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, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-31789
ASB HOLDING COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
United States 56-2317250
------------- ----------
(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 an accelerated filer (as
defined in Rule 126-2 of the Exchange Act).
Yes [ ] No [ X ]
As of August 12, 2005, there were 5,554,500 outstanding shares of the
Registrant's Common Stock.
ASB HOLDING COMPANY
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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Securities Holders 31
Item 5. Other Information 31
Item 6. Exhibits 31
FORM 10-Q SIGNATURE PAGE 32
CERTIFICATIONS
2
ITEM 1. FINANCIAL STATEMENTS
ASB Holding Company
Statements of Financial Condition
(in thousands, except share data)
(unaudited)
June 30, September 30,
2005 2004
---- ----
ASSETS
Cash and cash equivalents
Cash and due from banks $ 2,352 $ 2,256
Interest-bearing deposits 6,335 5,778
------------ ------------
Total cash and cash equivalents 8,687 8,034
Securities available-for-sale 68,682 89,495
Securities held-to-maturity (fair value: June 30, 2005 -
$8,162; September 30, 2004 - $2,806) 8,251 2,794
Loans, net 338,856 308,970
Loans held for sale 675 -
Premises and equipment 4,133 3,910
Federal Home Loan Bank stock, at cost 3,303 2,890
Cash surrender value of life insurance 7,442 6,242
Accrued interest receivable 1,494 1,359
Other assets 1,725 1,250
------------ ------------
Total assets $ 443,248 $ 424,944
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 26,259 $ 22,599
Interest-bearing 305,132 300,117
------------ ------------
Total deposits 331,391 322,716
Advance payments by borrowers for taxes and insurance 2,610 2,322
Federal Home Loan Bank borrowings 66,049 57,491
Accrued interest payable and other liabilities 3,486 3,049
Common stock in ESOP subject to contingent repurchase obligation 427 52
Stockholders' Equity
Preferred stock, $.10 par value, 5,000,000 shares authorized - -
Common stock, $.10 par value; 20,000,000 shares
authorized; 5,554,500 shares issued and outstanding 555 555
Additional paid-in capital 17,187 15,687
Unearned ESOP shares (1,097) (1,200)
Unearned RSP shares (1,283) -
Retained earnings 25,023 24,806
Accumulated other comprehensive loss (673) (482)
Amount reclassified on ESOP shares (427) (52)
------------- -------------
Total stockholders' equity 39,285 39,314
------------ ------------
Total liabilities and stockholders' equity $ 443,248 $ 424,944
============ ============
See accompanying notes to unaudited consolidated financial statements.
3
ASB Holding Company
Statements of Income
(in thousands, except share data)
(unaudited)
Nine Months Three Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2005 2004 2005 2004
------------------------ ------------------------
Interest and dividend income
Loan, including fees $ 12,985 $ 11,098 $ 4,502 $ 3,693
Securities 2,121 2,350 671 762
Federal funds sold and other 111 41 50 16
---------- ---------- ---------- ----------
Total interest income 15,217 13,489 5,223 4,471
Interest expense
NOW and money market 312 158 106 50
Savings 1,599 1,557 490 523
Certificates of deposit 2,811 2,158 1,106 699
Federal Home Loan Bank advances 2,181 2,117 777 689
---------- ---------- ---------- ----------
Total interest expense 6,903 5,990 2,479 1,961
---------- ---------- ---------- ----------
Net interest income 8,314 7,499 2,744 2,510
Provision for loan losses 105 96 (6) 42
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 8,209 7,403 2,750 2,468
Noninterest income
Deposit service fees and charges 502 519 182 170
Income from cash surrender value of
life insurance 200 156 67 41
Gain on sale of loans 5 22 3 1
Loss on sales of securities available-for-sale (16) - (16) -
Other 111 111 29 34
---------- ---------- ---------- ----------
Total noninterest income 802 808 265 246
Noninterest expense
Salaries and employee benefits 4,368 3,542 1,823 1,199
Occupancy and equipment 606 648 197 207
Data processing 471 500 177 165
Advertising 198 174 58 45
Federal deposit insurance 34 35 12 11
Other 950 700 249 203
---------- ---------- ---------- ----------
Total noninterest expense 6,627 5,599 2,516 1,830
---------- ---------- ---------- ----------
Income before provision for income taxes 2,384 2,612 499 884
Provision for income taxes 864 1,015 174 347
---------- ---------- ---------- ----------
Net income $ 1,520 $ 1,597 $ 325 $ 537
========== ========== ========== ==========
Comprehensive income (loss) $ 1,329 $ 675 $ 602 $ (896)
========== ========== ========== ==========
Dividends per share: $ 0.84 $ - $ 0.09 $ -
========== ========== ========== ==========
Earnings per share:
Basic and diluted $ 0.28 $ 0.29 $ 0.06 $ 0.10
========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
4
ASB Holding Company
Statements of Stockholders' Equity
Nine months ended June 30, 2004
(in thousands)
(unaudited)
Accumulated Amount Compre-
Additional Unearned Unearned Other Reclassified hensive
Common Paid-in ESOP RSP Retained comprehensive On ESOP Total Income
Stock Capital Shares Shares Earnings Income Shares Equity (Loss)
----- ------- ------ ------ -------- ------ ------ ------ ------
Balance at
September 30, 2003 $ - $ 100 $ - $ - $ 22,644 $ (405) $ - $ 22,339
Issuance of common stock, net
of issuance costs 555 15,506 (1,333) - - - - 14,728
ESOP shares earned - 81 133 - - - - 214
Reclassification due to change
in fair value of common stock
in ESOP subject to contingent
repurchase obligation - - - - - - (52) (52)
Comprehensive income
Net income - - - - 2,162 - - 2,162
Change in unrealized gain on
securities available-for-
sale, net of taxes - - - - - (77) - (77)
Total comprehensive income $2,085
------ -------- -------- ------- -------- --------- -------- -------- ======
Balance at
June 30, 2004 $ 555 $ 15,687 $ (1,200) $ - $ 24,806 $ (482) $ (52) $ 39,314
====== ======== ======== ======= ======== ========= ======== ========
See accompanying notes to unaudited consolidated financial statements.
5
ASB Holding Company
Statements of Stockholders' Equity
Nine months ended June 30, 2005
(in thousands)
(unaudited)
Accumulated Amount Compre-
Additional Unearned Unearned Other Reclassified hensive
Common Paid-in ESOP RSP Retained Comprehensive On ESOP Total Income
Stock Capital Shares Shares Earnings Income Shares Equity (Loss)
----- ------- ------ ------ -------- ------ ------ ------ ------
Balance at
September 30, 2004 $ 555 $ 15,687 $ (1,200) $ - $ 24,806 $ (482) $ (52) $ 39,314
RSP stock grants - 1,419 - (1,419) - - - -
RSP shares earned - - 136 - - - 136
ESOP shares earned - 81 103 - - - - 184
Cash dividends paid -
$0.84 per share - - - - (1,303) - - (1,303)
Reclassification due to change
in fair value of common stock
in ESOP subject to contingent
repurchase obligation - - - - - - (375) (375)
Comprehensive income
Net income - - - - 1,520 - - 1,520
Change in unrealized gain on
securities available-for-
sale, net of taxes - - - - - (191) - (191)
Total comprehensive income $1,329
------- -------- -------- ------- -------- ---------- -------- -------- ======
Balance at
June 30, 2005 $ 555 $ 17,187 $ (1,097) $(1,283) $ 25,023 $ (673) $ (427) $ 39,285
======= ======== ======== ======= ======== ========== ======== ========
See accompanying notes to unaudited consolidated financial statements.
