 | 5.11 | ||||||||||||||||
Interest-bearing
liabilities:
|
||||||||||||||||||||||||
Passbook
savings
|
$ | 42,045 | 364 | 0.87 | % | $ | 38,880 | 352 | 0.91 | |||||||||||||||
NOW
accounts
|
23,243 | 24 | 0.10 | 22,728 | 38 | 0.17 | ||||||||||||||||||
Money
market accounts
|
8,409 | 38 | 0.45 | 10,396 | 159 | 1.53 | ||||||||||||||||||
Time
deposits
|
105,672 | 2,809 | 2.66 | 109,851 | 4,086 | 3.72 | ||||||||||||||||||
Total
deposits
|
179,369 | 3,235 | 1.80 | 181,855 | 4,635 | 2.55 | ||||||||||||||||||
FHLB
advances and other
|
27,013 | 978 | 3.62 | 31,692 | 1,299 | 4.10 | ||||||||||||||||||
Total
interest-bearing
|
||||||||||||||||||||||||
liabilities
|
$ | 206,382 | 4,213 | 2.04 | $ | 213,547 | 5,934 | 2.78 | ||||||||||||||||
Net
interest income
|
$ | 6,290 | $ | 6,065 | ||||||||||||||||||||
Net
interest rate spread
|
||||||||||||||||||||||||
Net
interest-earning assets
|
$ | 16,421 | 2.67 | % | $ | 21,109 | 2.34 | % | ||||||||||||||||
Net
interest margin on average interest-
|
||||||||||||||||||||||||
earning
assets
|
2.82 | % | 2.59 | % | ||||||||||||||||||||
Average
interest-earning assets
|
||||||||||||||||||||||||
to
average interest-bearing
|
||||||||||||||||||||||||
liabilities
|
107.96 | % | 109.88 | % |
Rate/Volume
Analysis
The following table presents the dollar
amount of changes in interest income and interest expense for major components
of interest-earning assets and interest-bearing liabilities. It
distinguishes between the changes related to outstanding balances and those due
to the changes in interest rates. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., changes in
rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
Years Ended
December 31,
|
||||||||||||
2009 vs. 2008
|
||||||||||||
Increase/(Decrease)
|
Total
|
|||||||||||
Due to
|
Increase
|
|||||||||||
Volume
|
Rate
|
(Decrease)
|
||||||||||
(In
thousands)
|
||||||||||||
Interest-earning
assets
|
||||||||||||
Loans
receivable
|
$ | (111 | ) | $ | (689 | ) | $ | (800 | ) | |||
Securities
|
(53 | ) | (296 | ) | (349 | ) | ||||||
Interest-earning
deposits and other
|
(145 | ) | (150 | ) | (295 | ) | ||||||
Federal
funds
|
(28 | ) | (24 | ) | (52 | ) | ||||||
Total
interest-earning assets
|
$ | (337 | ) | $ | (1,159 | ) | $ | (1,496 | ) | |||
Interest-bearing
liabilities
|
||||||||||||
Passbook
savings
|
$ | 28 | $ | (16 | ) | $ | 12 | |||||
NOW
accounts
|
1 | (15 | ) | (14 | ) | |||||||
Money
market accounts
|
(26 | ) | (95 | ) | (121 | ) | ||||||
Time
deposits
|
(155 | ) | (1,122 | ) | (1,277 | ) | ||||||
Borrowings
|
(192 | ) | (129 | ) | (321 | ) | ||||||
Total
interest-bearing liabilities
|
$ | (344 | ) | $ | (1,377 | ) | $ | (1,721 | ) | |||
Change
in net interest income
|
$ | 7 | 218 | 225 |
Management
of Market Risk
General. 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-, five-
and seven-year adjustable rate mortgage loans, and three- and five-year balloon
loans. In a low interest rate environment, borrowers typically prefer
fixed-rate loans to adjustable-rate mortgages. We may sell 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.
Net Portfolio
Value. In past years, many savings associations have measured
interest rate sensitivity by computing the “gap” between the assets and
liabilities which 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 50
to 300 basis points. (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
September 30, 2009 (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.
