UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __ to __
Commission file number 000-1330039
AMERICAN BANCORP OF NEW JERSEY, INC.
(Exact name of registrant as specified in its charter)
New Jersey 55-0897507
---------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
365 Broad Street, Bloomfield, New Jersey 07003
----------------------------------------------
(Address of Principal Executive Offices)
(973) 748-3600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated Accelerated Non-accelerated Smaller reporting
filer [ ] filer [ X ] filer [ ] company [ ]
(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 Exchange Act.):
Yes [ ] No [ X ]
As of August 8, 2008, there were 10,945,856 outstanding shares of the
Registrant's Common Stock.
AMERICAN BANCORP OF NEW JERSEY, INC.
Table of Contents
PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements 3
Notes to Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
Item 4. Controls and Procedures 41
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 42
Item 1A. Risk Factors 42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
Item 3. Defaults Upon Senior Securities 42
Item 4. Submission of Matters to a Vote of Securities Holders 42
Item 5. Other Information 42
Item 6. Exhibits 43
FORM 10-Q SIGNATURE PAGE 44
CERTIFICATIONS
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
American Bancorp of New Jersey, Inc.
Statements of Financial Condition
(in thousands, except share data)
(unaudited)
June 30, September 30,
2008 2007
---- ----
ASSETS
Cash and cash equivalents
Cash and due from banks $ 9,952 $ 9,983
Interest-earning deposits 1,711 14,638
Federal funds sold 20,980 12,800
---------- ---------
Total cash and cash equivalents 32,643 37,421
Securities available-for-sale 85,136 58,093
Securities held-to-maturity (fair value, June 30, 2008 - $6,818 September 30,
2007 - $6,671) 6,856 6,730
Loans held for sale - 1,243
Loans receivable, net of allowance for loan losses (June 30, 2008 - $2,965,
September 30, 2007 - $2,568) 471,220 437,883
Premises and equipment 12,038 10,856
Federal Home Loan Bank stock, at cost 3,014 2,553
Cash surrender value of life insurance 13,619 13,214
Accrued interest receivable 2,365 2,212
Other assets 3,832 3,533
---------- ---------
Total assets $ 630,723 573,738
========== =========
LIABILITIES AND EQUITY
Deposits
Non-interest-bearing $ 30,558 $ 30,494
Interest-bearing 420,202 398,106
---------- ----------
Total deposits 450,760 428,600
Advance payments by borrowers for taxes and insurance 2,925 2,702
Borrowings 81,564 37,612
Accrued expenses and other liabilities 4,581 4,231
---------- ----------
Total liabilities $ 539,830 $ 473,145
Commitments and contingent liabilities
Equity
Preferred stock, $.10 par value, 10,000,000 shares authorized at June 30,
2008 and September 30, 2007; - -
Common stock, $.10 par value, 20,000,000 shares authorized, 14,527,953
shares issued at June 30, 2008 and September 30, 2007;
10,948,286 and 11,946,190 outstanding
at June 30, 2008 and September 30, 2007; 1,453 1,453
Additional paid in capital 115,235 113,607
Unearned ESOP shares (7,762) (8,099)
Retained earnings 23,430 24,258
Treasury Stock; 3,579,667 and 2,581,763 shares
at June 30, 2008 and September 30, 2007 (40,805) (30,353)
Accumulated other comprehensive loss (658) (273)
---------- ----------
Total equity 90,893 100,593
---------- ----------
Total liabilities and equity $ 630,723 $ 573,738
========== ==========
See accompanying notes to unaudited consolidated financial statements
3
American Bancorp of New Jersey, Inc.
Statements of Income
(in thousands, except share data)
(unaudited)
Nine Months Ended Three Months Ended
June 30, June 30,
-------- --------
2008 2007 2008 2007
---- ---- ---- ----
Interest and dividend income
Loan, including fees $ 20,107 $ 18,206 $ 6,685 $ 6,299
Securities 2,461 2,306 1,132 699
Federal funds sold and other 819 863 146 510
--------- --------- --------- ---------
Total interest income 23,387 21,375 7,963 7,508
Interest expense
NOW and money market 2,790 2,140 659 1,072
Savings 1,577 2,054 456 657
Certificates of deposit 7,285 6,124 2,436 2,182
Borrowings 1,714 1,767 699 533
--------- --------- --------- ---------
Total interest expense 13,366 12,085 4,250 4,444
Net interest income 10,021 9,290 3,713 3,064
Provision for loan losses 431 320 121 77
---------- --------- --------- ---------
Net interest income after provision for loan losses 9,590 8,970 3,592 2,987
Noninterest income
Deposit service fees and charges 704 518 262 183
Income from cash surrender value of life insurance 405 337 139 127
Gain on sale of loans 9 42 - 30
Loss on sales of securities available-for-sale (5) (11) - -
Other 201 165 80 68
--------- --------- --------- ---------
Total noninterest income 1,314 1,051 481 408
Noninterest expense
Salaries and employee benefits 6,729 6,345 2,174 2,254
Occupancy and equipment 1,414 744 506 282
Data processing 591 549 208 191
Advertising and marketing 171 244 39 78
Professional and consulting 308 299 110 95
Legal 160 110 41 27
Other 890 826 342 277
--------- --------- --------- ---------
Total noninterest expense 10,263 9,117 3,420 3,204
Income before provision for income taxes 641 904 653 191
Provision for income taxes 129 276 222 41
--------- --------- --------- ---------
Net income $ 512 $ 628 $ 431 $ 150
Comprehensive income $ 127 $ 957 $ (466) $ 151
Earnings per share:
Basic $ 0.05 $ 0.05 $ 0.04 $ 0.01
Diluted $ 0.05 $ 0.05 $ 0.04 $ 0.01
See accompanying notes to unaudited consolidated financial statements
4
American Bancorp of New Jersey, Inc.
Statements of Shareholders' Equity
Nine months ended June 30, 2007
(in thousands, except share data)
(unaudited)
Accumulated Compre-
Additional Unearned Other hensive
Common Paid-In ESOP Retained Comprehensive Total Income
Stock Capital Shares Earnings Income Treasury Stock Equity (Loss)
----- ------- ------ -------- ------ -------------- ------ ------
Balance at
September 30, 2006 $ 1,453 $ 111,780 $ (8,549) $ 25,438 $ (881) $ (4,380) $ 124,861
Cumulative effect of
adoption of SAB 108 - - - 130 - - 130
Balance at
October 1, 2006 $ 1,453 $ 111,780 $ (8,549) $ 25,568 (881) $ (4,380) $ 124,991
RSP stock grants
(6,249 shares issued) - (76) - - - 76 -
RSP shares earned including
tax benefit of vested
awards - 904 - - - - 904
Share purchases
(1,700,603 shares) - - - - - (20,347) (20,347)
Stock options earned 422 - - - - 422
ESOP shares earned - 127 337 - - - 464
Cash dividends paid
$0.12 per share - - - (1,421) - - (1,421)
Comprehensive income
Net income - - - 628 - - 628
Change in unrealized
loss on securities
available-for-sale,
net of taxes - - - 329 - 329
------- ----------- --------- -------- ------- --------- ---------
Total comprehensive
income $ 957
=======
Balance at
June 30, 2007 $ 1,453 $ 113,157 $ (8,212) $ 24,775 (552) (24,651) $ 105,970
======= =========== ========= ========= ======= ======== =========
See accompanying notes to unaudited consolidated financial statements
5
American Bancorp of New Jersey, Inc.
Statements of Shareholders' Equity
Nine months ended June 30, 2008
(in thousands, except share data)
(unaudited)
Accumulated Compre-
Additional Unearned Other hensive
Common Paid-In ESOP Retained Comprehensive Treasury Total Income
Stock Capital Shares Earnings Loss Stock Equity (Loss)
----- ------- ------ -------- ---- ----- ------ ------
Balance at
September 30, 2007 $ 1,453 $ 113,607 $ (8,099) $ 24,258 $ (273) $ (30,353) $ 100,593
RSP shares earned
including tax benefit
of vested awards - 1,010 - - - - 1,010
Tax benefit on dividends
paid on unvested RSP
shares - 66 - - - - 66
Share purchases
(1,002,070 shares) - - - - - (10,500) (10,500)
Stock options earned 490 - - - - 490
Stock options exercised - (19) - - - 48 29
ESOP shares earned - 81 337 - - - 418
Cash dividends paid
$0.13 per share - - - (1,340) - - (1.340)
Comprehensive income
Net income - - - 512 - - 512 512
Change in unrealized
loss on securities
available-for-sale,
net of taxes - - - - (385) - (385) (385)
------- ----------- --------- --------- ------- --------- --------- ----------
Total comprehensive
income $ 127
==========
Balance at
June 30, 2008 $ 1,453 $ 115,235 $ (7,762) $ 23,430 $ (658) $ (40,805) $ 90,893
======== =========== ========== ========= ======= ========= =========
See accompanying notes to unaudited consolidated financial statements
6
American Bancorp of New Jersey, Inc.
Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
June 30,
--------
2008 2007
---- ----
Cash flows from operating activities
Net Income $ 512 $ 628
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 411 261
Net amortization and accretion of premiums and discounts (54) (10)
Losses on sales of securities available-for-sale 5 11
ESOP compensation expense 418 464
RSP compensation expense 979 833
SOP compensation expense 490 422
Provision for loan losses 431 320
Increase in cash surrender value of life insurance (405) (337)
Gain on sale of loans (7) (42)
Proceeds from sales of loans 1,869 8,421
Origination of loans held for sale (619) (8,882)
Increase in accrued interest receivable (153) (183)
Decrease (increase) in other assets 398 (41)
Change in deferred income taxes (405) (269)
Decrease in other liabilities 350 187
----- -------
Net cash provided by operating activities 4,220 1,783
Cash flows from investing activities
Net increase in loans receivable (33,768) (27,259)
Purchases of securities held-to-maturity (1,108) -
Maturities of securities held-to-maturity - 2,000
Principal paydowns on securities held-to-maturity 972 1,319
Purchases of securities available-for-sale (54,841) (4,990)
Sales of securities available-for-sale 11,510 3,227
Maturities of securities available-for-sale 2,000 11,000
Principal paydowns on securities available-for-sale 13,670 13,028
Purchase of Federal Home Loan Bank stock (958) (1,999)
Redemption of Federal Home Loan Bank stock 497 2,711
Purchase of bank-owned life insurance - (4,000)
Purchase of premises and equipment (1,593) (4,079)
-------- ----------
Net cash used in investing activities (63,619) (9,042)
Cash flows from financing activities
Net increase in deposits 22,160 82,769
Net change in advance payments by borrowers for taxes and
insurance 223 399
Proceeds from borrowings 55,000 -
Repayment of borrowings (11,048) (6,047)
Net change in Federal Home Loan Bank of New York overnight
lines of credit - (10,400)
RSP tax benefit of vested awards 31 71
Tax benefit on dividends paid on unvested RSP shares 66 -
Proceeds from stock option exercises 29 -
Cash dividends paid (1,340) (1,421)
RSP and treasury share purchases (10,500) (20,347)
------- ---------
Net cash provided by financing activities 54,621 45,024
Net change in cash and cash equivalents (4,778) 37,765
Cash and cash equivalents at beginning of year 37,421 7,165
------- ---------
Cash and cash equivalents at end of period $ 32,643 $ 44,930
========== ===========
(Continued)
7
American Bancorp of New Jersey, Inc.
Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
June 30,
--------
2008 2007
---- ----
Supplemental cash flow information:
Cash paid during the period for
Interest $ 10,067 $ 12,232
Income taxes, net of refunds 506 867
Supplemental disclosures of non-cash financing transaction:
Cumulative effect of adoption of SAB 108 - 130
See accompanying notes to unaudited consolidated financial statements
8
American Bancorp of New Jersey, Inc.
Notes To Unaudited Financial Statements
(in thousands)
Note 1 - Basis of Presentation
American Bancorp of New Jersey, Inc. (the "Company") is a New Jersey
chartered corporation organized in May 2005 that was formed for the purpose of
acquiring all of the capital stock of American Bank of New Jersey, a federally
chartered Bank, (the "Bank"), which was previously owned by ASB Holding Company
("ASBH"). ASBH was a federally chartered corporation organized in June 2003 that
was formed for the purpose of acquiring all of the capital stock of the Bank,
which was previously owned by American Savings, MHC (the "MHC"), a federally
chartered mutual holding company. The Bank had previously converted from a
mutual to a stock savings bank in a mutual holding company reorganization in
1999 in which no stock was issued to any person other than the MHC.
On October 3, 2003, ASB Holding Company, the predecessor of American
Bancorp of New Jersey, Inc., completed a minority stock offering and sold
1,666,350 shares of common stock in a subscription offering at $10 per share and
received proceeds of $16,060,000, net of offering costs of $603,000. ASBH
contributed $9,616,000, or approximately 60% of the net proceeds, to the Bank in
the form of a capital contribution. ASBH loaned $1,333,080 to the Bank's
employee stock ownership plan ("ESOP") and the ESOP used those funds to acquire
133,308 shares of common stock at $10 per share.