6
ASB Holding Company
Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
June 30,
-----------------
2005 2004
-------- --------
Cash flows from operating activities
Net income $ 1,520 $ 1,597
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 267 319
Net amortization of premiums and discounts 93 253
Losses on sales of securities available-for-sale 16 -
ESOP compensation expense 184 164
RSP compensation expense 136 -
Provision for loan losses 105 96
Increase in cash surrender value of life insurance (200) (156)
Gain on sale of loans 5 (22)
Proceeds from sales of loans 1,007 3,809
Net change in loans held for sale (675) 500
Change in accrued interest receivable (135) (80)
Change in other assets (147) 194
Change in deferred income taxes (240) (37)
Increase in other liabilities 437 966
-------- --------
Net cash from operating activities 2,373 7,603
Cash flows from investing activities
Net increase in loans receivable (31,003) (26,028)
Purchases of securities held-to-maturity (6,227) (922)
Principal paydowns on securities held-to-maturity 762 752
Purchases of securities available-for-sale - (21,459)
Sales of securities available-for-sale 1,984 -
Calls of securities available-for-sale 2,000 8,560
Principal paydowns on securities available-for-sale 16,449 19,745
Purchase of Federal Home Loan Bank stock (2,524) (1,513)
Redemption of Federal Home Loan Bank stock 2,111 1,448
Purchase of bank-owned life insurance (1,000) -
Purchase of premises and equipment (490) (330)
-------- --------
Net cash from investing activities (17,938) (19,747)
Cash from financing activities
Net increase in deposits 8,675 8,169
Net change in advance payments by borrowers for taxes and insurance 288 213
Repayment of Federal Home Loan Bank of New York advances (16,042) (3,000)
Federal Home Loan Bank of New York advances 15,000 1,800
Net change in Federal Home Loan Bank of New York OLOC 9,600 10,100
Net proceeds from stock issuance - 14,728
Cash dividends paid (1,303) -
Stock subscriptions refunded or applied - (52,137)
-------- --------
Net cash from financing activities 16,218 (20,127)
-------- --------
Net change in cash and cash equivalents 653 (32,271)
Cash and cash equivalents at beginning of period 8,034 38,365
-------- --------
Cash and cash equivalents at end of period $ 8,687 $ 6,094
======== ========
See accompanying notes to unaudited consolidated financial statements.
7
ASB Holding Company
Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
June 30,
-----------------
2005 2004
------ ------
Supplemental cash flow information:
Cash paid during the period for
Interest $6,908 $6,009
Income taxes, net of refunds 1,277 991
Supplemental disclosures of non-cash investing transactions:
Transfer of loans to other real estate owned - 209
See accompanying notes to unaudited consolidated financial statements.
8
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
ASB Holding Company is a federally chartered corporation organized in
June 2003 that was formed for the purpose of acquiring all of the capital stock
of American Bank of New Jersey, which was previously owned by American Savings,
MHC, a federally chartered mutual holding company. American Bank of New Jersey
converted from a mutual to a stock savings bank in a mutual holding company
reorganization in 1999 in which no stock was sold to any person other than
American Savings, MHC. Currently, all of the outstanding stock of American Bank
of New Jersey is held by ASB Holding Company. The MHC holds 70% of the
outstanding stock of ASB Holding Company with the remaining 30% held by the
public.
The accompanying unaudited consolidated financial statements include
the accounts of ASB Holding Company ("the Company") and its wholly owned
subsidiaries, American Bank of New Jersey ("the Bank") and ASB Investment Corp.
("the Investment Corp.") as of June 30, 2005 and September 30, 2004 and for the
three- and nine-months ended June 30, 2005 and 2004. 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 in New Jersey. 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 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 Annual Report on
Form 10-KSB. The September 30, 2004 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-KSB
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 ended September 30, 2005. 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 three- and nine-months ended June 30,
2005 are not necessarily indicative of the results to be expected for the full
year or any other period.
9
Note 2 - Minority Offering
On October 3, 2003, the Company 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.
The Company contributed $9,616,000 or approximately 60% of the net proceeds to
the Bank in the form of a capital contribution. The Company loaned $1,333,000 to
the Bank's employee stock ownership plan and the ESOP used those funds to
acquire 133,000 shares of common stock at $10 per share.
After the sale of the stock, the MHC holds 70%, or 3,888,150 shares, of
the outstanding stock of the Company, with the remaining 30% or, 1,666,350
shares, held by persons other than the MHC. The Company holds 100% of the Bank's
outstanding common stock. The Bank may not pay dividends to the Company if the
dividends would cause the Bank to fall below the "adequately capitalized"
capital threshold.
The Company had stock subscriptions received totaling $52,137,000 at
September 30, 2003 pending completion of the Company's initial public offering.
At the time of closing on October 3, 2003, gross proceeds of $15,330,000 became
capital of the Company with the remainder returned on oversubscriptions.
Note 3 - Earnings Per Share (EPS)
Amounts reported as basic earnings per share of common stock reflect
earnings available to common stockholders for the period divided by the weighted
average number of commons shares outstanding during the period less unearned
ESOP 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.
The factors used in the earnings per share computation follow.
Nine Months Ended Three Months Ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
(Dollars in thousands
except share data)
Basic
Net income $ 1,520 $ 1,597 $ 325 $ 537
Weighted average common shares outstanding 5,442,278 5,426,230 5,448,955 5,429,542
Basic earnings per common share $ 0.28 $ 0.29 $ 0.06 $ 0.10
========== ========== ========== ==========
Diluted
Net income $ 1,520 $ 1,597 $ 325 $ 537
Weighted average common shares outstanding
for basic earnings per common share 5,442,278 5,426,230 5,448,955 5,429,542
Add: Dilutive effects of assumed exercises of stock options 5,131 - 32,847 -
Add: Dilutive effects of full vesting of stock awards
1,000 - 6,394 -
---------- ---------- ---------- ----------
Average shares and dilutive potential
common shares 5,448,409 5,426,230 5,488,197 5,429,542
========== ========== ========== ==========
Diluted earnings per common share $ 0.28 $ 0.29 $ 0.06 $ 0.10
========== ========== ========== ==========
10
Note 4 - Employee Stock Ownership Plan
As part of the minority stock offering, the Bank established an
employee stock ownership plan (ESOP) for the benefit of substantially all
employees. The ESOP borrowed $1,333,080 from the Company and used those funds to
acquire 133,308 shares of the Company's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants based on
principal repayments made by the ESOP on the loan from the Company. The loan is
secured by shares purchased with the loan proceeds and will be repaid by the
ESOP with funds from the Company's discretionary contributions to the ESOP and
earnings on the ESOP's assets. Principal payments are scheduled to occur over a
ten-year period.
At June 30, 2005, the ESOP held 133,308 shares of the Company's common
stock and 16,913 shares held by the ESOP were allocated to the accounts
maintained for participants. Participants become eligible to receive payment of
the vested benefits under the plan upon retirement, disability or termination of
employment. Participants who elect to receive their benefit payments in the form
of ASB Holding Company common stock may require the Company to purchase the
common stock distributed at fair value during two 60-day periods. The first
purchase period begins on the date the benefit is paid and the second purchase
period begins on the first anniversary of the payment date. This contingent
repurchase obligation is reflected in the Company's financial statements as
"Common stock in ESOP subject to contingent repurchase obligation" and reduces
stockholder's equity by an amount that represents the fair value of all the
shares of Company common stock held by the ESOP, without regard to whether it is
likely that the shares would be distributed or that the recipients of the shares
would be likely to exercise their right to require the Company to purchase the
shares. At June 30, 2005, this contingent repurchase obligation reduced
stockholders' equity by $427,000.
Note 5 - Other Stock-Based Compensation
At the annual meeting held on January 20, 2005, stockholders of ASB
Holding Company approved the ASB Holding Company 2005 Stock Option Plan and the
American Bank of New Jersey 2005 Restricted Stock Plan. Subject to regulatory
approval, 272,171 shares of common stock were made available under the 2005
Stock Option Plan of which all received regulatory approval for award. On
January 20, 2005, 259,923 options were awarded with the remaining 12,248 shares
awarded on May 6, 2005. Also subject to regulatory approval, 108,868 shares of
common stock were made available under the 2005 Restricted Stock Plan of which
81,651 received regulatory approval for award. On January 20, 2005, 76,752
shares of restricted stock were awarded with the remaining 4,899 shares awarded
on May 6, 2005.
Shares of common stock issuable pursuant to outstanding options under
the 2005 Stock Option Plan will be considered outstanding for purposes of
calculating earnings per share on a diluted basis. The Financial Accounting
Standards Board has announced a change in the required accounting methods
applicable to stock options that will be effective in the first quarter of
fiscal 2006 beginning October 1, 2005. Under such accounting requirements, the
Company will be required to recognize compensation expense related to stock
options outstanding based upon the fair value of such awards at the date of
grant over the period that such awards are earned.
For accounting purposes, the Bank will recognize compensation expense
for shares of common stock awarded under the 2005 Restricted Stock Plan over the
vesting period at the fair market value of the shares on the date they are
awarded.
11
Employee compensation expense under stock options is currently reported
using the intrinsic value method. No stock-based compensation cost is reflected
in net income, as all options granted had an exercise price equal to or greater
than the market price of the underlying common stock at date of grant. The
following table illustrates the effect on net income and earnings per share if
expense was measured using the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation.