Net
Portfolio Value as
|
||||||||||||||||||||||
a
% of Present Value of
|
||||||||||||||||||||||
Net Portfolio Value
|
Assets/Liabilities
|
|||||||||||||||||||||
Change
in
|
||||||||||||||||||||||
Interest
Rates
|
Estimated
|
Amount
of
|
||||||||||||||||||||
(Basis Points)
|
NPV
|
Change
|
Percent
|
NPV Ratio
|
Change(1)
|
|||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||
+300 | $ | 23,396 | $ | (10,374 | ) | (31 | )% | 10.07 | % | (360 | ) | |||||||||||
+200 | 27,527 | (6,243 | ) | (18 | ) | 11.57 | (210 | ) | ||||||||||||||
+100 | 31,341 | (2,429 | ) | (7 | ) | 12.89 | (78 | ) | ||||||||||||||
+50 | 31,845 | (1,925 | ) | (6 | ) | 13.03 | (64 | ) | ||||||||||||||
0 | 33,770 | 13.67 | ||||||||||||||||||||
-50 | 33,320 | (450 | ) | (1 | ) | 13.47 | (20 | ) | ||||||||||||||
-100 | 34,020 | 250 | 1 | 13.68 | 1 |
(1)
Expressed in basis points.
The table above indicates that at
September 30, 2009, in the event of a one hundred basis point decrease in
interest rates, we would experience a 1% increase in net portfolio
value. In the event of a two hundred basis point increase in interest
rates, we would experience an 18% decrease in net portfolio value.
Certain shortcomings are inherent in
the methodology used in the above interest rate risk
measurement. Modeling changes in net portfolio value require making
certain assumptions that may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this
regard, the net portfolio value table presented assumes that the composition of
our interest-sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and assumes that a
particular change in interest rates is reflected uniformly across the yield
curve, regardless of the duration or repricing of specific assets and
liabilities. Accordingly, although the net portfolio value table
provides an indication of our interest rate risk exposure at a particular point
in time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on our net interest
income, and will differ from actual results.
Critical
Accounting Policies and Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. By their nature, changes
in these assumptions and estimates could significantly affect our financial
position or results of operations. Actual results could differ from
those estimates. Discussed below are selected critical accounting
policies that are of particular significance to us.
Allowance for Loan
Losses. The allowance for loan losses represents management’s
estimate of probable incurred credit losses inherent in the loan
portfolio. Estimating the amount of the allowance for loan losses
requires significant judgment and the use of estimates related to the amount and
timing of expected future cash flows on impaired loans, estimated losses on
pools of homogeneous loans based on historical loss experience, and
consideration of current economic trends and conditions, all of which may be
susceptible to significant change. The loan portfolio also represents
the largest asset type on the consolidated balance sheet. Loan losses
are charged off against the allowance, while recoveries of amounts previously
charged off are credited to the allowance. A provision for loan
losses is charged to operations based on management’s periodic evaluation of the
factors previously mentioned, as well as other pertinent factors.
The allowance for loan losses consists
of specific allocations on impaired loans and general allocation for inherent
credit risks. The specific allocation component of the allowance for
loan losses reflects expected losses resulting from analyses developed through
specific credit allocations for individual loans. The general
allocation component of the allowance reflects historical loss experience for
each loan category adjusted for trends and credit risks. The specific
credit allocations are based on analyses involving a high degree of judgment in
estimating the amount of loss associated with specific loans, including
estimating the amount and timing of future cash flows and collateral
values. The historical loss analysis is performed quarterly and loss
factors are updated regularly based on actual experience and trends and credit
risk.
The allowance reflects management’s
estimate of probable inherent but undetected losses within the portfolio due to
uncertainties in economic conditions, delays in obtaining information, including
unfavorable information about a borrower’s financial condition, the difficulty
in identifying triggering events that correlate perfectly to subsequent loss
rates, and risk factors that have not yet manifested themselves in loss
allocation factors. In addition, the unallocated allowance includes a component
that accounts for the inherent imprecision in loan loss
models. Uncertainty surrounding the strength and timing of economic
cycles also affects estimates of loss. The historical losses used in
the migration analysis may not be representative of actual unrealized losses
inherent in the portfolio.