After the sale of the stock, the MHC held 70%, or 3,888,150 shares, of the
outstanding stock of ASBH with the remaining 30% or, 1,666,350 shares, held by
persons other than the MHC. ASBH held 100% of the Bank's outstanding common
stock.
On October 5, 2005, the Company completed a second step conversion in which
the 3,888,150 shares of ASB Holding Company held by the MHC were converted and
sold in a subscription offering. Through this transaction, ASBH ceased to exist
and was replaced by American Bancorp of New Jersey, Inc. as the holding company
for the Bank. A total of 9,918,750 shares of common stock were sold in the
offering at $10 per share through which the Company received proceeds of
$97,524,302, net of offering costs of $1,663,198. The Company contributed
$48,762,151 or approximately 50% of the net proceeds to the Bank in the form of
a capital contribution. The Company loaned $7,935,000 to the Bank's ESOP which
used those funds to acquire 793,500 shares of common stock at $10 per share.
As part of the second step conversion, each of the 1,666,350 outstanding
shares of ASBH held by public shareholders was exchanged for 2.55102 of the
Company's shares. This exchange resulted in an additional 4,250,719 shares of
the Company being issued, for a total of 14,169,469 outstanding shares.
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, the Bank and ASB
Investment Corp. (the "Investment Corp.") as of June 30, 2008 and September 30,
2007 and for the three and nine months ended June 30, 2008 and June 30, 2007.
Significant intercompany accounts and transactions have been eliminated in
consolidation. References in this Quarterly Report on Form 10-Q to the Company
generally refer to the Company and the Bank, unless the context indicates
otherwise. References to "we," "us," or "our" refer to the Bank or Company, or
both, as the context indicates.
The primary business of the Company is the ownership of the Bank and the
Investment Corp. The Bank provides a full range of banking services to
individual and corporate customers located primarily in the New Jersey and New
York metropolitan area. The Bank is subject to competition from other financial
institutions and to the regulations of certain federal and state agencies and
undergoes periodic examinations by those regulatory authorities. The Investment
Corp. was organized for the purpose of selling insurance and investment
9
products, including annuities, to customers of the Bank and the general public,
with initial activities limited to the sale of fixed rate annuities. The
Investment Corp. has had limited activity to date.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all the information and notes required by accounting principles
generally accepted in the United States of America for complete financial
statements. These interim statements should be read in conjunction with the
consolidated financial statements and notes included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2007. The September 30,
2007 balance sheet presented herein has been derived from the audited financial
statements included in the consolidated financial statements and notes included
in the Annual Report on Form 10-K filed with the Securities and Exchange
Commission, but does not include all disclosures required by accounting
principles generally accepted in the United States of America.
To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The allowance for loan losses,
prepayment speeds on mortgage-backed securities, and status of contingencies are
particularly subject to change.
Interim statements are subject to possible adjustment in connection with
the annual audit of the Company for the year ending September 30, 2008. In the
opinion of management of the Company, the accompanying unaudited interim
consolidated financial statements reflect all of the adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of the
consolidated financial position and consolidated results of operations for the
periods presented.
The results of operations for the nine months ended June 30, 2008 are not
necessarily indicative of the results to be expected for the full year or any
other period.
Note 2 - Earnings Per Share (EPS)
Amounts reported as basic earnings per share of common stock reflect
earnings available to common shareholders for the period divided by the weighted
average number of common shares outstanding during the period less unearned ESOP
and restricted stock plan shares. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock (such as
stock awards and options) were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed by dividing income by the weighted-average
number of shares outstanding for the period plus common-equivalent shares
computed using the treasury stock method.
10
The factors used in the earnings per share computation follow (in thousands
except share data).
Nine Months Ended Three Months Ended
June 30, June 30,
-------- --------
2008 2007 2008 2007
---- ---- ---- ----
Basic
Net income $ 512 $ 628 $ 431 $ 150
Weighted average common shares
outstanding 10,167,297 11,729,700 9,862,522 11,273,478
Basic earnings per common share $ 0.05 $ 0.05 $ 0.04 $ 0.01
============ ========== ============== ==========
Diluted
Net income $ 512 $ 628 $ 431 $ 150
Weighted average common shares
outstanding for basic earnings per
common share 10,167,297 11,729,700 9,862,522 11,273,478
Add: Dilutive effects of assumed
exercises of stock options 143,583 159,507 151,380 145,837
Add: Dilutive effects of full vesting
of stock awards 15,922 31,808 13,601 25,127
------------ ------- -------------- ------------
Average shares and dilutive
potential common shares 10,326,802 11,921,015 10,027,503 11,444,442
============ ========== ============== ============
Diluted earnings per common share $ 0.05 $ 0.05 $ 0.04 $ 0.01
============ ============ =============== ============
Note 3 - Other Stock-Based Compensation
At June 30, 2008, all shares and options available under the 2005 Restricted
Stock Plan, 2005 Stock Option Plan and the 2006 Equity Incentive Plan had been
awarded to participants.
11
A summary of the activity in the Company's stock option plans for the nine
months ended June 30, 2008 and 2007 is as follows.
For the nine months ended
June 30, 2008 June 30, 2007
------------- -------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----- ----- ------ -----
Outstanding at beginning of
period 1,416,948 $ 9.26 1,397,854 $ 9.23
Granted - - 19,094 11.87
Exercised ( 4,166) 6.80 - -
Forfeited or expired - - - -
---------- ---------- ------------ --------
Outstanding at end of period 1,412,782 $ 9.27 1,416,948 $ 9.26
========== ========= ========== ========
Options exercisable at period
end 733,125 $ 8.82 417,094 $ 8.43
========== ========== ========== ========
Weighted average remaining
contractual life 7.1 years 8.0 years
A summary of the status of the Company's nonvested restricted stock plan shares
as of June 30, 2008 and 2007 and changes during the nine months ended June 30,
2008 and 2007 are as follows.
For the nine months ended
June 30, 2008 June 30, 2007
------------- -------------
Weighted Weighted
Average Average
Grant Date Grant Date
Shares Fair Value Shares Fair Value
------ ---------- ------ -----------
Outstanding at beginning of
period 414,281 $ 10.13 520,126 $ 10.04
Granted - - 6,249 11.87
Vested (129,112) 9.85 (112,094) 9.80
Forfeited or expired - - - -
----------- --------- ---------- ---------
Outstanding at end of period 285,169 $ 10.25 414,281 $ 10.13
=========== ========== ========== ==========
Note 4 - Recent Accounting Pronouncements
In July 2006, the FASB released Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes." This Interpretation revises the recognition tests
for tax positions taken in tax returns such that a tax benefit is recorded only
when it is more likely than not that the tax position will be allowed upon
examination by taxing authorities. The amount of such a tax benefit to record is
the largest amount that is more likely than not to be allowed. Any reduction in
12
deferred tax assets or increase in tax liabilities upon adoption will
correspondingly reduce retained earnings. The adoption of Interpretation No. 48
on October 1, 2007 did not have a material impact on the Company's consolidated
financial statements.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157 "Fair Value Measurements" ("SFAS No. 157"), which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued Staff
Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays
the effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. The adoption of SFAS No.
157 when it becomes effective for the Company on October 1, 2008 is not expected
to have a material impact on the Company's consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159 "The Fair Value Option for Financial Assets and Financial
Liabilities" ("SFAS No. 159"), SFAS No. 159 permits entities to choose to
measure certain financial assets and financial liabilities at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS No. 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. The Company has not yet
determined the effect of adopting SFAS No. 159, which is effective for it on
October 1, 2008.
At its September 2006 meeting, the Emerging Issues Task Force ("EITF")
reached a final consensus on Issue 06-04, "Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements." The consensus stipulates that an agreement by an employer to
share a portion of the proceeds of a life insurance policy with an employee
during the postretirement period is a postretirement benefit arrangement
required to be accounted for under SFAS No. 106 or Accounting Principles Board
Opinion ("APB") No. 12, "Omnibus Opinion - 1967." The consensus concludes that
the purchase of a split-dollar life insurance policy does not constitute a
settlement under SFAS No. 106 and, therefore, a liability for the postretirement
obligation must be recognized under SFAS No. 106 if the benefit is offered under
an arrangement that constitutes a plan or under APB No. 12 if it is not part of
a plan. Issue 06-04 is effective for annual or interim reporting periods
beginning after December 15, 2007. The provisions of Issue 06-04 should be
applied through either a cumulative effect adjustment to retained earnings as of
the beginning of the year of adoption or retrospective application. The Company
is currently assessing the financial statement impact of implementing EITF
06-04.
On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109,
Written Loan Commitments Recorded at Fair Value through Earnings ("SAB 109").
Previously, SAB 105, Application of Accounting Principles to Loan Commitments,
stated that in measuring the fair value of a derivative loan commitment, a
company should not incorporate the expected net future cash flows related to the
associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that
the expected net future cash flows related to the associated servicing of the
loan should be included in measuring fair value for all written loan commitments
that are accounted for at fair value through earnings. SAB 105 also indicated
that internally-developed intangible assets should not be recorded as part of
the fair value of a derivative loan commitment, and SAB 109 retains that view.
SAB 109 is effective for derivative loan commitments issued or modified in
fiscal quarters beginning after December 15, 2007. The Company does not expect
the impact of this standard to be material.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995 as amended and is including this statement for purposes of these
safe harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations of the
Company, are generally identifiable by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors that could have a material adverse
affect on the operations and future prospects of the Company and its
wholly-owned subsidiaries include, but are not limited to, changes in: interest
rates; general economic conditions; legislative/regulatory provisions; monetary
and fiscal policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board; the quality or composition of the loan
or investment portfolios; demand for loan products; deposit flows; competition;
and demand for financial services in the Company's market area. These risks and
uncertainties should be considered in evaluating forward-looking statements, and
undue reliance should not be placed on such statements.
Business Strategy
Our business strategy has been to operate as a well-capitalized independent
financial institution dedicated to providing convenient access and quality
service at competitive prices. During recent years, we have experienced
significant loan and deposit growth. Our current strategy seeks to continue that
growth while we evolve from a traditional thrift institution into a full
service, community bank. Our key business strategies are highlighted below
accompanied by a brief overview of our progress in implementing each of these
strategies:
o Grow and diversify the deposit mix by emphasizing non-maturity account
relationships acquired through de novo branching and existing deposit
growth. Our current business plan calls for us to open up to three de
novo branches over approximately the next five years.
Having opened three full service branches located in Verona, Nutley
and Clifton, New Jersey during fiscal 2007, the Company currently has
no plans or commitments to open additional de novo deposit branches
during fiscal 2008. Rather, the Company continues to direct
significant strategic effort toward achieving and maintaining
profitability within each of these three branches. Based on the
Company's internal branch profitability model, the Verona branch,
which opened in December 2006, achieved profitability during the
quarter ended March 31, 2008 and continued to operate profitably
during the quarter ended June 30, 2008. The Bank's Nutley and Clifton
branches, which opened in May and August of 2007, respectively, have
not yet achieved quarterly profitability. However, the operating
losses for each of the two branches decreased during the quarter ended
June 30, 2008 compared with prior quarters. Notwithstanding this
current focus, the Company would consider additional branching
projects during fiscal 2008 if appropriate opportunities were to arise
but generally expects to revisit additional branching opportunities
after fiscal 2008.
14
o Grow and diversify the loan mix by increasing commercial loan
origination volume while increasing the balance of such loans as a
percentage of total loans.
For the fiscal year ended September 30, 2007, our commercial loans,
including multi-family, nonresidential real estate, construction and
business loans, grew $45.7 million, or 47.5%, from $96.2 million to
$141.9 million. This increase resulted in commercial loans growing
from 24.1% to 32.4% of loans receivable, net for fiscal 2007. Such
growth continued during the nine months ended June 30, 2008 when our
commercial loans grew an additional $32.5 million, or 22.9%, from
$141.9 million to $174.4 million increasing the percentage of
commercial loans from 32.4% to 37.0% of loans receivable, net. We
expect to continue our strategic emphasis on commercial lending
throughout the remainder of fiscal 2008 and thereafter.
o Continue to implement or enhance alternative delivery channels for the
origination and servicing of loan and deposit products.
In support of this objective, during fiscal 2007, we completed a
significant overhaul of our Internet website which serves as a portal
through which our customers access a growing menu of online services.
While enhancing our online services for retail customers, we are
concurrently addressing the growth in business demand for such
services. Toward that end, we have expanded our business online
banking product and service offerings to now include remote check
deposit, online cash management and online bill payment services for
business.
o Broaden and strengthen customer relationships by bolstering cross
marketing strategies with a focus on multiple account/service
relationships.
We will continue to cross market other products and services to
promote multiple account/service relationships and the retention of
long term customers and core deposits. These efforts are expected to
be directed to customers within all five of the Bank's branches.
o Utilize capital market tools to effectively manage capital and enhance
shareholder value.