Nine Months Ended Three Months Ended
June 30, June 30,
---------------------- ---------------------
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands
except share data)
Net income as reported $ 1,520 $ 1,597 $ 325 $ 537
Deduct: Stock-based compensation expense determined
under fair value based method 167 - 56 -
------- ------- ------- -------
Pro forma net income $ 1,353 $ 1,597 $ 269 $ 537
======= ======= ======= =======
Basic earnings per share as reported $ 0.28 $ 0.29 $ 0.06 $ 0.10
======= ======= ======= =======
Pro forma basic earnings per share $ 0.25 $ 0.29 $ 0.05 $ 0.10
======= ======= ======= =======
Diluted earnings per share as reported $ 0.28 $ 0.29 $ 0.06 $ 0.10
======= ======= ======= =======
Pro forma diluted earnings per share $ 0.25 $ 0.29 $ 0.05 $ 0.10
======= ======= ======= =======
The fair value of options granted and pro forma effects are computed using the
Black-Scholes option pricing model, using the following weighted-average
assumptions as of grant date.
January 20, 2005 May 6, 2005,
---------------- ------------
Options Awarded
Risk free interest rate 3.67% 3.95%
Expected option life 5.0 5.0
Expected stock price volatility 22.00% 22.00%
Dividend yield 0.00% 0.00%
Weighted average fair value of options granted during year $ 4.75 $ 5.00
====== =======
12
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.
General
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
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 and the cost of those
deposits and borrowed funds. Our interest-earning assets consist primarily of
residential mortgage loans, multi-family and commercial real estate mortgage
loans, residential mortgage-related securities and U.S. Agency debentures.
Interest-bearing liabilities consist primarily of retail deposits and borrowings
from the Federal Home Loan Bank of New York.
Declining interest rates in the three year period ended September 30,
2003 resulted in acceleration of asset prepayments due primarily to mortgage
refinancing. The negative impact on interest income from earning assets
refinancing to lower market interest rates was exacerbated during that period by
the accelerated amortization of the remaining balance of net deferred
origination costs and net premiums relating to such assets. This reduction in
earning asset yields was partially offset by a reduction in the Company's cost
of retail deposits. However, the reduction in the Company's overall cost of
liabilities lagged that of its deposits due to its balance of higher costing,
long term, fixed rate FHLB borrowings previously drawn for interest rate risk
management purposes. Together, these factors resulted in reduction of the
Company's net interest margin and its net income through that period.
During the Company's fiscal year ended September 30, 2004, the general
level of market interest rates increased from the historical lows of the prior
periods. Such increases slowed the pace of loan refinancing thereby reducing the
rate at which the Company's earning assets prepaid. Slowing prepayments resulted
in a corresponding reduction in the amortization of deferred costs and premiums
thereby increasing the Company's earning asset yields. The Company's cost of
interest-bearing liabilities lagged the upward movement in current market
interest rates. After decreasing for thirteen consecutive quarters, the
Company's cost of interest-bearing liabilities remained unchanged for the
quarters ended March 31, 2004 and June 30, 2004 before increasing modestly in
the final quarter of the fiscal year ended September 30, 2004. As a result, the
Company reported a 16 basis point improvement in its net interest margin to
2.60% for the year ended September 30, 2004 from 2.44% for the year ended
September 30, 2003.
The Company continued to realize modest improvement in its net interest
margin through the first nine months of fiscal 2005 when compared with that
reported for fiscal 2004. The Company realized a 14 basis point increase in its
yield on earning assets from 4.69% for the year ended September 30, 2004 to
4.83% for the nine months ended June 30, 2005. This increase was attributable to
a 21 basis point increase in the
13
yield on investment securities and a 115 basis point increase in the yield on
interest-bearing deposits and other earning assets. These increases were offset
by a 6 basis point decline in the yield on loans for the nine months ended June
30, 2005 as compared to the yield on loans for fiscal 2004. Offsetting this
overall improvement in earning asset yields was a 10 basis point increase in the
cost of interest-bearing liabilities from 2.41% to 2.51%. This increase
resulted, in part, from a 19 basis point increase in the cost of
interest-bearing deposits. This increase was offset by a 26 basis point decrease
in the cost of borrowings due largely to increased utilization of overnight
borrowings. In total, the Company's net interest margin increased 4 basis points
to 2.64% for the nine months ended June 30, 2005 from 2.60% for fiscal 2004.
Our results of operations also depend on our provision for loan losses,
noninterest income, and noninterest expense. Non-performing loans as a
percentage of total assets have increased modestly to 0.23% of total assets at
June 30, 2005 from 0.12% of total assets at September 30, 2004. However, this
increase in nonperforming assets has not resulted in the need for additional
loan loss provisions. Consequently, loan loss provisions in the current year
continue to result primarily from the overall growth in portfolio loans.
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, annualized noninterest
income as a percentage of average assets totaled 0.25% for the nine months ended
June 30, 2005 - a reduction of 2 basis points from 0.27% for fiscal 2004. A
portion of this decrease is attributable to overall growth in average earning
assets outpacing that of fee income from deposits and loans.
Gains and losses on sale of loans, excluded in the comparison above,
typically result from the Company selling long term, fixed rate mortgage loan
originations into the secondary market for interest rate risk management
purposes. 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 retains in the portfolio
rather than selling into the secondary market. Consequently, the gains and
losses on sale of loans reported by the Company will fluctuate with market
conditions.
Noninterest expense includes salaries and employee benefits, occupancy
and equipment expenses and other general and administrative expenses. Generally,
certain operating costs have increased since the Company's initial public
offering in the beginning of fiscal 2004. Operating as a public entity resulted
in comparatively higher legal, accounting and compliance costs throughout fiscal
2004 than had been recorded in earlier years. This trend is expected to continue
as the Company incurs additional compliance costs associated with the
Sarbanes-Oxley Act of 2002. Additionally, the Company is recording higher
employee compensation and benefit expense than it had in the years preceding its
minority stock offering. Much of this increase is attributable to the
implementation of an employee stock ownership plan benefit that did not exist
prior to the offering. More recently, benefit costs have increased as the
Company implemented the restricted stock and stock option plans approved by
shareholders at the Company's annual meeting held on January 20, 2005.
During fiscal 2004 we recognized a $125,000 penalty to prepay $3.0
million of fixed rate FHLB advances with a weighted average cost of 6.28%. In
the future, we may evaluate the costs and benefits of further prepayments, which
may result in additional one time charges to earnings in the form of FHLB
prepayment penalties to further improve the Bank's net interest spread and
margin and enhance future earnings..
Excluding penalties for prepayment of borrowed funds, annualized
noninterest expense as a percentage of average assets totaled 2.03% for the nine
months ended June 30, 2005 - an increase of 14 basis points from 1.89% for
fiscal 2004. In part, this increase is attributable to the implementation of the
restricted stock plan benefits noted above. However, a portion of this increase
is also attributable to the restructuring of the Company's Director Retirement
Plan which resulted in a pre tax charge of $444,000 during the three months
ended June 30, 2005. Additionally, the Company is also recording higher
consulting and professional fees associated with evaluating and executing the
Company's balance sheet growth and diversification strategies.
14
In relation to the rate of balance sheet growth, these sharp increases
in compensation, benefit and professional service costs have been partially
offset by slower increases - as well as outright reductions - in other
noninterest expenses. For the nine months ended June 30, 2005, both occupancy
and equipment and data processing costs have been reduced from both a dollar and
percentage of average assets perspective when compared with fiscal 2004.
Together, reductions in these expenses totaled 4 basis points which partially
offset the 18 basis point combined increase in all other non interest expenses
for the same period. In large part, these reductions result from reduced
depreciation and core processing expenses and the absence in the current period
of certain non-recurring charges associated with information technology
infrastructure upgrades that were incurred in fiscal 2004.
Management expects occupancy and equipment expense to increase in
future periods as we implement our de novo branching strategy to expand our
branch office network. Our current plan is to open up to five de novo branches
over approximately the next three years, and we have identified several
potential sites for de novo branches. Costs for land purchase and branch
construction will impact earnings going forward. The expenses associated with
opening new offices, in addition to the personnel and operating costs that we
will have once these offices are open, will significantly increase noninterest
expenses. Additional expenses are also expected in connection with our need to
augment the office space available for our administrative operations in order to
add the personnel called for by our growth plans.