There are many factors affecting the
allowance for loan losses; some are quantitative while others require
qualitative judgment. Although management believes its process for
determining the allowance adequately considers all of the potential factors that
could potentially result in credit losses, the process includes subjective
elements and may be susceptible to significant change. To the extent
actual outcomes differ from management estimates, additional provision for
credit losses could be required that could adversely affect earnings or
financial position in future periods. Significant influences
currently impacting our allowance for loan losses are rising real estate
inventories which is applying downward pressure in real estate values and
general economic conditions. Management continues to monitor these
credit risk trends during each quarterly allowance for loan loss
analysis.
Other Real Estate
Owned. Assets acquired through or instead of loan foreclosure
are initially recorded at lower of cost or fair value less costs to sell when
acquired, establishing a new cost basis. If fair value declines
subsequent to foreclosure, a valuation allowance is recorded through
expense. Operating costs after acquisition are
expensed.
Deferred Tax Valuation
Allowance. A valuation allowance should be recognized against
deferred tax assets if, based on the weight of available evidence, it is more
likely than not (i.e. greater than 50% probability) that some portion or all of
the deferred tax asset will not be realized. Future realization of a
deferred tax asset ultimately depends on the existence of sufficient taxable
income of the appropriate character (for example, ordinary income or capital
gain) within the carry back and carry forward periods available under the tax
law. The Company evaluates the future realization of the deferred tax
asset on a quarterly basis and establishes a valuation allowance predicated on
consideration of future performance as well as tax planning strategies available
to the Company. Tax-planning strategies are actions that the Company
would take in order to prevent an operating loss or tax credit carry forward
from expiring unused. In order for a tax-planning strategy to be
considered, it must be prudent and feasible and result in realization of the
deferred tax assets.
Fair Value of Financial
Instruments. Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments, and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates.
Liquidity
and Capital Resources
We maintain liquid assets at levels we
consider adequate to meet our liquidity needs. Our liquidity ratio
averaged 15.6% and 16.1% for the years ended December 31, 2009 and
2008. We adjust our liquidity levels to fund deposit outflows, pay
real estate taxes on mortgage loans, repay our borrowings and to fund loan
commitments. We also adjust liquidity as appropriate to meet asset
and liability management objectives.
Our primary sources of liquidity are
deposits, amortization and prepayment of loans and mortgage-backed securities,
maturities of investment securities and other short-term investments, and
earnings and funds provided from operations. While scheduled
principal repayments on loans and mortgage-backed securities are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions, and
competition. We set the interest rates on our deposits to maintain a
desired level of total deposits. In addition, we invest excess funds
in short-term interest-earning investments and other assets, which provide
liquidity to meet lending requirements. Short-term interest-earning
deposits with the Federal Home Loan Bank of Chicago amounted to $2.0 million at
December 31, 2009 and $1.5 million at December 31,
2008. For additional information about cash flows from our operating,
financing, and investing activities, see Consolidated Statements of Cash Flows
included in the consolidated financial statements.
A significant portion of our liquidity
consists of securities classified as available-for-sale and cash and cash
equivalents, which are a product of our operating, investing and financing
activities. Our primary sources of cash are net income, principal
repayments on loans and mortgage-backed securities, and increases in deposit
accounts, along with advances from the Federal Home Loan Bank of
Chicago.
Liquidity management is both a daily
and long-term function of business management. If we require funds
beyond our ability to generate them internally, borrowing agreements exist with
the Federal Home Loan Bank of Chicago which provide an additional source of
funds. At December 31, 2009, we had $25.3 million in advances
from the Federal Home Loan Bank of Chicago. Of this amount, $11.0
million is due within one year, $12.3 million is due between one and three
years, and $2.0 million is due between four and five years.
At December 31, 2009, we had
outstanding commitments of $3.2 million to originate loans. This
amount does not include the unfunded portion of loans in process. At
December 31, 2009, certificates of deposit scheduled to mature in less than
one year totaled $79.9 million. Based on prior experience, management
believes that a significant portion of such deposits will remain with us,
although there can be no assurance that this will be the case. In
addition, the cost of such deposits may be significantly higher upon renewal in
a rising interest rate environment. We intend to utilize our high
levels of liquidity to fund our lending activities.