Toward that end, the Company had completed two previous share
repurchase plans during fiscal 2007 through which it repurchased ten
percent and five percent, respectively, of its outstanding shares.
During the quarter ended December 31, 2007, the Company completed its
third share repurchase program through which it repurchased five
percent of its outstanding shares. A fourth share repurchase plan for
an additional five percent of its outstanding shares was announced in
January 2008 and remains ongoing at June 30, 2008. Additionally, the
Company increased its quarterly dividend paid to shareholders from
$0.04 per share to $0.05 per share during the quarter ended June 30,
2008.
A number of the strategies outlined above have had a detrimental impact on
short term earnings. Notwithstanding, we expect to continue to execute these
growth and diversification strategies designed to enhance future earnings and
resist adverse changes in market conditions toward the goal of enhancing
shareholder value. Toward that end, our deposit pricing strategy through the
prior quarter ended March 31, 2008 continued to reduce interest costs by
incrementally lowering interest rates paid on de novo branch deposits acquired
during fiscal 2007 from the higher promotional rates initially offered. By June
30, 2008, most deposits acquired through those de novo branches no longer
reflected the effects of promotional pricing. Additionally, we would expect that
the prior reductions in market interest rates and steepening of the yield curve
during fiscal 2008 may continue to have a beneficial impact on earnings.
However, the resiliency of the Bank's branch deposits to future movements in
market interest rates and/or competitive pricing pressures - and their
respective impact on earnings - can not be assured.
15
Executive Summary
The Company's results of operations depend primarily on its net interest
income. Net interest income is the difference between the interest income we
earn on our interest-earning assets and the interest we pay on our
interest-bearing liabilities. It is a function of the average balances of loans
and investments versus deposits and borrowed funds outstanding in any one period
and the yields earned on those loans and investments versus the cost of those
deposits and borrowed funds. Our loans consist primarily of residential mortgage
loans, comprising first and second mortgages and home equity lines of credit,
and commercial loans, comprising multi-family and nonresidential real estate
mortgage loans, construction loans and business loans. Our investments primarily
include U.S. Agency residential mortgage-related securities and U.S. Agency
debentures. Our interest-bearing liabilities consist primarily of retail
deposits, advances from the Federal Home Loan Bank of New York and other
borrowings associated with reverse repurchase agreement transactions with
institutional counterparties.
During the first nine months of fiscal 2008, the Company's net interest
rate spread increased 30 basis points to 1.74% in comparison to 1.44% for all of
fiscal 2007. The increase in net interest rate spread resulted primarily from a
reduction in the Company's cost of interest-bearing liabilities which decreased
33 basis points to 3.88% from 4.21% for those same comparative periods. The
decrease in interest costs was partially offset by a reduction in the Company's
yield on earning assets which decreased one basis point to 5.63% from 5.64% for
the same comparative periods. This widening of our net interest rate spread
reversed the trend of spread compression previously reported during fiscal 2007
when the Company's net interest rate spread decreased 36 basis points from 1.80%
during fiscal 2006.
In large part, the improvements in net interest rate spread for the nine
months ended June 30, 2008 resulted from continued decreases in the cost of
retail deposits augmented by the addition of lower cost borrowings during the
year. The decrease in retail deposit interest costs continues to reflect the
overall reduction in market interest rates coupled with the downward adjustment
of interest rates paid on deposits acquired through the de novo branches opened
during fiscal 2007 on which the Company originally paid higher, promotional
interest rates. By contrast, the effects of lower market interest rates on the
Company's adjustable rate loans, including construction loans, business loans
and home equity lines of credit, have been substantially offset by the positive
effect on overall loan yields attributable to the Company's commercial lending
strategies.
The factors resulting in the widening of the Company's net interest rate
spread also positively impacted the Company's net interest margin. However, the
impact of improved net interest rate spread was substantially offset by the
impact of the Company's share repurchase program on the Company's net interest
margin. The foregone interest income on the earning assets used to fund share
repurchases contributed significantly to limiting the increase in the Company's
net interest margin which increased two basis points to 2.41% for the nine
months ended June 30, 2008 from 2.39% for all of fiscal 2007.
Our net interest rate spread and margin may be adversely affected
throughout several possible interest rate environments. The risks presented by
movements in interest rates is addressed more fully under Item 3. Quantitative
and Qualitative Disclosures About Market Risk found later in this report.
Our results of operations are also affected by our provision for loan
losses. For the nine months ended June 30, 2008, the Company recorded a net loan
loss provision of $431,000. The provision for loan losses for the nine months
ended June 30, 2008 generally reflected the Bank's increased strategic emphasis
in commercial lending and the comparatively higher rate of growth in such loan
balances than in earlier years. The provision for loan losses for the nine
months ended June 30, 2008 also reflected a specific provision of $34,000
attributable to one impaired construction loan, a portion of which was deemed
uncollectible by management and was therefore charged off in the second quarter
of fiscal 2008. No other additions to the allowance for loan losses were
required during the nine months ended June 30, 2008 for nonperforming loans
which decreased as a percentage of total assets to 0.14% at June 30, 2008 from
16
0.22% at September 30, 2007. Net loan loss provision expense, reflected as a
percentage of average earning assets, increased one basis point to 0.10% for the
nine months ended June 30, 2008 from 0.09% reported for fiscal 2007.
Our results of operations also depend on our noninterest income and
noninterest expense. Noninterest income includes deposit service fees and
charges, income on the cash surrender value of life insurance, gains on sales of
loans and securities, gains on sales of other real estate owned and loan related
fees and charges. Excluding gains and losses on sale of assets, noninterest
income as a percentage of average assets increased four basis points to 0.30%
for the nine months ended June 30, 2008 from 0.26% for all of fiscal 2007
primarily due to increases in deposit services fees and charges. Such increases
were attributable, in part, to deposit service fees and charges at the Bank's de
novo branches opened during fiscal 2007. However, the reported increase was also
due to growth in deposit-related fees and charges within the Bank's other
branches.
Gains and losses on sale of assets, excluded in the comparison above,
typically resulted from the Company selling long term, fixed rate mortgage loan
originations into the secondary market. Demand for such loans typically
fluctuates with market interest rates. As interest rates rise, market demand for
long term, fixed rate mortgage loans diminishes in favor of hybrid ARMs which
the Company has historically retained in its portfolio rather than selling into
the secondary market. Consequently, the gains and losses on sale of loans
reported by the Company have fluctuated with market conditions. Additionally,
such gains and losses also reflected the impact of infrequent investment
security sales for asset/liability management purposes. As a percentage of
average total assets, gains and losses on asset sales for the nine months ended
June 30, 2008 totaled less than 0.01% which was relatively unchanged from the
0.01% reported for all of fiscal 2007.
Noninterest expense includes salaries and employee benefits, occupancy and
equipment expenses, data processing and other general and administrative
expenses. As a percentage of average total assets, noninterest expense for the
nine months ended June 30, 2008 totaled 2.32% representing an increase of one
basis point from 2.31% reported for all of fiscal 2007.
The noninterest expense reported above for the first nine months of fiscal
2008 fully reflects the ongoing costs of the three full service branches opened
during the prior fiscal year. In general, management expects occupancy and
equipment expense to increase in the future as we continue to implement our de
novo branching strategy to expand our branch office network. However, the
Company currently has no plans or commitments to open additional de novo
branches during fiscal 2008. Rather, the Company expects to direct significant
strategic effort toward achieving and maintaining profitability within each of
these three branches while revisiting additional branching opportunities after
fiscal 2008. Notwithstanding the expected de novo branching hiatus for fiscal
2008, our current business plan targets the opening of up to three additional de
novo branches over approximately the next five years. The costs for land
purchases or leases, branch construction costs and ongoing operating costs for
additional branches will impact future earnings.
The Company also expects occupancy expense to continue to reflect the costs
associated with the relocation of the Bank's Bloomfield branch which opened in
April 2008. This relocation has significantly upgraded and modernized the
Bloomfield branch facility supporting the Company's deposit growth and customer
service enhancement objectives. The relocation will also support potential
expansion of the administrative and lending office space within the Company's
existing headquarters facility, where the branch had previously been located,
should such expansion be required to support the Company's business plan.
In an effort to reduce ongoing operating expenses, the Company enacted a
reduction in workforce during the first quarter of fiscal 2008 resulting in the
elimination of five managerial and administrative support positions. Salary and
17
employee benefit expense reductions resulting from this initiative are expected
to total approximately $388,000 per year which began during the second quarter
of fiscal 2008, equal to annual after-tax earnings of approximately $0.02 per
share based upon the Company's outstanding shares at June 30, 2008. This action,
in conjunction with other adjustments to staffing, has enabled the Company to
reduce the number of full time equivalent employees by nearly 10% during fiscal
2008.
The effect of these compensation expense reduction measures during the
first nine months of fiscal 2008 was somewhat muted by an offsetting increase in
expense attributable to the death of a Director Emeritus of the Company during
the second fiscal quarter. Under the terms of the Company's restricted stock and
stock option plans, the vesting of the remaining unearned benefits accruing to
the director through these plans was automatically accelerated. As such, the
Company incurred an acceleration of the remaining pre-tax expenses associated
with these benefits totaling approximately $254,000 during that period.
Notwithstanding, the Company will continue to monitor its employee staffing
levels in relation to the goals and objectives of its business plan and may
consider further opportunities to adjust such staffing levels, as appropriate,
to support the achievement of those goals and objectives.
In total, our annualized return on average assets increased two basis
points to 0.12% for the nine months ended June 30, 2008 from 0.10% for all of
fiscal 2007, while annualized return on average equity increased 21 basis points
to 0.72% from 0.51% for the same comparative periods.
Comparison of Financial Condition at June 30, 2008 and September 30, 2007
Our total assets increased by $57.0 million, or 9.9%, to $630.7 million at
June 30, 2008 from $573.7 million at September 30, 2007. The increase primarily
reflected comparatively higher balances of investment securities and loans
receivable, net partially offset by lower balances of cash and cash equivalents
and loans held for sale.
Cash and cash equivalents decreased by $4.8 million, or 12.8%, to $32.6
million at June 30, 2008 from $37.4 million at September 30, 2007. The net
decrease in cash and cash equivalents primarily reflects cash outflows funding
share repurchases and growth in loans receivable, net partially offset by cash
inflows from investment security maturities and repayments, reductions in the
balance of loans held for sale and continued net growth in deposits.
The balance of cash and cash equivalents continues to reflect the
accumulation of short term, interest-earning investments which resulted from the
net cash inflows associated with deposit growth during fiscal 2007 and the first
nine months of fiscal 2008. The Company expects to continue reinvesting the
proceeds received through its growth in deposits into the loan portfolio over
time as lending opportunities arise. To the extent supported by loan demand and
origination volume, the Company expects to reinvest deposit proceeds into its
commercial loan portfolio. such loans. However, the net addition of residential
mortgages to the loan portfolio, including longer term, fixed rate one- to four
family mortgages which were historically sold into the secondary market, is
expected to continue augmenting the growth in commercial loans as a reinvestment
alternative for a portion of the accumulated balance of cash and cash
equivalents. (See further discussion in the subsequent section titled
"Quantitative and Qualitative Disclosures About Market Risk".)
Securities classified as available-for-sale increased $27.0 million, or
46.6%, to $85.1 million at June 30, 2008 from $58.1 million at September 30,
2007 while securities held-to-maturity increased approximately $126,000, or 1.9%
to $6.9 million from $6.7 million for those same comparative periods.
The net increase in available-for-sale securities was largely attributable
to a wholesale growth transaction in March 2008 through which the Company
purchased approximately $50.0 million of mortgage-related investment securities
18
funded by an equivalent amount of borrowings. The ongoing net interest income
resulting from this transaction continues to augment the Company's earnings to
offset a portion of the near term costs associated with executing its business
plan. Through this transaction, the Company took advantage of the opportunity
presented by recent turmoil in the mortgage securities markets to acquire
agency, AAA-rated mortgage-related securities at historically wide interest rate
spreads in relation to the cost of wholesale funding sources. The growth in
available-for-sale securities associated with this transaction was partially
offset by the continued reinvestment of a significant portion of the funds
received from maturing debentures and other mortgage-related security repayments
into the loan portfolio.
The following table compares the composition of the Company's investment
securities portfolio by security type as a percentage of total assets at June
30, 2008 with that of September 30, 2007. Amounts reported exclude unrealized
gains and losses on the available for sale portfolio.
June 30, 2008 September 30, 2007
------------- ------------------
Percent of Percent of
Type of Securities Amount Total Assets Amount Total Assets
- ------------------ ------ ------------ ------ ------------
(Dollars in thousands)
--------------------
Fixed rate MBS $ 49,174 7.79% $ 11,454 2.00%
ARM MBS 10,127 1.61 14,470 2.52
Fixed rate CMO 31,950 5.07 35,280 6.14
Floating rate CMO 1,846 0.29 2,047 0.36
Fixed rate agency debentures - - 2,000 0.35
----------------- ------------ ----------- -------
Total $ 93,097 14.76% $ 65,251 11.37%
=========== ======= =========== =======
Assuming no change in interest rates, the estimated average life of the
investment securities portfolio was 5.27 years and 2.24 years, respectively, at
June 30, 2008 and September 30, 2007. Assuming a hypothetical immediate and
permanent increase in interest rates of 300 basis points, the estimated average
life of the portfolio would have extended to 6.23 years and 2.65 years at June
30, 2008 and September 30, 2007, respectively.