In total, our return on average assets decreased 7 basis points to
0.47% for the nine months ended June 30, 2005 from 0.54% for fiscal 2004 while
return on average equity decreased 50 basis points to 5.27% from 5.77% for the
same comparative periods. However, absent the after-tax charge for restructuring
the Company's Director Retirement Plan of approximately $267,000, our return on
average assets and return on average equity for the nine months ended June 30,
2005 would have been 0.55% and 6.20%, respectively.
Our net interest margin may be adversely affected in either a rising or
falling rate environment. A decrease in interest rates could trigger another
wave of loan refinancing that could result in the margin compression previously
experienced. Conversely, notwithstanding the earning asset yield improvement
during fiscal 2004 and the first six months of fiscal 2005 while interest rates
rose from their historical lows, further increases in interest rates from
current levels could trigger continued increases in the Bank's cost of
interest-bearing liabilities that outpace that of its yield on earning assets
causing further net interest margin compression. Such compression occurred
during the three months ended June 30, 2005 when our net interest spread shrank
17 basis point to 2.24% from 2.41% for the three month period ended March 31,
2005. While yield on earning assets grew 6 basis points from 4.85% at March 31,
2005 to 4.91% at June 30, 2005, that improvement in yield was more than offset
by a 23 basis point increase in the cost of interest-bearing liabilities from
2.44% to 2.67% during the same comparative period. A portion of this increased
cost was attributable to the disintermediation of lower cost, non-maturity
deposits into higher cost certificates of deposit.
The risk of continued disintermediation of our deposits into higher
cost accounts continues to be noteworthy given the Bank's substantial net growth
in non-maturity deposits during the prior three years. Like many banks, we were
successful in growing deposits while interest rates decreased to their
historical lows. However, our ability to retain and grow such deposits at a
reasonable cost, while a highly competitive marketplace adjusts its pricing
strategies to an environment of rising interest rates, is now being rigorously
tested.
Finally, our results of operations may also be affected significantly
by other economic and competitive conditions in our market area as well as
changes in applicable laws, regulations or governmental policies. Furthermore,
because our lending activity is concentrated in loans secured by real estate
located in northern New Jersey, downturns in the regional economy encompassing
New Jersey could have a negative impact on our earnings.
15
Comparison of Financial Condition at June 30, 2005 and September 30, 2004
Our total assets increased by $18.3 million, or 4.3%, to $443.2 million
at June 30, 2005 from $424.9 million at September 30, 2004. The increase
reflected growth in securities held to maturity, cash and cash equivalents and
loans receivable, net offset by declines in securities available for sale. Loans
receivable, net increased by $29.9 million, or 9.7%, to $338.9 million at June
30, 2005 from $309 million at September 30, 2004. Our increase in loans resulted
from a high volume of multi-family and commercial real estate and one-to-four
family mortgage loan originations.
The following table compares the composition of the Company's loan
portfolio by loan type as a percentage of total assets at June 30, 2005 and
September 30, 2004. Amounts reported exclude allowance for loan losses and net
deferred origination costs.
June 30, 2005 September 30, 2004
------------- ------------------
(Dollars in thousands)
Percent of Percent of
Total Total
Type of Loans Amount Assets Amount Assets
------------- ------ ------ ------ ---------
Construction $ 2,569 0.58% $ 3,075 0.72%
1/1 and 3/3 ARMs 4,895 1.10% 1,800 0.42%
3/1 and 5/1 ARMs 109,720 24.76% 89,694 21.11%
5/5 and 10/10 ARMs 37,669 8.50% 24,619 5.79%
7/1 and 10/1 ARMs 1,748 0.40% 1,675 0.40%
15 year fixed or less 109,233 24.65% 112,238 26.41%
Greater than 15 year fixed 60,915 13.74% 64,702 15.23%
Home equity lines of credit 11,711 2.64% 10,666 2.51%
Consumer 725 0.16% 746 0.18%
Commercial 993 0.22% 398 0.09%
--------- ----- --------- -----
Total $ 340,178 76.75% $ 309,613 72.86%
========= ====== ========= =====
Securities classified as available-for-sale decreased $20.8 million,
or 23.2%, to $68.7 million at June 30, 2005 from $89.5 million at September 30,
2004 as the Bank continued to reinvest cash flows from the investment securities
portfolio into loans. This decrease was partially offset by an increase in
securities held to maturity of $5.5 million or 195.3% to $8.3 million at June
30, 2005 from $2.8 million at September 30, 2004. Additionally, cash and cash
equivalents increased by $653,000, or 8.1%, to $8.7 million at June 30, 2005
from $8 million at September 30, 2004.
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, 2005 and September 30, 2004. Amounts reported exclude unrealized
gains and losses on the available for sale portfolio.
June 30, 2005 September 30, 2004
------------- ------------------
(Dollars in thousands)
Percent of Percent of
Total Total
Type of Security Amount Assets Amount Assets
---------------- ------ ------ ------ ------------
Fixed rate MBS $ 13,850 3.12% $ 15,923 3.75%
ARM MBS 8,442 1.90% 8,755 2.06%
Fixed rate CMO 30,731 6.93% 43,982 10.36%
Floating rate CMO 2,994 0.68% 435 0.10%
ARM mutual fund 10,000 2.26% 10,000 2.35%
Fixed rate agency debentures 11,998 2.71% 13,997 3.29%
-------- ----- --------- -----
Total $ 78,015 17.60% $ 93,092 21.91%
======== ===== ========= =====
16
Assuming no change in interest rates, the estimated average life of the
investment securities portfolio, excluding the ARM mutual fund, was 2.09 years
and 2.23 years at June 30, 2005 and September 30, 2004, respectively. Assuming a
hypothetical immediate and permanent increase in interest rates of 300 basis
points, the estimated average life of the portfolio extends to 2.69 years and
3.12 years at June 30, 2005 and September 30, 2004, respectively.
Total deposits increased by $8.7 million, or 2.7%, to $331.4 million at
June 30, 2005 from $322.7 million at September 30, 2004. The increase was
primarily due to increases in certificates of deposit and non interest-bearing
deposits, partially offset by a decline in savings deposits and interest-bearing
checking deposits. Certificate of deposit accounts increased $31.5 million or
26.7% to $149.5 million. Savings deposits decreased by $22.8 million, or 15.9%
to $120.6 million. Checking deposits, including demand, NOW and money market
checking accounts, increased $6,000 or 0.01% to $61.3 million.
The following table compares the composition of the Company's deposit
portfolio by category as a percentage of total assets at June 30, 2005 with that
of September 30, 2004.
June 30, 2005 September 30, 2004
----------------------- ------------------------
(Dollars in thousands)
Percent of Percent of
Total Total
Deposit category Amount Assets Amount Assets
---------------- ------ ------------ ------ ------------
Money market checking $ 20,066 4.53% $ 25,834 6.08%
Other checking 41,235 9.30% 35,461 8.34%
Money market savings 32,466 7.32% 44,880 10.56%
Other savings 88,125 19.88% 98,521 23.18%
Certificates of deposit 149,499 33.73% 118,020 27.78%
--------- ----- --------- -----
Total $ 331,391 74.76% $ 322,716 75.94%
========= ===== ========= =====
FHLB advances increased $8.5 million, or 14.8%, to $66.0 million at
June 30, 2005 from $57.5 million at September 30, 2004. The net increase of $8.5
million comprised a net increase of $9.6 million drawn on overnight repricing
lines of credit offset by the repayment of a maturing $1.0 million fixed rate
term advance and $42,000 of amortization on fixed rate amortizing advances.
The following table compares the composition of the Company's borrowing
portfolio by remaining term to maturity at June 30, 2005 and September 30, 2004.
Scheduled principal payments on amortizing borrowings are reported as
maturities.
June 30, 2005 September 30, 2004
------------- ------------------
(Dollars in thousands)
Percent of Percent of
Total Total
Remaining Term Amount Assets Amount Assets
-------------- ------ ------ ------ ------
Overnight $ 12,300 2.77% $ 2,700 0.64%
One year or less 6,059 1.37% 1,057 0.25%
One to two years 8,063 1.82% 8,060 1.90%
Two to three years 8,063 1.82% 8,062 1.90%
Three to four years 11,564 2.61% 12,065 2.84%
Four to five years 6,000 1.35% 7,547 1.77%
More than five years 14,000 3.16% 18,000 4.23%
--------- ----- --------- -----
Total $ 66,049 14.90% $ 57,491 13.53%
========= ===== ========= =====
17
Equity decreased $29,000, or 0.07% to $39.3 million at June 30, 2005
from $39.3 million at September 30, 2004. The decrease reflects dividends paid
of $1.3 million, offset by net income of $1.5 million for the nine months ended
June 30, 2005. In addition, the amount reclassified on ESOP shares increased
$375,000 due to a change in the fair value and the number of shares of common
stock in the ESOP subject to a contingent repurchase obligation as discussed in
Note 4 above.