Liquidity. We
are required to maintain liquid assets in an amount that would ensure our safe
and sound operation. Our liquidity ratio at December 31, 2009
was 20.0%.
Contractual
Obligations and Commitments
The following table sets forth our
contractual obligations and commercial commitments at December 31,
2009.
Total
|
Less
than
1
year
|
1-3
Years
|
4-5
years
|
After
5
Years
|
||||||||||||||||
FHLB
advances
|
$ | 25,300 | $ | 11,000 | $ | 12,300 | $ | 2,000 | $ | - | ||||||||||
Time
deposits
|
117,931 | 79,852 | 28,491 | 9,588 | - | |||||||||||||||
Non-qualified,
unfunded retirement plan
|
1,615 | 137 | 1,478 | - | - |
Total
Amounts
Committed
|
Less
than
1
year
|
1-3
Years
|
4-5
years
|
Over
5
Years
|
||||||||||||||||
Lines
of credit (1)
|
$ | 13,139 | $ | 1,455 | $ | 4,573 | $ | 6,989 | $ | 122 | ||||||||||
Standby
letters of credit (1)
|
190 | 190 | - | - | - | |||||||||||||||
Other
commitments to extend credit (1)
|
3,191 | 3,191 | - | - | - | |||||||||||||||
Total
|
$ | 16,520 | $ | 4,836 | $ | 4,573 | $ | 6,989 | $ | 122 |
__________________________
(1)
|
Represents
amounts committed to customers.
|
Not included above is the $787,000
liability for the Employee Stock Ownership Plan (“ESOP”) put option. This option
allows the ESOP participant, following termination of their employment, to ‘put’
their stock back to the Company at the fair value as determined by an
independent appraisal. It is unlikely that all of the plan
participants will put their stock back to the Company at any one time, however,
should they choose to do so the participants could put their stock back to the
Company during 2010.
Impact
of Inflation and Changing Prices
Accounting principles generally
accepted in the United States of America (“GAAP”) generally require the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is
reflected in the increased cost of our operations. Unlike industrial
companies, our assets and liabilities are primarily monetary in
nature. As a result, changes in market interest rates have a greater
impact on performance than the effect of inflation.
ITEM
7A.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations- Management of Market Risk” above.
ITEM
8.
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The financial statements are attached
as Exhibit 13 hereto and are incorporated by reference
hereunder.
ITEM
9.
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A(T). CONTROLS AND
PROCEDURES
(a) Evaluation
of disclosure controls and procedures.
Under the supervision and with the
participation of our management, including our Chief Executive Officer,
President and Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) as of the end of the fiscal year (the
“Evaluation Date”). Based upon that evaluation, the Chief Executive Officer,
President and Chief Financial Officer concluded that, as of the Evaluation Date,
our disclosure controls and procedures were effective in timely alerting them to
the material information relating to us (or our consolidated subsidiaries)
required to be included in our periodic SEC filings.
(b) Management’s
annual report on internal control over financial reporting
The
management of AJS Bancorp, Inc. (the “Company”) is responsible for establishing
and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. The Company’s
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and (iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could
have a material affect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. All internal control systems, no
matter how well designed, have inherent limitations, including the possibility
of human error and the circumvention of overriding controls. However,
even effective internal control over financial reporting can provide only
reasonable assurance with respect to financial statement
preparation. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that degree of compliance with the policies
or procedures may deteriorate.
Management
has assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009, based on the framework set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on that assessment,
management concluded that, as of December 31, 2009, the Company’s internal
control over financial reporting was effective based on the criteria established
in the Internal Control-Integrated Framework.
This
annual report does not include an audit report of the company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to audit by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management’s report in the annual report.
(c) Changes
in internal controls.
There were no changes in our internal
control over financial reporting that occurred during the fourth quarter of
fiscal year 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
See the Certifications pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
ITEM
9B.
OTHER
INFORMATION
None.
PART
III
ITEM
10.
DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
Information concerning Directors of the
Company is incorporated herein by reference from the Company’s definitive Proxy
Statement (the “Proxy Statement”), specifically the section captioned “Proposal
I—Election of Directors.” In addition, see “Executive Officers of AJS
Bancorp, Inc.” in Item 1 for information concerning the Company’s executive
officers.