Loans receivable, net increased by $33.3 million, or 7.6%, to $471.2
million at June 30, 2008 from $437.9 million at September 30, 2007. The growth
was comprised of net increases in commercial loans totaling $32.5 million or
22.9%. Such loans include multi-family, nonresidential real estate, construction
and business loans. The increase in loans receivable, net also included net
increases in home equity loans and home equity lines of credit totaling $1.8
million and net increases in consumer loans of $247,000. Offsetting the growth
in these categories was a $799,000 decrease in the balance of one- to four
family first mortgages resulting from diminished loan origination volume
stemming from slowing purchase and refinance activity coupled with the Company's
reduced strategic emphasis on the origination of such loans. Additionally, the
Company reported a net increase to the allowance for loan losses totaling
$397,000.
One- to four-family mortgage loans are generally grouped by the Bank into
one of three categories based upon underwriting criteria: "Prime", "Alt-A" and
"Sub-prime" mortgages. Sub-prime loans are generally defined by the Bank as
loans to borrowers with deficient credit histories and/or higher debt-to-income
ratios. Loans falling within the Alt-A category, as defined by the Bank, include
loans to borrowers with blemished credit credentials that are less severe than
those characterized by Sub- prime loans but otherwise preclude the loan from
being considered Prime. Alt-A loans may also be characterized by other
19
underwriting or documentation exceptions such as reduced or limited loan
documentation. Loans without the deficiencies or exceptions characterizing
Sub-prime and Alt-A loans are considered Prime and comprise the significant
majority of the one- to four family mortgages originated and retained by the
Bank.
The Bank does not currently offer Sub-prime loan programs. Prior to fiscal
2007, the Bank had offered a limited number of one- to four-family loan programs
through which it originated and retained Sub-prime loans to borrowers with
deficient credit histories or higher debt-to-income ratios. At June 30, 2008 and
September 30, 2007, the remaining balance of these loans was approximately $1.2
million and $1.4 million, respectively, comprising 10 and 11 loans,
respectively, at each date. All such loans were performing in accordance with
their terms for the periods reported.
Through fiscal 2007, the Bank offered an Alt-A stated income loan program
by which it originated and retained loans to borrowers whose income was
affirmatively stated at the time of application, but not verified by the Bank.
The Bank discontinued that program in the first quarter of fiscal 2008. At June
30, 2008 and September 30, 2007, the remaining balance of these loans was
approximately $7.8 million and $8.6 million, respectively, comprising 28 and 29
loans, respectively, at each date. Two of these loans, with balances of $421,000
and $371,000 were 30 and 60 days past due, respectively, at June 30, 2008 with
the latter being paid in full during July, 2008.
The Bank continues to offer a limited Alt-A program through which it
originates and sells all such loans to Fannie Mae under its Expanded Approval
program on a non-recourse, servicing retained basis. A significant portion of
the loans originated under this remaining Alt-A program support the procurement
of mortgage financing for first time home buyers.
At June 30, 2008 and September 30, 2007, respectively, the balance of one-
to four-family mortgage loans included $23.9 million and $22.6 million of thirty
year adjustable rate loans with initial fixed interest rate periods of three to
five years during which time monthly loan payments comprise interest only. After
the initial period, the monthly payments on such loans are adjusted to reflect
the collection of both interest and principal over the loan's remaining term to
maturity.
The following two tables compare the composition of the Company's loan
portfolio by loan type as a percentage of total assets at June 30, 2008 with
that of September 30, 2007. Amounts reported exclude allowance for loan losses
and net deferred origination costs.
20
The table below generally defines loan type by loan maturity and/or
repricing characteristics:
June 30, 2008 September 30, 2007
------------- ------------------
Percent of Percent of
Type of Loans Amount Total Assets Amount Total Assets
- ------------- ------ ------------ ------ ------------
(Dollars in thousands)
--------------------
Construction (1) $ 41,931 6.65% $ 32,592 5.68%
Prime-indexed Land 2,232 0.35 - -
1/1 and 3/3 ARMs 7,289 1.16 7,642 1.33
3/1 and 5/1 ARMs 131,982 20.92 142,254 24.80
5/5 and 10/10 ARMs 45,858 7.27 46,017 8.02
7/1 and 10/1 ARMs 4,978 0.79 3,500 0.61
15 year fixed or less 143,473 22.74 129,158 22.52
Greater than 15 year fixed 64,366 10.21 52,012 9.07
Prime-indexed HELOC 21,739 3.45 19,756 3.44
Consumer (2) 902 0.14 655 0.11
Business (3) 8,449 1.34 7,024 1.22
----------- ------- ----------- -------
Total $ 473,199 75.02% $ 440,610 76.80%
=========== ======= =========== =======
(1) Construction loans are generally floating rate with original maturities of
two years or less.
(2) Consumer loans are generally fixed rate with original maturities of less
than five years.
(3) Business loans are generally fixed or floating rate with original
maturities of five years or less.
The table below generally defines loan type by collateral or purpose:
June 30, 2008 September 30, 2007
------------- ------------------
Percent of Percent of
Type of Loans Amount Total Assets Amount Total Assets
- ------------- ------ ------------ ------ ------------
(Dollars in thousands)
--------------------
Construction (1) $ 41,931 6.65% $ 32,592 5.68%
1-4 family mortgage 275,995 43.75 278,183 48.50
Multifamily (5+) mortgage 33,354 5.29 30,585 5.33
Nonresidential mortgage 85,577 13.57 68,474 11.94
Land 5,252 0.83 3,341 0.58
1-4 family HELOC 21,739 3.45 19,756 3.44
Consumer (2) 902 0.14 655 0.11
Business (3) 8,449 1.34 7,024 1.22
----------- ------- ----------- -------
Total $ 473,199 75.02% $ 440,610 76.80%
=========== ======= =========== =======
(1) Construction loans generally include loans collateralized by land and one-
to four family, multifamily and commercial buildings in process of
construction.
(2) Consumer loans generally include secured account loans and unsecured
overdraft protection balances.
(3) Business loans generally include secured and unsecured business lines of
credit and term notes.
21
Total deposits increased by $22.2 million, or 5.2%, to $450.8 million at
June 30, 2008 from $428.6 million at September 30, 2007. This net growth
reflected increases in certificates of deposit and noninterest-bearing checking
accounts of $36.6 million and $64,000, respectively, offset by reductions in the
balance of interest-bearing checking, including money market checking, and
savings accounts of $13.7 million and $819,000, respectively. These net changes
reflect, in part, the disintermediation of a portion of the non-maturity
deposits generated through the three branches opened during fiscal 2007 on which
interest rates have been reduced from the higher, promotional levels originally
paid.
The following table compares the composition of the Company's deposit
portfolio by category as a percentage of total assets at June 30, 2008 with that
of September 30, 2007.
June 30, 2008 September 30, 2007
------------- ------------------
Percent of Percent of
Deposit category Amount Total Assets Amount Total Assets
- ---------------- ------ ------------ ------ ------------
(Dollars in thousands)
--------------------
Noninterest bearing checking $ 30,558 4.84% $ 30,494 5.31%
Money market checking 75,866 12.03 92,550 16.13
Interest bearing checking 22,262 3.53 19,245 3.35
Money market savings 8,097 1.28 10,263 1.79
Other savings 83,862 13.30 82,515 14.38
Certificates of deposit 230,115 36.49 193,533 33.74
----------- ------- ----------- -------
Total $ 450,760 71.47% $ 428,600 74.70%
=========== ======= =========== =======
The following table compares the composition of the Company's deposit
portfolio by branch as a percentage of total assets at June 30, 2008 with that
of September 30, 2007.
June 30, 2008 September 30, 2007
------------- ------------------
Percent of Percent of
Branch Amount Total Assets Amount Total Assets
- ------ ------ ------------ ------ ------------
(Dollars in thousands)
--------------------
Bloomfield $ 229,834 36.45% $ 223,557 38.97%
Cedar Grove 113,309 17.96 111,030 19.35
Verona 50,914 8.07 55,193 9.62
Nutley 30,611 4.85 23,534 4.10
Clifton 26,092 4.14 15,286 2.66
------------- ----------- ------------- ---------
Total $ 450,760 71.47% $ 428,600 74.70%
============= =========== ============= =========
The reported reduction in the Verona branch deposit balances largely
reflects the outflow of a portion of the deposits generated through this branch
during the prior fiscal year on which interest rates have been reduced from the
higher, promotional levels originally paid.
Borrowings increased $44.0 million, or 116.9%, to $81.6 million at June 30,
2008 from $37.6 million at September 30, 2007. The growth in borrowings was
primarily attributable to the additions in FHLB advances and reverse repurchase
agreements associated with the $50.0 million wholesale growth transaction noted
earlier partially offset by the net repayment of $6.0 million of maturing fixed
rate FHLB term advances.
22
The following table compares the composition of the Company's borrowing
portfolio by remaining term to maturity as a percentage of total assets at June
30, 2008 with that of September 30, 2007. Scheduled principal payments on
amortizing borrowings are reported as maturities.
June 30, 2008 September 30, 2007
------------- ------------------
Percent of Percent of
Remaining Term Amount Total Assets Amount Total Assets
- -------------- ------ ------------ ------ ------------
(Dollars in thousands)
--------------------
Overnight $ - -% $ - -%
One year or less 16,564 2.63 12,065 2.10
Greater than one to two years 16,000 2.54 7,547 1.32
Greater than two to three years 6,000 0.95 6,000 1.05
Greater than three to four years 6,000 0.95 6,000 1.05
Greater than four to five years 2,000 0.32 5,000 0.87
More than five years (1) 35,000 5.54 1,000 0.17
----------- ------- ----------- -------
Total $ 81,564 12.93% $ 37,612 6.56%
=========== ======= =========== =======
(1) Borrowing category includes two reverse repurchase agreements totaling
$35.0 million originally drawn in March 2008 and maturing in March 2018
whose terms enable the counterparty, at their option, to require full
repayment of the borrowing at par prior to maturity. Early repayment may be
required on one $25.0 million borrowing on or after the two year
anniversary of its original funding. Similarly, early repayment may be
required on the remaining $10.0 million borrowing on or after the four year
anniversary of its original funding.
Equity decreased $9.7 million, or 9.6% to $90.9 million at June 30, 2008
from $100.6 million at September 30, 2007. The reported decrease in equity was
primarily attributable to a $10.5 million increase in Treasury stock resulting
from the Company's share repurchases during the first nine months of fiscal 2008
during which time the Company had repurchased a total of 1,002,070 shares at an
average price of $10.44 per share.
Comparison of Operating Results for the Three Months Ended June 30, 2008 and
June 30, 2007
General. The Company recorded net income of $431,000 for the three months
ended June 30, 2008, an increase of $281,000, or 187.3% from the three months
ended June 30, 2007 when the Company reported net income of $150,000. The
increase in net income resulted from increases in net interest income and
noninterest income partially offset by increases in noninterest expense,
provision for loan losses and provision for income taxes.
Interest Income. Total interest income increased 6.1% or $455,000 to $8.0
million for the three months ended June 30, 2008 from $7.5 million for the three
months ended June 30, 2007. For those same comparative periods, the average
yield on interest-earning assets decreased 26 basis points to 5.43% from 5.69%
while the average balance of interest-earning assets increased $59.1 million to
$586.4 million from $527.3 million.
Interest income on loans increased $385,000 or 6.1%, to $6.7 million for
the three months ended June 30, 2008 from $6.3 million for the three months
ended June 30, 2007. This increase was due, in part, to a $40.6 million increase
in the average balance of loans receivable, including loans held for sale, to
$466.2 million for the three months ended June 30, 2008 from $425.6 million for
the three months ended June 30, 2007. The impact of the higher average balance
was partially offset by a reduction in the average yield on loans which
decreased 18 basis points to 5.74% from 5.92% for those same comparative
periods. The increase in the average balance on loans receivable was primarily
attributable to the Company's strategic emphasis on commercial lending while the
reduction in average yield on loans generally reflects the effect of lower
market interest rates on the floating rate portion of the portfolio.
23
Interest income on securities increased $433,000 or 62.0% to $1.1 million
for the three months ended June 30, 2008 from $699,000 for the three months
ended June 30, 2007. The increase was due, in part, to a $33.2 million increase
in the average balance of investment securities, excluding the available for
sale mark to market adjustment, to $98.1 million for the three months ended June
30, 2008 from $64.8 million for the three months ended June 30, 2007. The impact
on interest income attributable to this increase was augmented by a 31 basis
point increase in the average yield on securities which grew to 4.62% from 4.31%
for the same comparative periods. The increase in yield primarily resulted from
the maturity and repayment of lower yielding investment securities coupled with
higher yields on newly purchased securities, including those relating to the
$50.0 million wholesale growth transaction completed in March 2008. The increase
in yield also reflects the repricing of adjustable rate securities in accordance
with the general movement of market interest rates between the comparative
periods.