Comparison of Operating Results for the Nine Months Ended June 30, 2005 and June
30, 2004
General. Net income for the nine months ended June 30, 2005 was $1.5
million, a decrease of $77,000, or 4.8% from the same period in 2004. The
decrease in net income resulted from an increase in noninterest expense and the
provision for loan losses offset by an increase in net interest income coupled
with a decrease in non interest income and the provision for income taxes.
Interest Income. Total interest income increased 12.8% or $1.7 million
to $15.2 million for the nine months ended June 30, 2005, from $13.5 million for
the same period in 2004. For those same comparative periods, the average yield
on interest-earning assets increased 14 basis points to 4.83% from 4.69% while
the average balance of interest-earning assets increased $36.1 million or 9.4%
to $419.7 million from $383.6 million.
Interest income on loans increased $1.9 million or 17%, to $13 million
for the nine months ended June 30, 2005 from $11.1 million for the same period
in 2004. This increase was due, in part, to a $52.0 million increase in the
average balance of loans receivable to $324.8 million for the nine months ended
June 30, 2005 from $272.8 million for same period in 2004. The impact on
interest income attributable to this growth more than offset the 9 basis points
decrease in the average yield on loans which declined to 5.33% from 5.42% for
those same comparative periods. The increase in the average balance of loans
receivable was the result of loan originations exceeding repayments due to
strong borrower demand.
The rise in interest income on loans was offset by lower interest
income on securities, which decreased $229,000 to $2.1 million for the nine
months ended June 30, 2005 from $2.4 million for the same period in 2004. The
decrease was due, in part, to a $16.7 million decline in the average balance of
investment securities to $88.0 million for the nine months ended June 30, 2005
from $104.7 million for the same period in 2004. The impact on interest income
attributable to this decline was partly offset by a 23 basis point increase in
the average yield on securities which grew to 3.22% from 2.99% for those same
comparative periods. This increase in yield primarily resulted from slowing
prepayments which reduced net premium amortization and higher yields on
adjustable rate securities which have repriced upward in accordance with the
general movement of market interest rates.
Further, interest income on federal funds sold and other
interest-bearing deposits increased $70,000 to $111,000 for the nine months
ended June 30, 2005 from $41,000 for the same period in 2004. This increase was
due, in part, to an increase of $895,000 in the average balance of these assets
to $6.9 million for the nine months ended June 30, 2005 from $6.0 million for
the same period in 2004. The impact on interest income attributable to this
growth was further augmented by a 123 basis point rise in the average yield on
these assets which increased to 2.13% from 0.90% for those same comparative
periods.
Interest Expense. Total interest expense increased by $913,000 or 15.2%
to $6.9 million for the nine months ended June 30, 2005 from $6.0 million for
the same period in 2004. For those same comparative periods, the average cost of
interest-bearing liabilities increased 11 basis points to 2.51% from 2.40% while
the average balance of interest-bearing liabilities increased $34.0 million or
10.3% to $366.4 million from $332.4 million.
18
Interest expense on deposits increased $849,000 or 21.9% to $4.7
million for the nine months ended June 30, 2005 from $3.9 million for the same
period in 2004. This increase was due, in part, to a $28.8 million increase in
the average balance of interest-bearing deposits to $301.8 million for the nine
months ended June 30, 2005 from $273.0 million for the same period in 2004. The
components of this net increase for the comparative periods include an increase
of $13.2 million in the average balance of certificates of deposit, a $1.5
million increase in the average balance of savings accounts and a $14.1 million
increase in the average balance of interest-bearing checking accounts.
The impact on interest expense attributable to the net growth in these
average balances was exacerbated by a 20 basis point increase in the average
cost of interest-bearing deposits to 2.09% for the nine months ended June 30,
2005 from 1.89% for the same period in 2004. The components of this increase for
the comparative periods include a 42 basis point increase in the average cost of
certificates of deposit, a 2 basis point increase in the average cost of savings
accounts and a 19 basis point increase in the average cost of interest-bearing
checking accounts.
Interest expense on FHLB advances increased $64,000 to $2.2 million for
the nine months ended June 30, 2005 from $2.1 million for the same period in
2004. This increase was due, in part, to a $5.2 million increase in the average
balance of advances to $64.6 million for the nine months ended June 30, 2005 as
compared to the same period one year ago. The impact on expense attributable to
this increase in average balance was modestly offset by a 26 basis point decline
in the average cost of advances for those same comparative periods. The lower
average cost is primarily due to utilization of overnight repricing line of
credit borrowings whose current cost is less than that of the remaining
portfolio of fixed-rate term advances.
Net Interest Income. In total, net interest income for the nine months
ended June 30, 2005 increased by $815,000 or 10.9%, to $8.3 million from $7.5
million for the same period in 2004. For those same comparative periods, our net
interest rate spread increased 3 basis points to 2.32% while our net interest
margin increased 3 basis points to 2.64% from 2.61%.
Provision for Loan Losses. In evaluating the level of the allowance for
loan losses, management considers historical loss experience, the types of loans
and the amount of loans in the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any underlying
collateral, peer group information, and prevailing economic conditions. Large
groups of smaller balance homogeneous loans, such as residential real estate,
small commercial real estate, and home equity and consumer loans, are evaluated
in the aggregate using historical loss factors and peer group data adjusted for
current economic conditions. Large balance and/or more complex loans, such as
multi-family and commercial real estate 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 as of
June 30, 2005 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.
The provision for loan losses totaled $105,000 for the nine months
ended June 30, 2005 representing an increase of $9,000 over the same comparative
period in 2004. The current year's loss provision was reduced by the reversal of
a $42,000 reserve previously established against an impaired loan which paid off
in full during the current year. Notwithstanding this reversal, other provisions
for specific nonperforming assets and historical losses based on net charge-offs
were nominal due to a history of low charge-offs and the relative stability of
nonperforming asset balances. However, the application of the Bank's loan loss
methodology outlined above results, in part, in historical and environmental
loss factors being applied to the
19
outstanding balance of homogeneous groups of loans to estimate probable credit
losses. For example, as a result of recent loan growth, a large part of the
Bank's loan portfolio is considered "unseasoned," meaning the loans were
originated less than three years ago. Generally, unseasoned loans demonstrate a
greater risk of credit losses than their seasoned counterparts. Moreover, in
many cases, these unseasoned loans are obligations of borrowers with whom the
Bank has had no prior payment experience. These risks are considered in the
environmental factors used in the Bank's loss provision calculations as
described above. Both historical and environmental loss factors are reviewed and
updated quarterly as part of management's assessment of the allowance for loan
losses.
Using this methodology, incremental growth in the outstanding balance
of the loans on which historical and environmental loss factors are applied
results in additional loss provisions. For the nine months ended June 30, 2005,
total gross loan balances, excluding the allowance for loan loss, grew $30.7
million or 9.9%. The growth was primarily comprised of net increases in
one-to-four family mortgages totaling $14.7 million, increases in home equity
and commercial loans totaling $1.7 million and increases in multi-family and
commercial real estate loans totaling $14.8 million, offset by a decline in
consumer loan totaling $21,000 and the disbursed balances of construction loans
totaling $500,000.
By comparison, loan growth for the nine months ended June 30, 2004
totaled $22.7 million or $8.0 million less than the same comparative period this
year. The growth in this prior comparative period was primarily comprised of an
increase in one-to-four family mortgages totaling $20.3 million, an increase of
$2.5 million in multi-family and commercial real estate loans and an increase of
$594,000 in home equity loans, offset by net decreases in consumer loans,
construction loans and commercial loans totaling $706,000.
In total, the allowance for loan losses as a percentage of gross loans
outstanding decreased 2 basis points to 0.49% at June 30, 2005 from 0.51% at
June 30, 2004. These ratios reflect allowance for loan loss balances of $1.7
million and $1.5 million, respectively. As noted earlier, the level of the
allowance is based on estimates and the ultimate losses may vary from those
estimates.