The Board
of Directors has adopted a Code of Ethics, applicable to the Chief Executive
Officer, President and Chief Financial Officer. The Code of Ethics
may be accessed through our website at www.ajsmithbank.com
and is filed as Exhibit 14 hereto.
ITEM
11.
EXECUTIVE
COMPENSATION
Information concerning executive
compensation is incorporated herein by reference from the Company’s Proxy
Statement, specifically the section captioned “Executive
Compensation.”
ITEM
12.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information concerning security
ownership of certain owners and management is incorporated herein by reference
from the Company’s Proxy Statement, specifically the section captioned “Voting
Securities and Principal Holder Thereof.”
ITEM
13.
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning relationships
and transactions is incorporated herein by reference from the Company’s Proxy
Statement, specifically the section captioned “Transactions with Certain Related
Persons.”
ITEM
14.
PRINCIPAL ACCOUNTANT FEES
AND SERVICES
Information concerning principal
accountant fees and services is incorporated herein by reference from the
Company’s Proxy Statement.
PART
IV
ITEM
15.
EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
3.1
|
Certificate
of Incorporation of AJS Bancorp, Inc.
(1)
|
3.2
|
Bylaws
of AJS Bancorp, Inc. (1)
(2)
|
4
|
Form
of Common Stock Certificate of AJS Bancorp, Inc.
(1)
|
10.1
|
Employment
Agreement with Thomas R. Butkus(3)
|
10.2
|
Employment
Agreement with Lyn G. Rupich(4)
|
10.3
|
AJS
Bancorp, Inc. 2003 Stock Option Plan(5)
|
10.4
|
AJS
Bancorp, Inc. 2003 Recognition and Retention Plan(5)
|
10.5
|
Amendments
to 2003 Stock Option Plan(6)
|
Financial
Statements
|
14
|
Code
of Ethics(7)
|
Subsidiaries
of the Registrant
|
23
|
Consent
of Auditors to incorporate financial statements into Form
S-8
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
Certification
of President pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002
|
___________________
|
(1)
|
Incorporated
by reference to the Company’s registration statement on Form S-1
(commission file number 333-69482, filed on September 17, 2001, as
amended).
|
|
(2)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K filed on April
27, 2009.
|
|
(3)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K filed on June 18,
2009.
|
|
(4)
|
Incorporated
by reference to the Company’s Current Report on Form 8 - K filed on
November 20, 2009.
|
|
(5)
|
Incorporated
by reference to the Company’s registration statement on Form S-8
(commission file number 333-105598, filed on May 28,
2003).
|
|
(6)
|
Incorporated
by reference to the Company’s Annual Report on Form 10 - K for the year
ended December 31, 2005.
|
|
(7)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K filed on June 23,
2008.
|
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) 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:
March 18, 2010
|
By:
|
/s/ Thomas R. Butkus
|
||
Thomas
R. Butkus,
|
||||
Chairman
of the Board and
|
||||
Chief
Executive Officer
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:
|
/s/ Thomas R. Butkus
|
By:
|
/s/ Lyn G. Rupich
|
|
Thomas
R. Butkus, Chairman of the Board
|
Lyn
G. Rupich, President
|
|||
and
Chief Executive Officer
|
(Principal
Executive Officer)
|
|||
Date:
|
March
18 2010
|
Date:
|
March
18, 2010
|
|
By:
|
/s/ Pamela N. Favero
|
By:
|
/s/ Roger L. Aurelio
|
|
Pamela
N. Favero, Chief Financial Officer
|
Roger
L. Aurelio, Director
|
|||
Date:
|
March
18, 2010
|
Date:
|
March
18, 2010
|
|
By:
|
/s/ Raymond J. Blake
|
By:
|
/s/ Richard J. Nogal
|
|
Raymond
J. Blake, Director
|
Richard
J. Nogal, Director
|
|||
Date:
|
March
18, 2010
|
Date:
|
March
18, 2010
|
|
By:
|
/s/ Edward S. Milen
|
|||
Edward
S. Milen, Director
|
||||
Date:
|
March
18, 2010
|
45