Interest and dividend income on federal funds sold, other interest-earning
deposits and FHLB stock decreased $364,000 to $146,000 for three months ended
June 30, 2008 from $510,000 for the three months ended June 30, 2007. This
reduction in income was due primarily to a decline in the average yield of these
assets which decreased 289 basis points to 2.64% from 5.53% for the same
comparative periods reflecting reductions in short term market interest rates.
The impact of the decline in yield was exacerbated by a $14.8 million decline in
the average balance of these assets to $22.1 million for the three months ended
June 30, 2008 from $36.9 million for the three months ended June 30, 2007. The
average balances reported and used for yield calculations reflect, where
appropriate, the reduction for outstanding checks issued against such accounts.
This has the effect of increasing the reported yield on such assets.
Interest Expense. Total interest expense decreased by $193,000 or 4.3% to
$4.2 million for the three months ended June 30, 2008 from $4.4 million for the
three months ended June 30, 2007. For those same comparative periods, the
average cost of interest-bearing liabilities decreased 86 basis points from
4.30% to 3.44%, while the average balance of interest-bearing liabilities
increased $80.3 million or 19.4% to $493.9 million for the three months ended
June 30, 2008 from $413.7 million for the three months ended June 30, 2007.
Interest expense on deposits decreased $360,000 or 9.2% to $3.6 million for
the three months ended June 30, 2008 from $3.9 million for the three months
ended June 30, 2007. This decrease was due largely to a reduction in the
Company's overall cost of interest-bearing deposits which decreased 68 basis
points to 3.21% for the three months ended June 30, 2008 from 3.89% for the
three months ended June 30, 2007. The components of this decrease include a 190
basis point reduction in the average cost of interest-bearing checking accounts
to 2.68% from 4.58%, a 62 basis point reduction in the average cost of savings
accounts to 2.03% from 2.65% and a 50 basis point reduction in the average cost
of certificates of deposit to 4.36% from 4.86%. This decrease in the cost of
interest-bearing deposits was primarily attributable to two related factors.
First, the Company continued to reduce the interest rates paid on deposits
generated through the three full service branches opened during the prior fiscal
year on which promotional interest rates had originally been paid. As noted
earlier, at June 30, 2008, most deposits acquired through those de novo branches
no longer reflect the effects of promotional pricing. Second, reductions in
market interest rates enabled the Company to reduce rates paid on many
interest-bearing deposit types across all branches.
The impact of the decrease in the cost of interest-bearing deposits was
partially offset by the growth in the average balance of interest-bearing
deposits which grew $39.4 million to $411.7 million for the three months ended
June 30, 2008 from $372.3 million for the three months ended June 30, 2007. The
reported net growth in average interest-bearing deposits comprised $4.6 million
and $44.1 million of growth in the average balance of interest-bearing checking
accounts and certificates of deposit, respectively. Offsetting this growth was a
net decline in the average balance of savings accounts totaling $9.3 million
primarily reflecting the disintermediation of such deposits into higher yielding
time deposits. The overall growth in the average balance of interest-bearing
24
deposits for the more recent period was primarily attributable to the Bank's
three de novo branches which opened during fiscal 2007.
Interest expense on borrowings increased $166,000 to $699,000 for the three
months ended June 30, 2008 from $533,000 for the three months ended June 30,
2007. This increase was attributable, in part, to growth in the average balance
of borrowings which increased $40.8 million to $82.2 million for the three
months ended June 30, 2008 from $41.4 million for the three months ended June
30, 2007. The effects of the higher average balance of borrowings on interest
expense were partially offset by a decline in their average cost which decreased
174 basis point to 3.40% for the three months ended June 30, 2008 from 5.14% for
the three months ended June 30, 2007. The changes in the average cost and
average balance of borrowings between the two comparative periods generally
reflects the addition of $50.0 million of comparatively lower costing borrowings
relating to the wholesale growth transaction noted earlier, partially offset by
the repayment of all other maturing FHLB term advances not related to that
transaction since the close of the earlier comparative period.
Net Interest Income. Net interest income increased by $649,000 or 21.2%, to
$3.7 million for the three months ended June 30, 2008 from $3.1 million for the
three months ended June 30, 2007. The Company's net interest rate spread widened
59 basis points to 1.99% from 1.40% for the same comparative periods, while the
net interest margin increased 21 basis points to 2.53% from 2.32%. As noted
earlier, the change in the Company's net interest margin was significantly
impacted by the Company's share repurchase plans. The average balance of the
Company's treasury stock increased $16.9 million to $39.6 million for the three
months ended June 30, 2008 from $22.8 million for the three months ended June
30, 2007. Based upon that growth in the average balance of the Company's
treasury stock account and its average yield on interest-earning assets reported
for the earlier comparative period, the Company estimates that the net increase
of $649,000 in net interest income was reduced by approximately $240,000
attributable to interest earned during the earlier comparative period on the
interest-earning assets that were subsequently utilized to fund share
repurchases.
Provision for Loan Losses. Using the loan loss allowance methodology
described under Critical Accounting Policies found later in this discussion, the
provision for loan losses totaled $121,000 for the three months ended June 30,
2008, representing an increase of $44,000 from the $77,000 provision reported
for the three months ended June 30, 2007. The provision for loan losses for both
comparative periods resulted from the application of historical and
environmental loss factors against the net growth in loans in accordance with
the Bank's loan loss methodology.
In total, the allowance for loan losses as a percentage of gross loans
outstanding increased to 0.63% at June 30, 2008 representing an increase of 6
basis points from 0.57% at June 30, 2007. These ratios reflect allowance for
loan loss balances of $3.0 million and $2.4 million, respectively, at each date.
The overall increase in the ratio of allowance to gross loans reported continues
to reflect the changing composition of the portfolio with greater strategic
emphasis on loans with higher risk factors. As noted earlier, nonperforming
loans decreased to 0.14% of total assets at June 30, 2008 compared with 0.22% at
June 30, 2007. The level of the allowance is based on estimates and the ultimate
losses may vary from those estimates.
Noninterest Income. Noninterest income increased $73,000 to $481,000 for
the three months ended June 30, 2008 from $408,000 for the three months ended
June 30, 2007. The growth in noninterest income was partly the result of
comparative increases in deposit service fees and charges of $79,000. Such
increases were attributable, in part, to deposit service fees and charges at the
Bank's de novo branches opened during fiscal 2007. However, the reported
increase was also due to growth in deposit-related fees and charges within the
Bank's other branches. For those same comparative periods, the Company reported
an $11,000 increase in income from the cash surrender value of life insurance
arising from improved yields on those assets. The Company also reported a
$13,000 increase in other noninterest income attributable primarily to increases
in loan fees and charges including, but not limited to, increases in prepayment
25
penalties and late charges. The increases in noninterest income were partially
offset by a decline of $30,000 in gain on sale of loans resulting from the
absence of loan sales in the current period.
Noninterest Expense. Noninterest expense increased $214,000 to $3.4 million
for the three months ended June 30, 2008 from $3.2 million for the three months
ended June 30, 2007. Significant components of this growth in operating costs
include comparative increases in several noninterest expense categories
including occupancy and equipment expense of $224,000, data processing expense
of $16,000, legal expense of $14,000, professional and consulting expense of
$15,000 and other noninterest expense of $65,000. Offsetting these increases in
noninterest expense was a reduction in salaries and employee benefits of $80,000
and a reduction in advertising and marketing expenses of $40,000.
The costs of the two additional branches opened in the latter half of
fiscal 2007 was a significant contributor to the reported net increase in
occupancy and equipment expense for the three months ended June 30, 2008.
However, the reported increase also reflects the ongoing operating costs
associated with the Bank's relocated Bloomfield branch which opened in April
2008. Additionally, the increase includes the costs associated with outsourcing
a significant portion of the Company's information technology infrastructure
support services. The reported increase resulted from the Bank's decision to
consolidate the provision of a variety of information technology administration
support services under a single outsourced service provider. Such services had
previously been rendered by a combination of other outsourced and in-house
resources. This decision resulted in the elimination of one managerial position
within the Bank's MIS department during the fourth quarter of fiscal 2007. The
reported increase in data processing charges was also largely attributable to
the two additional branches opened in the latter half of fiscal 2007 including
increases to both core processing and item processing expenses.
The reported increase in legal expense was primarily attributable to
recently completed revisions to benefit plan agreements as required by
newly-implemented Internal Revenue Service regulations while the increase in
professional and consulting expenses resulted from additional costs associated
with disaster recovery and physical security planning and review services
utilized during the more recent comparative quarter.
Finally, the growth in other noninterest expense includes increases in FDIC
insurance expense resulting from both growth in the balance of FDIC-insured
deposits plus the expiration of FDIC insurance credits which had reduced the
Bank's net cost of FDIC deposit insurance premiums over several prior quarters.
Increases in noninterest expense also included increases in corporate insurance
and regulatory assessment expenses as well as increases in general and
administrative expenses attributable to the two additional branches opened in
the latter half of fiscal 2007.
The reported net decrease in compensation expense was attributable to
several offsetting factors. First, employee wages and salaries, including
bonuses and payroll taxes, decreased due largely to accrued compensation expense
reductions based on current year bonus projections. This net decrease also
reflected the growth in compensation expense relating to the increase in
staffing costs associated with the two branches opened in the latter half of
fiscal 2007. However, these increases have been substantially offset by the
Company's workforce reduction efforts which have reduced the Company's number of
full time equivalent employees by nearly 10% during fiscal 2008.
The reported net decrease in compensation expense also included net
increases to employee healthcare benefit expenses reflecting the growing level
of health care costs per employee. Additionally, expenses associated with the
Bank's supplemental executive retirement program increased due largely to
updated assumptions used in benefit accrual calculations.
Offsetting these increases were net reductions in director compensation
costs due largely to the absence in the current period of the changes in
retirement plan benefit accrual assumptions that had increased the related
expenses during the earlier comparative period. Additionally, ESOP expense
26
decreased due to the comparatively lower average price of the Company's shares
during the more recent comparative period while personnel procurement expenses
declined due to the absence of such costs during the current period.
Finally, the reported decrease in advertising and marketing expenses
primarily reflected the absence, in the current period, of de novo branch grand
opening expenses that were incurred during the earlier comparative period.
Provision for Income Taxes. The provision for income taxes increased
$181,000 for the three months ended June 30, 2008 compared with the three months
ended June 30, 2007. For the more recent period, the Company's effective income
tax rate was 33.9% compared with an effective income tax rate of 21.5% for the
earlier comparative period. The tax expense in the current and prior period
reflects the comparative levels of pre-tax income coupled with the level of "tax
favored" income reported by the Company during each period. "Tax favored" income
arises from revenue sources on which the Company pays income taxes at a
comparatively lower effective tax rate than it generally pays on other sources
of income.
Specifically, the Company's effective tax rate is influenced by the level
of interest income on investment securities held by the Bank's investment
subsidiary, American Savings Investment Corporation ("ASIC"). ASIC is a wholly
owned New Jersey investment subsidiary formed in August 2004 by American Bank of
New Jersey. The purpose of this subsidiary is to invest in stocks, bonds, notes
and all types of equity, mortgages, debentures and other investment securities.
Interest income from this subsidiary is taxed by the state of New Jersey at an
effective rate lower than the statutory corporate state income tax rate.
Additionally, the Company also recognizes tax exempt income from the cash
surrender value of bank owned life insurance.
The Company recognized income from these two "tax favored" sources during
both comparative quarters. However, the comparatively lower pretax net income
reported for the earlier quarter resulted in the items discussed above having a
proportionally greater net beneficial impact on the Company's reported effective
tax rate in the earlier comparative period.
Comparison of Operating Results for the Nine Months Ended June 30, 2008 and June
30, 2007
General. The Company recorded net income of $512,000 for the nine months
ended June 30, 2008, a decrease of $116,000, or 18.5% from the nine months ended
June 30, 2007 when the Company reported net income of $628,000. The decrease in
net income resulted from increases in noninterest expense and provision for loan
losses partially offset by increases in net interest income and noninterest
income and a decrease in the provision for income taxes.
Interest Income. Total interest income increased $2.0 million or 9.4% to
$23.4 million for the nine months ended June 30, 2008 from $21.4 million for the
nine months ended June 30, 2007. For those same comparative periods, the average
yield on interest-earning assets increased 2 basis points to 5.63% from 5.61%
while the average balance of interest-earning assets increased $45.6 million to
$554.1 million from $508.4 million.