Noninterest Income. Noninterest income decreased $6,000 to $802,000 for
the nine months ended June 30, 2005 compared to the same period in 2004. The
decrease was primarily the result of a $16,000 loss on sale of
available-for-sale securities coupled with a decline of $17,000 in deposit
service fees attributable primarily to reduced customer utilization of deposit
services introduced in the prior fiscal year. In addition, there was a decrease
of $17,000 in gains on sale of held for sale loans as fewer long term, fixed
rate loans were originated and sold into the secondary market. These decreases
were offset by an increase in income from cash surrender value of life insurance
which grew $44,000 from $156,000 for the nine months ended June 30, 2004 to
$200,000 for the same quarter ended this year resulting from higher policy
balances held by the Company. Other non-interest income remained flat at
$111,000 from period to period.
Noninterest Expense. Noninterest expense increased $1.0 million, or
18.4% to $6.6 million for the nine months ended June 30, 2005 from $5.6 million
for the same period in 2004. The increase was primarily a result of higher
expenses for salaries and benefits, advertising and other non-interest expense,
offset by decreases in occupancy and equipment expense, data processing, and
federal deposit insurance expense.
Salaries and employee benefits increased $826,000 or 23.3% to $4.4
million for the nine months ended June 30, 2005 as compared to $3.5 million for
the same period in 2004. A significant portion of this increase was attributable
to a charge of $444,000 resulting from restructuring the Bank's director
retirement plan. The plan was amended to provide that retirement benefits will
be calculated based upon the sum of the annual retainer and regular meeting fees
paid by the Company as well as the Bank. Previously, such retirement plan
benefits were based upon only the annual retainer paid by the Bank.
Additionally, compensation and benefits costs increased $136,000 due to the
implementation of a restricted stock plan during the current fiscal year.
Salaries and wages including bonus and payroll taxes, increased $204,000 or
7.98% due, in part, to executive and lending staffing additions coupled with
overall annual increases in employee compensation. Finally, medical insurance
benefit premiums increased $20,000 or 6.57% for the same comparative periods.
20
Occupancy and equipment expense decreased $42,000 to $606,000 for the
nine months ended June 30, 2005 as compared to $648,000 for the same period in
2004. This decrease is primarily attributable to a $54,000 decrease in computer
depreciation expense. For the same comparative periods, data processing costs
also decreased $29,000 from $500,000 to $471,000 due to the absence in the
current period of non recurring information technology conversion and upgrade
expenses that were recognized during 2004.
Other noninterest expenses increased $250,000 for the nine months ended
June 30, 2005 as compared to the same period in 2004. Legal fees increased
$104,000 to $187,000 for the nine months ended June 30, 2005 from $83,000 for
the same period in 2004. A portion of the increase in legal fees is attributable
to matters presented to shareholders at the Company's annual meeting held
January 20, 2005. Additionally, professional and consulting fees, including
auditing and accounting fees, increased $104,000 to $217,000 for the nine months
ended June 30, 2005 as compared to the same period in 2004. A portion of this
increase is attributable to the Company's operation as a public company
including implementation costs associated with the Sarbanes-Oxley Act of 2002.
Other comparative increases in both legal and professional and consulting fees
are attributable to ongoing evaluation and implementation of growth and
diversification strategies relating to the execution of the Company's business
plan.
Notwithstanding these increases mentioned above, management expects
ongoing compliance costs of the Sarbanes-Oxley Act of 2002 to continue to grow.
Furthermore, we currently intend to expand our branch office network over the
next several years, and expenses related to such expansion may impact earnings
in future periods.
Provision for Income Taxes. The provision for income taxes decreased
$151,000 for the nine months ended June 30, 2005 from the same period in 2004.
The effective tax rate was 36.2% and 38.9% for the nine months ended June 30,
2005 and 2004, respectively. The modest decrease in the effective tax rate is
primarily attributable to the Company's funding of American Savings Investment
Corporation in November 2004, 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, increases in the
Bank's balance of bank-owned life insurance, which generates tax exempt income
from growth in the cash surrender value of policies, has also contributed to
reductions in the Company's effective income tax rate.
Comparison of Operating Results for the Three Months Ended June 30, 2005 and
June 30, 2004
General. Net income for the three months ended June 30, 2005 was
$325,000, a decrease of $212,000, or 39.5% from the same period in 2004. The
decrease in net income resulted from an increase in noninterest expense offset
by an increase in net interest income and non interest income and a decrease in
the provision for loan losses and income taxes.
Interest Income. Total interest income increased 16.7% or $752,000 to
$5.2 million for the three months ended June 30, 2005, from $4.5 million for the
same period in 2004. For those same comparative periods, the average yield on
interest-earning assets increased 28 basis points to 4.91% from 4.63% while the
average balance of interest-earning assets increased $39.3 million or 10.2% to
$425.6 million from $386.3 million.
Interest income on loans increased $809,000 or 21.9%, to $4.5 million
for the three months ended June 30, 2005 from $3.7 million for the same period
in 2004. This increase was due, in part, to a $60.1 million increase in the
average balance of loans receivable to $337.2 million for the three months ended
June 30, 2005 from $277.1 million for same period in 2004. The impact on
interest income attributable to this growth was augmented by a 1 basis point
rise in the average yield on loans which increased to 5.34% from 5.33% for those
same comparative periods. The increase in the average balance of loans
receivable was the result of loan originations exceeding repayments due to
strong borrower demand.
21
The rise in interest income on loans was offset by lower interest
income on securities, which decreased $91,000 to $671,000 for the three months
ended June 30, 2005 from $762,000 for the same period in 2004. The decrease was
due primarily to a $21.4 million decline in the average balance of investment
securities to $81.6 million for the three months ended June 30, 2005 from $103.0
million for the same period in 2004. The impact on interest income attributable
to this decline was offset by a 33 basis point increase in the average yield on
securities which grew to 3.29% from 2.96% for those same comparative periods.
This increase in yield primarily resulted from slowing prepayments which reduced
net premium amortization and higher yields on adjustable rate securities which
have repriced upward in accordance with the general movement of market interest
rates.
Further, interest income on federal funds sold and other
interest-bearing deposits increased $34,000 to $50,000 for the three months
ended June 30, 2005 from $16,000 for the same period in 2004. This increase was
due, in part, to an increase of $535,000 in the average balance of these assets
to $6.7 million for the three months ended June 30, 2005 from $6.2 million for
the same period in 2004. The impact on interest income attributable to this
growth was augmented by a 191 basis point rise in the average yield on these
assets which increased to 2.97% from 1.06% for those same comparative periods.
Interest Expense. Total interest expense increased by $518,000 or 26.4%
to $2.5 million for the three months ended June 30, 2005 from $2.0 million for
the same period in 2004. For those same comparative periods, the average cost of
interest-bearing liabilities increased 31 basis points to 2.66% from 2.35% while
the average balance of interest-bearing liabilities increased $38.6 million or
11.6% to $372.1 million from $333.5 million.
Interest expense on deposits increased $430,000 or 33.8% to $1.7
million for the three months ended June 30, 2005 from $1.3 million for the same
period in 2004. This increase was due, in part, to a $26.9 million increase in
the average balance of interest bearing deposits to $302.0 million for the three
months ended June 30, 2005 from $275.1 million for the same period in 2004. The
components of this net increase for the comparative periods include an increase
of $29.1 million in the average balance of certificates of deposit and an $11.7
million increase in the average balance of interest-bearing checking accounts,
offset by a decrease of $13.9 million increase in the average balance of savings
accounts. The impact on interest expense attributable to the net growth in these
average balances was exacerbated by a 40 basis point increase in the average
cost of interest-bearing deposits which rose to 2.25% for the three months ended
June 30, 2005 from 1.85% for the same period in 2004. The components of this net
increase for the comparative periods includes a 64 basis point increase in the
average cost of certificates of deposit, a 6 basis point increase in the average
cost of savings accounts and a 36 basis point increase in the average cost of
interest-bearing checking accounts.
Interest expense on FHLB advances increased $88,000 to $777,000 for the
three months ended June 30, 2005 from $689,000 for the same period in 2004. This
increase was due, in part, to a $11.8 million increase in the average balance of
FHLB advances to $70.2 million for the three months ended June 30, 2005 from
$58.4 million for the same period in 2004. The impact on expense attributable to
this increase in average balance was modestly offset by a 29 basis point decline
in the average cost to 4.43% for the three months ended June 30, 2005 from 4.72%
for the same 2004 period. The lower average cost is primarily due to utilization
of overnight repricing line of credit borrowings whose current cost is less than
that of the remaining portfolio of fixed-rate term advances.