Interest income on loans increased $1.9 million or 10.4%, to $20.1 million
for the nine months ended June 30, 2008 from $18.2 million for the nine months
ended June 30, 2007. This increase was due, in part, to a $40.2 million increase
in the average balance of loans receivable, including loans held for sale, to
$455.0 million for the nine months ended June 30, 2008 from $414.8 million for
the nine months ended June 30, 2007. The impact of the higher average balance
was augmented by an increase in the average yield on loans which increased 4
basis points to 5.89% from 5.85% for those same comparative periods. The
increase in the average balance and yield on loans receivable was primarily
attributable to the Company's strategic emphasis on commercial lending.
27
Interest income on securities increased $155,000 or 6.7% to $2.5 million
for the nine months ended June 30, 2008 from $2.3 million for the nine months
ended June 30, 2007. The increase was due, in part, to a 40 basis point increase
in the yield on investment securities which grew to 4.56% for the nine months
ended June 30, 2008 from 4.16% for the nine months ended June 30, 2007. The
increase in yield primarily resulted from the maturity and repayment of lower
yielding investment securities coupled with higher yields on newly purchased
securities, including those relating to the $50.0 million wholesale growth
transaction completed in March 2008. The increase in yield also reflects the
repricing of adjustable rate securities in accordance with the general movement
of market interest rates between the comparative periods. The impact on interest
income attributable to the increase in the yield was partially offset by a $1.9
million decline in the average balance of investment securities, excluding the
available for sale mark to market adjustment, to $72.0 million for the nine
months ended June 30, 2008 from $73.9 million for the nine months ended June 30,
2007.
Interest and dividend income on federal funds sold, other interest-earning
deposits and FHLB stock decreased $45,000 to $818,000 for the nine months ended
June 30, 2008 from $863,000 for the nine months ended June 30, 2007. This
decrease in income was due primarily to a decline in the average yield on these
assets which decreased 180 basis points to 4.04% from 5.84% for the same
comparative periods reflecting reductions in short term market interest rates.
The impact of the decline in yield was partially offset by a $7.3 million
increase in the average balance of these assets to $27.0 million for the nine
months ended June 30, 2008 from $19.7 million for the nine months ended June 30,
2007. The average balances reported and used for yield calculations reflect,
where appropriate, the reduction for outstanding checks issued against such
accounts. This has the effect of increasing the reported yield on such assets.
Interest Expense. Total interest expense increased by $1.3 million or 10.6%
to $13.4 million for the nine months ended June 30, 2008 from $12.1 million for
the nine months ended March 31, 2007. For those same comparative periods, the
average cost of interest-bearing liabilities decreased 27 basis points from
4.15% to 3.88%, while the average balance of interest-bearing liabilities
increased $70.5 million or 18.2% to $458.8 million for the nine months ended
June 30, 2008 from $388.3 million for the nine months ended June 30, 2007.
Interest expense on deposits increased $1.3 million or 12.9% to $11.7
million for the nine months ended June 30, 2008 from $10.3 million for the nine
months ended June 30, 2007. This increase was due largely to growth in the
average balance of interest-bearing deposits which grew $61.8 million to $403.9
million for the nine months ended June 30, 2008 from $342.1 million for the nine
months ended June 30, 2007. The reported net growth in average interest-bearing
deposits comprised $37.5 million and $36.2 million of growth in the average
balance of interest-bearing checking accounts and certificates of deposit,
respectively. Offsetting this growth was a net decline in the average balance of
savings accounts totaling $11.9 million primarily reflecting the
disintermediation of such deposits into higher yielding time deposits.
The overall growth in the average balance of interest-bearing deposits for
the more recent period was primarily attributable to the Bank's three de novo
branches which opened during fiscal 2007. The growth in deposits at these
branches contributed significantly to the reported increase in deposit interest
expense.
The impact on interest expense attributable to the growth in the average
balance of interest-bearing deposits was partially offset by a reduction in the
cost of such deposits. Specifically, the Company's overall cost of
interest-bearing deposits decreased 17 basis points to 3.85% for the nine months
ended June 30, 2008 from 4.02% for the nine months ended June 30, 2007. The
components of this decrease include a 72 basis point reduction in the average
cost of interest-bearing checking accounts to 3.58% from 4.30%, a 35 basis point
reduction in the average cost of savings accounts to 2.32% from 2.67% and an 8
basis point reduction in the cost of certificates of deposit to 4.64% from
4.72%. As noted in the prior section discussing the comparative three month
28
periods, the decrease in the cost of interest-bearing deposits was primarily
attributable to two related factors. First, the Company has reduced the interest
rates paid on deposits generated through the three full service branches opened
during the prior fiscal year on which promotional interest rates had originally
been paid. As noted earlier, at June 30, 2008, most deposits acquired through
those de novo branches no longer reflect the effects of promotional pricing.
Second, reductions in market interest rates enabled the Company to reduce rates
paid on many interest-bearing deposit types across all branches.
Interest expense on borrowings decreased $53,000 to $1.7 million for the
nine months ended June 30, 2008 from $1.8 million for the nine months ended June
30, 2007. This decrease was due, in part, to a 95 basis point decrease in the
cost of borrowings to 4.16% for the nine months ended June 30, 2008 from 5.11%
for the nine months ended June 30, 2007. The impact on interest expense
attributable to this decrease in cost was partially offset by an increase in the
average balance of borrowings which increased $8.8 million to $54.9 million for
the nine months ended June 30, 2008 from $46.1 million for the nine months ended
June 30, 2007. The changes in the average cost and average balance of borrowings
between the two comparative periods generally reflects the addition of $50.0
million of comparatively lower costing borrowings relating to the wholesale
growth transaction noted earlier, partially offset by the repayment of all other
maturing FHLB term advances not related to that transaction since the close of
the earlier comparative period.
Net Interest Income. Net interest income increased by $731,000 or 7.9%, to
$10.0 million for the nine months ended June 30, 2008 from $9.3 million for the
nine months ended June 30, 2007. For those same comparative periods, the
Company's net interest rate spread widened 28 basis points to 1.74% from 1.46%
while the net interest margin decreased 3 basis points to 2.41% from 2.44%. As
noted earlier, the change in the Company's net interest margin was significantly
impacted by the Company's share repurchase plans. The average balance of the
Company's treasury stock increased $19.0 million to $36.0 million for the nine
months ended June 30, 2008 from $17.0 million for the nine months ended June 30,
2007. Based upon that growth in the average balance of the Company's treasury
stock account and its average yield on interest-earning assets reported for the
earlier comparative period, the Company estimates that the net increase of
$731,000 in net interest income was reduced by approximately $799,000
attributable to interest earned during the earlier comparative period on the
interest-earning assets that were subsequently utilized to fund share
repurchases.
Provision for Loan Losses. Using the loan loss allowance methodology
described under Critical Accounting Policies found later in this discussion, the
provision for loan losses totaled $431,000 for the nine months ended June 30,
2008, representing an increase of $111,000 from the nine months ended June 30,
2007. The expense in the current nine month period reflected a provision of
$34,000 attributable to one impaired construction loan, that portion of which
was deemed uncollectible by management during its asset quality review conducted
at March 31, 2008 and therefore charged off. By contrast, the expense in the
earlier comparative period reflected a reversal of an $86,000 impairment reserve
that was no longer required. Excluding these adjustments, the provision for loan
losses for both comparative periods resulted from the application of historical
and environmental loss factors against the net growth in loans in accordance
with the Bank's loan loss methodology.
In total, the allowance for loan losses as a percentage of gross loans
outstanding increased to 0.63% at June 30, 2008 representing an increase of 6
basis points from 0.57% at June 30, 2007. These ratios reflect allowance for
loan loss balances of $3.0 million and $2.4 million, respectively. The overall
increase in the ratio of allowance to gross loans reported continues to reflect
the changing composition of the portfolio with greater strategic emphasis on
loans with higher risk factors. As noted earlier, nonperforming loans decreased
to 0.14% of total assets at June 30, 2008 compared with 0.22% at June 30, 2007.
The level of the allowance is based on estimates and the ultimate losses may
vary from those estimates.
29
Noninterest Income. Noninterest income increased $263,000 to $1.3 million
for the nine months ended June 30, 2008 from $1.1 million for the nine months
ended June 30, 2007. The growth in noninterest income was partly the result of
comparative increases in deposit service fees and charges of $186,000. Such
increases were attributable, in part, to deposit service fees and charges at the
Bank's de novo branches opened during fiscal 2007. However, the reported
increase was also due to growth in deposit-related fees and charges within the
Bank's other branches. The Company also reported a $68,000 increase in income
from the cash surrender value of life insurance attributable to a combination of
higher average balances and improved yields on those assets. The Company also
reported a $37,000 increase in other noninterest income attributable primarily
to increases in loan fees and charges including, but not limited to, increases
in prepayment penalties and late charges. The increases in noninterest income
were partially offset by a decline of $33,000 in gain on sale of loans resulting
from fewer loans sold during the more recent comparative period
Noninterest Expense. Noninterest expense increased $1.1 million to $10.3
million for the nine months ended June 30, 2008 from $9.1 million for the nine
months ended June 30, 2007. Significant components of this growth in operating
costs include comparative increases in several noninterest expense categories
including salaries and employee benefits expense of $384,000, occupancy and
equipment expense of $670,000, data processing expense of $41,000, legal expense
of $50,000 and other noninterest expense of $64,000. Offsetting these increases
in noninterest expense was a reduction in advertising and marketing expenses of
$73,000.
The net increase in salaries and employee benefits for the comparative
periods was significantly impacted by of the death of a director emeritus of the
Company, during the quarter ended March 31, 2008. Under the terms of the
Company's restricted stock and stock option plans, the vesting of the remaining
unearned benefits accruing to the former director through these plans was
automatically accelerated. As such, the Company incurred an acceleration of the
remaining pre-tax expenses associated with these benefits totaling approximately
$254,000 during the quarter ended March 31, 2008 resulting in an increase in
such expenses of approximately $210,000 between the comparative nine month
periods.
The remaining increase in compensation expense was attributable to several
other offsetting factors. First, a portion of the growth in compensation expense
relates to the increase in staffing costs associated with the two branches
opened in the latter half of fiscal 2007. However, these increases have been
partially offset by the Company's workforce reduction efforts which have reduced
the Company's number of full time equivalent employees by nearly 10% during
fiscal 2008. Increased branch staffing costs have also been partially offset by
accrued compensation expense reductions based on current year bonus projections.
The reported increase in compensation expense also included net increases
to employee healthcare benefit expenses reflecting the growing level of health
care costs per employee. Additionally, expenses associated with the Bank's
supplemental executive retirement program increased due largely to updated
assumptions used in benefit accrual calculations.
Offsetting these increases were net reductions in director compensation
costs due largely to the absence in the current period of the changes in
retirement plan benefit accrual assumptions that had increased the related
expenses during the earlier comparative period. Additionally, ESOP expense
decreased due to the comparatively lower average price of the Company's shares
during the more recent comparative period while personnel procurement expenses
declined due to the absence of such costs during the current period.
The costs of the two additional branches opened in the latter half of
fiscal 2007 was a significant contributor to the reported net increase in
occupancy and equipment expense for the nine months ended June 30, 2008.
However, the reported increase also reflects the ongoing operating costs
associated with the Bank's relocated Bloomfield branch which opened in April
2008. Additionally, the increase includes the costs associated with outsourcing
30
a significant portion of the Company's information technology infrastructure
support services. The reported increase resulted from the Bank's decision to
consolidate the provision of a variety of information technology administration
support services under a single outsourced service provider. Such services had
previously been rendered by a combination of other outsourced and in-house
resources. This decision resulted in the elimination of one managerial position
within the Bank's MIS department during the fourth quarter of fiscal 2007.
The reported increase in data processing charges was also partly
attributable to the associated costs of the two additional branches opened in
the latter half of fiscal 2007 including increases to both core processing and
item processing expenses. However, the increase also included "one time"
expenses associated with converting the Bank's official check processing to an
in-house system during the quarter and implementing additional commercial
deposit services on its core processing system.
The reported increase in legal expense was attributable to several matters
including, but not limited to, services associated with expanded SEC disclosure
requirements regarding the Company's annual meeting proxy material, recently
completed revisions to benefit plan agreements as required by newly-implemented
Internal Revenue Service regulations and various other human resource-related
matters.
The growth in other noninterest expense includes increases in FDIC
insurance expense resulting from both growth in the balance of FDIC-insured
deposits plus the expiration of FDIC insurance credits which had reduced the
Bank's net cost of FDIC deposit insurance premiums over several prior quarters.
Increases in noninterest expense also included increases in corporate insurance
and regulatory assessment expenses as well as increases in general and
administrative expenses attributable to the two additional branches opened in
the latter half of fiscal 2007.
Finally, the comparative decrease in advertising and marketing expenses
primarily reflected the absence of de novo branch grand opening expenses during
the more recent period that were incurred during the earlier comparative period.
Provision for Income Taxes. The provision for income taxes decreased
$263,000 for the nine months ended June 30, 2008 compared with the nine months
ended June 30, 2007. For the more recent period, the Company's effective income
tax rate was 20.1% compared with an effective income tax rate of 30.5% for the
earlier comparative period. The tax expense in the current and prior period,
respectively, reflects the comparative levels of pre-tax income coupled with the
level of "tax favored" income reported by the Company during each period. "Tax
favored" income arises from revenue sources on which the Company pays income
taxes at a comparatively lower effective tax rate than it generally pays on
other sources of income.
Specifically, the Company's effective tax rate is influenced by the level
of interest income on investment securities held by the Bank's investment
subsidiary, American Savings Investment Corporation ("ASIC"). ASIC is a wholly
owned New Jersey investment subsidiary formed in August 2004 by American Bank of
New Jersey. The purpose of this subsidiary is to invest in stocks, bonds, notes
and all types of equity, mortgages, debentures and other investment securities.
Interest income from this subsidiary is taxed by the state of New Jersey at an
effective rate lower than the statutory corporate state income tax rate.
Additionally, the Company also recognizes tax exempt income from the cash
surrender value of bank owned life insurance.
The Company recognized income from these two "tax favored" sources during
both comparative periods. However, the comparatively lower pretax net income
reported for the current nine month period resulted in the items discussed above
having a proportionally greater net beneficial impact on the Company's reported
effective tax rate in the current period.
31
Critical Accounting Policies
Various elements of our accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. The following is a description of our critical
accounting policy and an explanation of the methods and assumptions underlying
its application.
Allowance for Loan Losses. Our policy with respect to the methodologies
used to determine the allowance for loan losses is our most critical accounting
policy. This policy is important to the presentation of our financial condition
and results of operations, and it involves a higher degree of complexity and
requires management to make difficult and subjective judgments, which often
require assumptions or estimates about highly uncertain matters. The use of
different judgments, assumptions, and estimates could result in material
differences in our results of operations or financial condition.
In evaluating the level of the allowance for loan losses, management
considers the Company's historical loss experience as well as various
"environmental factors" including 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, industry condition
information, and prevailing economic conditions. Large groups of smaller balance
homogeneous loans, such as residential real estate and home equity and consumer
loans, are evaluated in the aggregate using historical loss factors adjusted for
current economic conditions. Large balance and/or more complex loans, such as
multi-family, nonresidential real estate and construction loans, are evaluated
individually for impairment. This evaluation is inherently subjective, as it
requires estimates that are susceptible to significant revision, as more
information becomes available or as projected events change.
Management assesses the allowance for loan losses quarterly. 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, regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require the Bank to
recognize additional provisions based on their judgment of information available
to them at the time of their examination. The allowance for loan losses in the
periods presented was maintained at a level that represented management's best
estimate of losses in the loan portfolio to the extent they were both probable
and reasonable to estimate.
Application of the Bank's loan loss methodology outlined above results, in
part, in historical and environmental loss factors being applied to the
outstanding balance of homogeneous groups of loans to estimate probable credit
losses. Both historical and environmental loss factors are reviewed and updated
quarterly, where appropriate, as part of management's assessment of the
allowance for loan losses. A limited number of loss factors used in the Bank's
loss provision calculations were updated during the nine months ended June 30,
2008 to reflect changes general market and economic conditions, their effect on
the value of real estate collateralizing the Bank's loans and the resulting
tightening of the Bank's loan underwriting standards.
Management generally expects provisions for loan losses to continue to
increase as a result of the net growth in loans called for in the Company's
business plan. Specifically, our business strategy calls for increased strategic
emphasis in commercial lending. The loss factors used in the Bank's allowance
for loan loss calculations are generally higher for such loans compared with
those applied to one- to four family mortgage loans. Consequently, management
expects the net growth in commercial loans called for in the Company's strategic
business plan to result in required loss provisions that exceed those recorded
in prior years when comparatively greater strategic emphasis had been placed on
growth in one- to four family mortgage loans.
32
Liquidity and Commitments
We are required to have enough investments that qualify as liquid assets in
order to maintain sufficient liquidity to ensure a safe and sound operation.
Liquidity may increase or decrease depending upon the availability of funds and
comparative yields on investments in relation to the return on loans.
Historically, we have maintained liquid assets above levels believed to be
adequate to meet the requirements of normal operations, including potential
deposit outflows. Cash flow projections are regularly reviewed and updated to
assure that adequate liquidity is maintained.
The Bank's short term liquidity, represented by cash and cash equivalents,
is a product of its operating, investing and financing activities. The Bank's
primary sources of funds are deposits, amortization, prepayments and maturities
of outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds provided from operations.
While scheduled payments from the amortization of loans and mortgage-backed
securities and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by the level of market interest rates, economic conditions,
and competition. In addition, the Bank invests excess funds in short-term
interest-earning assets, which provide liquidity to meet lending requirements.
The Bank also generates cash through borrowings. The Bank utilizes Federal Home
Loan Bank advances and reverse repurchase agreements to leverage its capital
base by providing funds for its lending and investing activities, to enhance its
earnings and to assist in the management of interest rate risk.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits or U.S. Agency securities. On a longer-term basis,
the Bank maintains a strategy of investing in various loan products and in
securities collateralized by loans. The Bank uses its sources of funds primarily
to meet its ongoing commitments, to pay maturing certificates of deposit and
savings withdrawals, to fund loan commitments and to maintain its portfolio of
mortgage-backed securities and investment securities. At June 30, 2008, the
total approved loan origination commitments outstanding amounted to $25.0
million. At the same date, unused lines of credit were $29.8 million and
undisbursed loans in process were $23.0 million.
Certificates of deposit scheduled to mature in one year or less at June 30,
2008, totaled $204.0 million. Notwithstanding promotional deposit pricing
strategies relating to the Bank's de novo branches, management's general policy
is to maintain deposit rates at levels that are competitive with other local
financial institutions. Based on the competitive rates and on historical
experience, management believes that a significant portion of maturing
certificates of deposit will remain with the Bank. Additionally, at June 30,
2008 the Bank had $16.6 million of borrowings maturing in less than one year,
all of which were advances from the FHLB. Repayment of FHLB advances increases
the Bank's unused borrowing capacity from that source which totaled $111.0
million at June 30, 2008. In calculating our borrowing capacity, the Bank
utilizes the FHLB's guideline, which generally limits advances secured by
residential mortgage collateral to 25% of the Bank's total assets.
33
The following tables disclose our contractual obligations and commercial
commitments as of June 30, 2008. Scheduled principal payments on amortizing
borrowings are reported as maturities.
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
----- ------ --------- --------- -------
(In thousands)
Time Deposits $ 230,115 $ 203,980 $ 12,643 $ 3,852 $ 9,640
Borrowings(1) 81,564 16,564 22,000 8,000 35,000
----------- -------- ----------- ----------- -----------
Total $ 311,679 $ 220,544 $ 34,643 $ 11,852 $ 44,640
=========== ========== =========== =========== ===========
(1) At June 30, 2008, borrowings include FHLB advances of $46.6 million and
reverse repurchase agreements of $35.0 million. The total collateralized
borrowing limit at the FHLB was $157.6 million at June 30, 2008 of which
the $46.6 million of advances were outstanding.
Total
Amounts Less Than Over
Committed 1 Year 1-3 Years 4-5 Years 5 Years
--------- ------ --------- --------- -------
(In thousands)
Lines of credit(1) $ 29,821 $ 1,848 $ 1,908 $ 783 $ 25,282
Land lease - Bloomfield 2,307 120 277 290 1,620
Building lease - Nutley 1,431 84 184 188 975
Loans in process(1) 23,003 16,394 6,609 - -
Other commitments to
extend credit(1) 25,033 25,033 - - -
----------- ----------- --------- --------- ----------
Total $ 81,595 $ 43,479 $ 8,978 $ 1,261 $ 27,977
=========== =========== ========= ========= ==========
(1) Represents amounts committed to customers.
In addition to the commitment included in the table above, the Bank has one
outstanding standby letter of credit totaling $247,320. The standby letter of
credit, which represents a contingent liability to the Bank, expires in June
2009.
Regulatory Capital
Consistent with its goals to operate a sound and profitable financial
organization, American Bank of New Jersey actively seeks to maintain its
classification as a "well capitalized" institution in accordance with regulatory
standards. The Bank's total equity was $78.9 million at June 30, 2008, or 12.51%
of total assets on that date. As of June 30, 2008, the Bank exceeded all capital
requirements of the Office of Thrift Supervision. The Bank's regulatory capital
ratios at June 30, 2008 were as follows: Core capital, 12.60%; Tier I risk-based
capital, 19.97%; and total risk-based capital, 20.72%. The regulatory capital
requirements to be considered well capitalized are 5.0%, 6.0% and 10.0%,
respectively.
34
Impact of Inflation
The consolidated financial statements presented herein have been prepared
in accordance with accounting principles generally accepted in the United States
of America. These principles require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturity structure of our
assets and liabilities are critical to the maintenance of acceptable performance
levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
Recent Accounting Pronouncements
See Note 4 - Recent Accounting Pronouncements within the Notes to Unaudited
Financial Statements included in this report.
35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Qualitative Analysis. Because the income on the majority of our assets and
the cost of the majority of our liabilities are sensitive to changes in interest
rates, a significant form of market risk for us is interest rate risk. Changes
in interest rates may have a significant, adverse impact on our net interest
income.
Our ability to make a profit largely depends on our net interest income,
which could be negatively affected by changes in interest rates. Net interest
income is the difference between:
o The interest income we earn on our interest-earning assets such as
loans and securities; and
o The interest expense we pay on our interest-bearing liabilities such
as deposits and amounts we borrow.
The rates we earn on our assets and the rates we pay on our liabilities are
generally fixed for a contractual period of time. We, like many savings
institutions, have liabilities that generally have shorter contractual
maturities than our assets. This imbalance can create significant earnings
volatility, because market interest rates change over time. In a period of
rising interest rates, the interest income earned on our assets may not increase
as rapidly as the interest paid on our liabilities. In a period of declining
interest rates the interest income earned on our assets may decrease more
rapidly, due to accelerated prepayments, than the interest paid on our
liabilities.
The prepayment characteristics of our loans and mortgage-backed and related
securities are greatly influenced by movements in market interest rates. For
example, a reduction in interest rates results in increased prepayments of loans
and mortgage-backed and related securities, as borrowers refinance their debt in
order to reduce their borrowing cost. This causes reinvestment risk, because we
are generally not able to reinvest prepayment proceeds at rates that are
comparable to the rates we previously earned on the prepaid loans or securities.
By contrast, increases in interest rates reduce the incentive for borrowers to
refinance their debt. In such cases, prepayments on loans and mortgage-backed
and related securities may decrease thereby extending the average lives of such
assets and reducing the cash flows that are available to be reinvested by the
Company at higher interest rates.
Tables presenting the composition and allocation of the Company's
interest-earning assets and interest-bearing liabilities from an interest rate
risk perspective are set forth in the preceding section of this report titled
"Comparison of Financial Condition at June 30, 2008 and September 30, 2007."
These tables present the Company's investment securities, loans, deposits, and
borrowings by categories that reflect certain characteristics of the underlying
assets or liabilities that impact the Company's interest rate risk. Shown as a
percentage of total assets, the comparative data presents changes in the
composition and allocation of those interest-earning assets and interest-bearing
liabilities that have influenced the level of interest rate risk embedded within
the Company's balance sheet.
Our net interest margin may be adversely affected throughout several
possible interest rate environments. For example, during fiscal 2007, the
continued inversion of the yield curve, by which shorter term market interest
rates exceed those of longer term rates, triggered further increases in the
Bank's cost of interest-bearing liabilities that outpaced our increase in yield
on earning assets causing further net interest rate spread compression. Such
compression resulted in a 0.36% reduction in our net interest rate spread to
1.44% for fiscal 2007 from 1.80% for the fiscal year ended September 30, 2006.
As noted in the Executive Summary discussion earlier, that trend was
reversed during fiscal 2008 when the Company's net interest rate spread
increased 30 basis points to 1.74% in comparison to 1.44% for fiscal 2007 as the
Company substantially maintained its yield on earning assets while decreasing
its cost of interest-bearing liabilities. In large part, the improvements in net
36
interest rate spread for the nine months ended June 30, 2008 resulted from the
Company's ability to support its yield on loans through its commercial lending
strategies while it decreased its cost of retail deposits. The reduction in
retail deposit interest costs reflects the overall reduction in market interest
rates coupled with the downward adjustment of interest rates paid on deposits
acquired through the de novo branches opened during fiscal 2007 on which the
Company originally paid higher, promotional interest rates.
Notwithstanding the reported improvement in the net interest rate spread
reported for the first nine months of fiscal 2008, our earnings may be impacted
by an "earnings squeeze" in the future resulting from further movements in
market interest rates. For example, we are vulnerable to an increase in interest
rates because the majority of our loan portfolio consists of longer-term, fixed
rate loans and adjustable rate mortgages, most of which are fixed rate for an
initial period of time. At June 30, 2008, excluding allowance for loan losses
and net deferred origination costs and including loans held for sale, loans
totaled $473.2 million comprising 75.02% of total assets. As presented in the
loan-related tables in the preceding section of this report titled "Comparison
of Financial Condition at June 30, 2008 and September 30, 2007", loans reported
as fixed rate mortgages totaled $207.8 million or 32.9% of total assets while
adjustable rate mortgages ("ARMs") totaled $190.1 million or 30.1% of total
assets. In a rising rate environment, our cost of funds may increase more
rapidly than the interest earned on our loan portfolio and investment securities
portfolio because our primary source of funds is deposits with substantially
greater repricing sensitivity than that of our loans and investment securities.