Net Interest Income. In total, net interest income for the three months
ended June 30, 2005 increased by $234,000 or 9.3%, to $2.7 million from $2.5
million for the same period in 2004. For those same comparative periods, our net
interest rate spread decreased 4 basis points to 2.24% from 2.28% while our net
interest margin decreased 2 basis points to 2.58% from 2.60%.
Provision for Loan Losses. In evaluating the level of the allowance for
loan losses, management considers historical loss experience, the types of loans
and the amount of loans in the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any underlying
collateral, peer
22
group information, and prevailing economic conditions. Large groups of smaller
balance homogeneous loans, such as residential real estate, small commercial
real estate, and home equity and consumer loans, are evaluated in the aggregate
using historical loss factors and peer group data adjusted for current economic
conditions. Large balance and/or more complex loans, such as multi-family and
commercial real estate 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 as of
June 30, 2005 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.
The Company's quarterly analysis of the allowance for loan losses
resulted in a required loss provision of $36,000 which was offset by the
reversal of a $42,000 reserve previously established against an impaired loan
which paid off in full during the quarter ended June 30, 2005. Consequently, the
Company reported a net reduction of the allowance totaling $6,000 for the three
months ended June 30, 2005 representing a decrease of $48,000 from the loss
provisions recorded for same comparative period in 2004. Provisions for specific
nonperforming assets and historical losses based on net charge-offs were nominal
due to a history of low charge-offs and the relative stability of nonperforming
asset balances. However, the 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. For example, as a result of recent loan growth,
a large part of the Bank's loan portfolio is considered "unseasoned," meaning
the loans were originated less than three years ago. Generally, unseasoned loans
demonstrate a greater risk of credit losses than their seasoned counterparts.
Moreover, in many cases, these unseasoned loans are obligations of borrowers
with whom the Bank has had no prior payment experience. These risks are
considered in the environmental factors used in the Bank's loss provision
calculations as described above. Both historical and environmental loss factors
are reviewed and updated quarterly as part of management's assessment of the
allowance for loan losses.
Using this methodology, incremental growth in the outstanding balance
of the loans on which historical and environmental loss factors are applied
results in additional loss provisions. For the three months ended June 30, 2005,
total gross loan balances, excluding the allowance for loan loss, grew $6
million or 1.8%. The growth was primarily comprised of net increases in
one-to-four family mortgages totaling $4 million, increases in multi-family and
commercial real estate loans totaling $2.6 million, and increases in home equity
loans, consumer loans and commercial loans totaling $718,000 offset by a decline
in disbursed balances of construction loans totaling $1.3 million.
By comparison, loan growth for the three months ended June 30, 2004
totaled $10.6 million or $4.6 million less than the same comparative period this
year. The growth in this prior comparative period was primarily comprised of net
increases in one-to-four family mortgages and home equity lines of credit
totaling $8.1 million, an increase in multi-family and commercial real estate
loans totaling $2.8 million and an increase of $29,000 in consumer loans offset
by net decreases in construction loans and commercial loans totaling $303,000.
In total, the allowance for loan losses as a percentage of gross loans
outstanding decreased 2 basis point to 0.49% at June 30, 2005 from 0.51% at June
30, 2004. These ratios reflect allowance for loan loss balances of $1.7 million
and $1.5 million, respectively. As noted earlier, the level of the allowance is
based on estimates and the ultimate losses may vary from those estimates.
23
Noninterest Income. Noninterest income increased $19,000 to $265,000
for the three months ended June 30, 2005 compared to the same period in 2004.
The increase was primarily the result of a rise in deposit service fees and
charges totaling $12,000 primarily due to fees resulting from annuity program
sales. For these same comparative periods, income on cash surrender value of
life insurance increased $26,000 resulting from higher policy balances held by
the Company. Additionally, gain on sale of held for sale loans also increased
$2,000. Offsetting these increases was a decline of $5,000 in other non interest
income and a loss of $16,000 on sale of available-for-sale securities.
Noninterest Expense. Noninterest expense increased $686,000, or 37.5%
to $2.5 million for the three months ended June 30, 2005 from $1.8 million for
the same period in 2004. The increase was primarily a result of higher expenses
for salaries and benefits, advertising, data processing, federal deposit
insurance expense and other non-interest expense, offset by decreases in
occupancy and equipment expense.
Salaries and employee benefits increased $624,000 or 52% to $1.8
million for the three months ended June 30, 2005 as compared to $1.2 million for
the same period in 2004. A significant portion of this increase was attributable
to a charge of $444,000 resulting from restructuring the Bank's director
retirement plan. The plan was amended to provide that retirement benefits will
be calculated based upon the sum of the annual retainer and regular meeting fees
paid by the Company as well as the Bank. Previously, such retirement plan
benefits were based upon only the annual retainer paid by the Bank.
Additionally, compensation and benefits costs increased $69,500 due to the
implementation of a restricted stock plan during the current fiscal year.
Salaries and wages including bonus and payroll taxes, increased $70,000 due in
part, to executive and lending staffing additions coupled with overall annual
increases in employee compensation while medical insurance premiums increased
$8,000.
Occupancy and equipment expense decreased $10,000 to $197,000 for the
three months ended June 30, 2005 as compared to $207,000 for the same period in
2004. This decrease is primarily attributable to a $17,000 decrease in computer
depreciation expense partly offset by small increases in various miscellaneous
related expenses. For the same comparative periods, data processing costs
increased $12,000 to $177,000 largely due to one-time conversion charges
resulting from a change in ATM service providers.
Other noninterest expenses increased $46,000 for the three months ended
June 30, 2005 as compared to the same period in 2004. Legal fees increased
$20,000 to $31,000 for the three months ended June 30, 2005 from $11,000 for the
same period in 2004. A portion of the increase in legal fees is attributable to
matters presented to shareholders at the Company's annual meeting held January
20, 2005. Additionally, professional and consulting fees, including auditing and
accounting fees, increased $14,000 to $51,000 for the three months ended June
30, 2005 as compared to the same period in 2004. A portion of this increase is
due largely to the Company's operation as a public company including
implementation costs associated with the Sarbanes-Oxley Act of 2002. Other
comparative increases in both legal and professional and consulting fees are
attributable to ongoing evaluation and implementation of growth and
diversification strategies relating to the execution of the Company's business
plan.
Notwithstanding these increases mentioned above, management expects
ongoing compliance costs of the Sarbanes-Oxley Act of 2002 to continue to grow.
Furthermore, we currently intend to expand our branch office network over the
next several years, and expenses related to such expansion may impact earnings
in future periods.
Provision for Income Taxes. The provision for income taxes decreased
$173,000 for the three months ended June 30, 2005 from the same period in 2004.
The effective tax rate was 34.9% and 39.3% for the three months ended June 30,
2005 and 2004, respectively. The modest decrease in the effective tax rate is
primarily attributable to the Company's funding of American Savings Investment
Corporation in November 2004, 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, increases in
24
the Bank's balance of bank-owned life insurance, which generates tax exempt
income from growth in the cash surrender value of policies, has also contributed
to reductions in the Company's effective income tax rate.
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 in 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
and securities prepayments are greatly influenced by general 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 to leverage its capital base and provide funds
for its lending and investing activities, and to enhance its interest rate risk
management.
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, 2005, the
total approved loan origination commitments outstanding amounted to $12.3
million. At the same date, unused lines of credit were $13.8 million and
construction loans in process were $688,000. Management's 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 deposits will remain
with the Bank. In addition, the Bank has the ability at June 30, 2005 to borrow
an additional $44.4 million from the FHLB of New York as a funding source to
meet commitments and for liquidity purposes.
In addition to the above commitments, the Company has financial
obligations regarding outstanding contracts for sale relating to future branch
sites. As of June 30, 2005 the Bank has paid deposits totaling $417,500 on sale
contracts for future branch locations. Upon closing, the Bank is committed to
disbursing an additional $4,957,500 to fulfill its obligations under these
contracts. These commitments are contingent upon the fulfillment of certain
conditions outlined in the sale contracts.
25
Capital
Consistent with its goals to operate a sound and profitable financial
organization, the Bank actively seeks to maintain a "well capitalized"
institution in accordance with regulatory standards. The Bank's total equity was
$34.7 million at June 30, 2005, or 7.85% of total assets on that date. As of
June 30, 2005, the Bank exceeded all capital requirements of the Office of
Thrift Supervision. American Bank of New Jersey's regulatory capital ratios at
June 30, 2005 were as follows: core capital 7.99%; Tier 1 risk-based capital
14.57%; and total risk-based capital 15.23%. The regulatory capital requirements
to be considered well capitalized are 5.0%, 6.0%, and 10.0%, respectively.