Having interest-bearing liabilities that reprice more frequently than
interest-earning assets is detrimental during periods of rising interest rates
and could cause our net interest rate spread to shrink because the increase in
the rates we would earn on our securities and loan portfolios would be less than
the increase in the rates we would pay on deposits and borrowings.
Notwithstanding the risks presented by the flat to inverted yield curve
that was prevalent during fiscal 2007, or those resulting from increases to
short term interest rates, a significant decrease in market interest rates
could, by contrast, trigger a new wave of loan refinancing that could result in
the margin compression experienced in prior years when rates fell to their
historical lows.
The Bank also faces the risk of continued disintermediation of our deposits
into higher cost accounts as well as the risk of some amount of additional
deposit outflows. Specifically, we were successful in growing non-maturity
deposits during fiscal 2007 due, in part, to higher promotional interest rates
paid at the Bank's three newest branches. Our ability to retain these deposits
as rates on such accounts were incrementally adjusted to "non-promotional"
levels was rigorously tested during the current year. As evidenced through the
first nine months of fiscal 2008, a portion of recently acquired deposits may be
subject to further disintermediation into higher yielding deposit accounts, such
as certificates of deposit, while the most "price sensitive" of those deposits
may be withdrawn. Moreover, recent volatility in the financial institutions
marketplace may result in upward pressure on retail deposit pricing and/or
additional deposit outflows as certain institutions seek to attract liquidity at
comparatively higher interest rates. A portion of the Bank's balance of short
term liquid assets is attributable to managing the contingency of that latter
risk.
37
Quantitative Aspects of Market Risk. The following table presents American
Bank of New Jersey's net portfolio value as of March 31, 2007 - the latest date
for which information is available. The net portfolio value was calculated by
the Office of Thrift Supervision, based on information provided by the Bank.
Net Portfolio
Value as % of Board
Net Portfolio Value Present Value of Assets Established Limits
------------------- ----------------------- ------------------
Net Net
Portfolio Basis Portfolio Basis
Changes in Value Point Value Point
Rates $ Amount $ Change % Change Ratio Change Ratio Change
----- -------- -------- -------- ----- ------ ----- ------
(Dollars in thousands)
+300 bp 70,325 -21,251 -23% 11.45% -272bp 5.00% -450bp
+200 bp 79,039 -12,537 -14% 12.63% -155bp 6.00% -300bp
+100 bp 86,690 -4,886 -5% 13.61% -57bp 7.00% -150bp
0 bp 91,576 14.17% 8.00%
-100 bp 92,994 1,418 +2% 14.25% +8bp 7.00% -150bp
Future interest rates or their effect on net portfolio value or net
interest income are not predictable. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit run-offs, and
should not be relied upon as indicative of actual results. Certain shortcomings
are inherent in this type of computation. Although certain assets and
liabilities may have similar maturity or periods of repricing, they may react at
different times and in different degrees to changes in the market interest
rates. The interest rate on certain types of assets and liabilities such as
demand deposits and savings accounts, may fluctuate in advance of changes in
market interest rates, while rates on other types of assets and liabilities may
lag behind changes in market interest rates. Certain assets such as adjustable
rate mortgages generally have features, which restrict changes in interest rates
on a short-term basis and over the life of the asset. In the event of a change
in interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Strategies for the Management of Interest Rate Risk and Market Risk. The
Board of Directors has established an Asset/Liability Management Committee which
is responsible for monitoring interest rate risk. The committee comprises the
Bank's Chief Executive Officer, the Bank's President and Chief Operating
Officer, the Bank's Senior Vice President and Chief Financial Officer, the
Bank's Senior Vice President and Chief Lending Officer, the Bank's Senior Vice
President Commercial Real Estate, the Bank's VP Branch Administration and the
Bank's Vice President and Controller. Management conducts regular, informal
meetings, generally on a weekly basis, to address the day-to-day management of
the assets and liabilities of the Bank, including review of the Bank's short
term liquidity position; loan and deposit pricing and production volumes and
alternative funding sources; current investments; average lives, durations and
repricing frequencies of loans and securities; and a variety of other asset and
liability management topics. The committee generally meets quarterly to formally
review such matters. The results of the committee's quarterly review are
reported to the full Board, which makes adjustments to the Bank's interest rate
risk policy and strategies, as it considers necessary and appropriate.
The qualitative and quantitative interest rate analysis presented above
indicate that various foreseeable movements in market interest rates may have an
adverse effect on our net interest margin and earnings. The growth and
diversification strategies outlined in the Company's current business plan are
38
designed not only to enhance earnings, but also to better support the resiliency
of those earnings throughout various movements in interest rates. Toward that
end, implementation of the Company's business plan over time is expected to
result in a better matching of the repricing characteristics of its
interest-earning assets and interest-bearing liabilities. Specific business plan
strategies to achieve this objective include:
(1) Open up to three de novo branches over the next five years with an
emphasis on growth in non-maturity deposits;
(2) Attract and retain lower cost business transaction accounts by
expanding and enhancing business deposit services including online cash
management and remote deposit capture services;
(3) Attract and retain lower cost personal checking and savings accounts
through expanded and enhanced cross selling efforts;
(4) Originate and retain commercial loans with terms that increase overall
loan portfolio repricing frequency and cash flows while reducing call risk
through prepayment compensation provisions;
(5) Originate and retain one- to four family home equity loans and variable
rate lines of credit to increase loan portfolio repricing frequency and cash
flows;
(6) Originate both fixed and adjustable rate one- to four family first
mortgage loans eligible for sale in the secondary market and, if warranted, sell
such loans on either a servicing retained or servicing released basis. The
strategy reduces the balance of longer duration and/or non-prepayment protected
loans while enhancing non interest income.
At June 30, 2008, the Bank did not have any outstanding contracts to sell
mortgage loans into the secondary market. In general, the Bank intends to
continue retaining most one- to four family mortgage loan originations for a
period of time to augment the growth in commercial loans through which the Bank
will reinvest a portion of the balances of cash and cash equivalents accumulated
during fiscal 2007. As discussed in the preceding section titled "Comparison of
Financial Condition at June 30, 2008 and September 30, 2007", such balances
resulted from significant growth in deposits acquired through the Bank's de novo
branches opened during the prior fiscal year. The Bank continues to offer a
limited Alt-A program through which it originates and sells all such loans to
Fannie Mae under its Expanded Approval program on a non-recourse, servicing
retained basis. The Bank will carefully monitor the earnings, liquidity, and
balance sheet allocation impact of these strategies and make interim
adjustments, as necessary, to support achievement of the Company's business plan
goals and objectives.
In addition to the strategies noted above, we may utilize other strategies
aimed at improving the matching of interest-earning asset maturities to
interest-bearing liability maturities. Such strategies may include:
(1) Purchase short to intermediate term securities and maintain a
securities portfolio that provides a stable cash flow, thereby providing
investable funds in varying interest rate cycles;
(2) Lengthen the maturities of our liabilities through utilization of FHLB
advances and other wholesale funding alternatives.
The Bank will also selectively consider certain strategies to enhance net
interest income as opportunities arise to do so in a manner that supports the
goals and objectives of the Company's business plan. Notwithstanding the
discussion above, the implementation of these strategies may result in an
acceptable and manageable increase to the level of interest rate risk within the
balance sheet. Such an opportunity arose during the second quarter of fiscal
39
2008 when the Company completed a wholesale growth transaction through which the
Company purchased approximately $50.0 million of mortgage-related investment
securities funded by an equivalent amount of borrowings. Through this
transaction, the Company took advantage of the opportunity presented by recent
turmoil in the mortgage securities markets to acquire agency, AAA-rated
mortgage-related securities at historically wide interest rate spreads in
relation to the cost of wholesale funding sources.
The ongoing net interest income resulting from this transaction is intended
to augment the Company's earnings as it continues to incur the near term costs
associated with executing its business plan. However, the characteristics of the
specific investment securities and borrowings underlying the transaction have
added a measurable and manageable degree of interest rate risk to the Company's
balance sheet. This additional risk primarily arises from the potential
"mismatch" between the repricing of investment security cash flows and that of
the related borrowings. For example, mortgage-related security cash flows are
largely determined by market interest rates and their effect on loan
prepayments. Similarly, market interest rates will largely determine the
likelihood that certain borrowings underlying the transaction may require full
repayment at par prior to maturity - an option granted to the reverse repurchase
agreement counterparty in a portion of the borrowings utilized in the
transaction.
The Company carefully evaluated the impact of the transaction on the
Company's overall interest rate risk profile from both an earnings and net
portfolio value perspective. Through this evaluation, the Company confirmed that
movements in market interest rates may significantly impact the relative market
value of the financial instruments underlying this transaction and the amount of
additional net interest income earned by the Company resulting from it. However,
the Company concluded that the additional interest rate risk, as measured and
evaluated, was both manageable and appropriate given the additional net interest
income that is expected to be earned by the Company throughout the various
market interest rate scenarios modeled.
40
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Section
13(a)-15(e) of the Securities Exchange Act of 1934 ("the Act") was
carried out under the supervision and with the participation of the
Company's Chief Executive Officer, Chief Financial Officer and several
other members of the Company's senior management. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and
procedures in effect as of the end of the period covered by this
quarterly report are effective in ensuring that the information
required to be disclosed by the Company in the reports it files or
submits under the Act is (i) accumulated and communicated to the
Company's management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms.
(b) Changes in internal controls: In the last fiscal quarter, there was no
change in the Company's internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
41
PART II - - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
At June 30, 2008, the Company and its subsidiaries were not involved in any
pending proceedings other than the legal proceedings occurring in the ordinary
course of business. Such legal proceedings in the aggregate are believed by
management to be immaterial to the Company's financial condition and results of
operations.
ITEM 1A. RISK FACTORS
There have been no material changes to the factors disclosed in Item 1A.,
Risk Factors, in our Annual Report on Form 10-K for the year ended September 30,
2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes our share repurchase activity during the
three months ended June 30, 2008 and additional information regarding our share
repurchase program.
(c) Total Number
of Shares (or (d) Maximum Number
(a) Total Units) Purchased (or Approximate Dollar
Number (b) as Part Of Value) of Shares (or
Of Shares Average Price Publicly Units) that May Yet Be
Period Units) Paid per Share Announced Plans Purchased Under
Purchased (or Unit) or Programs Plans or Programs (1)
--------- --------- ----------- ---------------------
Repurchases for the Month
April 1 - April 30, 2008 - - - 204,104
May 1 - May 31, 2008 134,971 $10.51 134,971 69,133
June 1 - June 30, 2008 59,244 $10.92 59,244 9,889
Total repurchases 194,215 $10.63 194,215
(1) The shares reported were repurchased under a share repurchase plan
announced by the Company on January 2, 2008 through which five percent, or
approximately 575,000, of the Company's outstanding shares would be
repurchased through open market or privately negotiated transactions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
42
ITEM 6. EXHIBITS
(a) Exhibits
10.1 Executive Salary Contination Agreement by and between American
Bank of New Jersey and Fred G. Kowal, dated June 17, 2008.
10.2 Employment Agreement by and between American Bank of New Jersey
and Catherine Bringuier, dated June 17, 2008.
10.3 Employment Agreement by and between American Bank of New Jersey
and Eric B. Heyer, dated June 17, 2008.
10.4 Employment Agreement by and between American Bank of New Jersey
and Joseph Kliminski, dated June 17, 2008.
10.5 Employment Agreement by and between American Bank of New Jersey
and Fred G. Kowal, dated June 17, 2008.
10.6 Amended and Restated Executive Salary Continuation Agreement by
and between American Bank of New Jersey and Catherine Bringuier,
dated June 17, 2008.
10.7 Amended and Restated Executive Salary Continuation Agreement by
and between American Bank of New Jersey and Eric B. Heyer,
dated June 17, 2008.
10.8 Amended and Restated Executive Salary Continuation Agreement by
and between American Bank of New Jersey and Joseph Kliminiski,
dated June 17, 2008.
10.9 American Bank of New Jersey Director Consultation and Retirement
Plan as Amended and Restated, Amended as of June 28, 2005,
Further Amended June 17, 2008.
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14a
and 15d-14a.
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14a
and 15d-14a.
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
43
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Bancorp of New Jersey, Inc.
(Registrant)
Date: August 11, 2008 /s/ Joseph Kliminiski
--------------------------------------
Joseph Kliminski
Chief Executive Officer
Date: August 11, 2008 /s/ Eric B. Heyer
--------------------------------------
Eric B. Heyer
Senior Vice President and
Chief Financial Officer
44