Impact of Inflation
The financial statements included in this document 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 maturities structures 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 Regulatory and Accounting Developments
FAS 123, Revised, requires all public companies to record compensation cost for
stock options provided to employees in return for employee service. The cost is
measured at the fair value of the options when granted, and this cost is
expensed over the employee service period, which is normally the vesting period
of the options. This will apply to awards granted or modified after the first
quarter or year beginning after December 15, 2005. Compensation cost will also
be recorded for prior option grants that vest after the date of adoption. The
effect on results of operations will depend on the level of future option grants
and the calculation of the fair value of the options granted at such future
date, as well as the vesting periods provided, and so cannot currently be
predicted. Notwithstanding options granted in the future, management has
evaluated the pro forma cost of the options granted on January 20, 2005 and May
6, 2005. The pro forma cost and impact on earnings per share for the three and
nine months ended June 30, 2005 are presented in Note 5 to the Consolidated
Financial Statements.
We will begin to record compensation costs for stock options granted on
January 20, 2005 and May 6, 2005 beginning on October 1, 2005. The estimated
after-tax cost of these options for each of the next five fiscal years is as
follows:
2006 $ 223,302
2007 $ 223,302
2008 $ 223,302
2009 $ 223,302
2010 $ 58,277
26
Notwithstanding this additional cost, there will be no significant
effect on our financial position for options that vest after the adoption date
as total equity will not change. The estimated after-tax cost of options shown
above includes only the 272,171 options granted prior to June 30, 2005, and thus
does not reflect the options that may be granted under the new stock option plan
that we intend to adopt following this stock offering.
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,
or changes in interest rates. Notwithstanding the unpredictability of future
interest rates, we expect that 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.
In addition, changes in interest rates can affect the average lives of
loans and mortgage-backed and related securities. 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 prepayments at rates that are comparable to the rates we previously
earned on the prepaid loans or securities. At June 30, 2005, 78.1% of our loan
portfolio was comprised of one- to four-family mortgage loans, which experienced
very high prepayment rates during recent years.
Our net interest rate spread, which is the difference between the
yields we receive on assets and the rates we pay on liabilities, increased
during fiscal 2004 after decreasing during fiscal 2003 and continued to improve
during the first half of fiscal 2005. For the year ended September 30, 2004 our
net interest rate spread was 2.28%, as compared to 2.14% for the year ended
September 30, 2003. Our net interest rate spread was 2.32% for the nine months
ended June 30, 2005. In large part, the improvement in net interest rate spread
resulted from slowing asset prepayments attributable to interest rates rising
from their historical lows of fiscal 2003. During fiscal 2003, decreases in
market interest rates triggered rapid loan and security prepayments which caused
our net interest rate spread to shrink. Our spread shrank because the decrease
in the yields on our securities and loan portfolios was greater than the
decrease in the rates we paid on deposits and borrowings during that year. This
caused a decrease in our earnings, sometimes referred to as an "earnings
squeeze" which eased somewhat in fiscal 2004.
Depending upon the movement of market interest rates, our earnings may
continue to be impacted by an "earnings squeeze" in the future. 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 recently originated
27
hybrid ARMs that are fixed rate for an initial period of time. At June 30, 2005,
excluding allowance for loan losses and net deferred origination costs and
including loans held for sale, loans totaled $340.2 million comprising 76.8% of
total assets. Of those loans, fixed rate mortgages totaled $170.1 million or
38.4% of total assets while hybrid ARMs, including 3/1, 5/1, 7/1 and 10/1 ARMs
totaled $154 million of 34.8% of total assets. In an increasing 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 shorter maturities than
the maturities on our loans and investment securities. Having interest-bearing
liabilities that reprice more frequently than interest-earning assets will be
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. This could cause a decrease in
our earnings and an "earnings squeeze" just as the decrease in interest rates in
prior periods had impacted our earnings.
The Board of Directors has established an Asset/Liability Management
Committee, comprised of Joseph Kliminski, the Bank's Chief Executive Officer,
Fred Kowal, the Bank's President and Chief Operating Officer, Richard Bzdek, the
Bank's Executive Vice President and Corporate Secretary, Eric Heyer, the Bank's
Senior Vice President and Chief Financial Officer, Catherine Bringuier, the
Bank's Senior Vice President and Chief Lending Officer, Josephine Castaldo, the
Bank's Vice President of Branch Administration, and John Scognamiglio, the
Bank's Vice President and Controller which is responsible for monitoring
interest rate risk. The committee 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 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.
To reduce the effect of interest rate changes on net interest income,
we seek to utilize various strategies aimed at improving the matching of
interest-earning asset maturities to interest-bearing liability maturities. The
main elements of these strategies include seeking to:
(1) Originate and retain loans with adjustable rate features and fixed rate
loans with shorter maturities including commercial real estate loans;
(2) Originate longer term, fixed rate loans eligible for sale in the secondary
market and, if warranted, sell such loans;
(3) Lengthen the maturities of our liabilities through utilization of Federal
Home Loan Bank advances;
(4) Attract low cost checking and transaction accounts which tend to be less
interest rate sensitive; and
(5) 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.
28
Quantitative Aspects of Market Risk. The following table presents
American Bank of New Jersey's net portfolio value as of March 31, 2005, 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
Net Portfolio Value As % of Present Value of Assets
Change Net Portfolio Basis Point
in Rate(1) $ Amount $ Change % Change Value Ratio Change
---------- -------- -------- -------- ----------- ------
(Dollars in thousands)
+300 bp $24,991 -23,067 -48% 5.98% -468 bp
+200 bp 33,146 -14,912 -31 7.72% -293 bp
+100 bp 41,117 -6,940 -14 9.33% -132 bp
0 bp 48,058 10.66%
-100 bp 53,007 4,950 +10 11.53% + 87 bp
-200 bp 53,372 5,314 +11 11.49% + 84 bp
- ----------
(1) The -300 basis points scenario is not shown due to the low prevailing
interest rate environment. One basis point is 0.01% or one one-hundredth of
a percent. Thus, a 100, 200 or 300 basis point change is equivalent to a
change of 1.0%, 2.0% or 3.0%, respectively.
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.
Notwithstanding the discussion above, the qualitative interest rate
analysis findings presented herein indicate that a rapid increase in interest
rates would adversely affect our net interest margin and earnings. Given the low
interest rates prevalent in the current marketplace, management is continuing to
evaluate a variety of strategies to manage the earnings risks presented by an
upward movement in interest rates. These strategies include the continued sale
of longer term, fixed rate conforming loan originations into the secondary
market and the use of wholesale borrowings to match fund longer term, fixed rate
loan originations that are retained in portfolio.
For the purpose of managing interest rate risk, we continue to maintain
a strategy of selling a portion of our long term, fixed rate mortgage loans
originated into the secondary market. For the year ended September 30, 2004, we
sold a total of $4.8 million of loans to the Federal National Mortgage
Association. Gains on sales of mortgage loans held for sale totaled $27,000 for
2004. Such sales contributed to a 14.9% or $11.3 million reduction in the
balance of fixed rate mortgage loans with original maturities exceeding fifteen
years during 2004.
We offer borrowers the option to lock in their interest rate prior to
closing their mortgage loans. Once a loan's rate is locked, we are exposed to
market value risk because the price at which we can sell the loan will vary with
movements in market interest rates. To manage that risk, we may take forward
commitments to sell loans at a fixed price. At June 30, 2005, the Bank had three
outstanding contracts to sell long term, fixed rate mortgage loans totaling
$675,000 to Federal National Mortgage Association. Loans sold under contracts
drawn in the future may generate additional gains or losses on sale of mortgage
loans in subsequent periods.
Finally, during fiscal 2004 we recognized a $125,000 penalty to prepay
$3.0 million of fixed rate FHLB advances with a weighted average cost of 6.28%.
In the future, we may evaluate the costs and benefits of further prepayments,
which may result in additional one time charges to earnings in the form of FHLB
prepayment penalties to further improve the Bank's net interest spread and
margin and enhance future earnings.
29
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 quarter ended June 30, 2005, 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.
30
PART II - - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
At June 30, 2005, 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits
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.
31
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.
ASB Holding Company
(Registrant)
Date: August 12, 2005 /s/Joseph Kliminski
---------------------------------------------------
Joseph Kliminski
Chief Executive Officer
Date: August 12, 2005 /s/Eric B. Heyer
---------------------------------------------------
Eric B. Heyer
Senior Vice President and Chief Financial Officer
32