2005 ANNUAL REPORT TO STOCKHOLDERS
TABLE OF CONTENTS
Letter from the Chief Executive Officer.......................................................1
Financial Highlights..........................................................................3
Management's Discussion and Analysis of Financial Condition and Results of Operations.........5
Report of Independent Registered Public Accounting Firm......................................32
Consolidated Statements of Financial Condition...............................................33
Consolidated Statements of Income............................................................34
Consolidated Statements of Changes in Equity.................................................35
Consolidated Statements of Cash Flows........................................................37
Notes to Consolidated Financial Statements...................................................39
Directors and Officers.......................................................................68
Investor and Corporate Information...........................................................69
Office Locations.............................................................................70
LETTER FROM THE CHIEF EXECUTIVE OFFICER
Dear Fellow Stockholders:
On behalf of the Board of Directors and employees, I am pleased to
present the 2005 Annual Report to Stockholders.
This was a significant year for American Bank of New Jersey. On October
5, 2005, we completed our conversion from the mutual to the stock form and
became a fully public company. A newly incorporated holding company, American
Bancorp of New Jersey, Inc. became the successor to ASB Holding Company. In a
stock offering completed as part of the conversion, American Bancorp sold the
70% ownership interest previously held by the mutual holding company, American
Savings, MHC, and the 30% ownership interest held by the ASB Holding Company
stockholders was converted into an equivalent ownership of American Bancorp of
New Jersey, Inc. Shares of American Bancorp began trading on October 6, 2005 on
the Nasdaq National Market under the symbol "ABNJ." After offering expenses and
funding the employee stock ownership plan's purchase of 8% of the shares sold in
the offering, investable net proceeds were approximately $89.6 million. We
believe this additional capital and the flexibility afforded by our new
structure will better position us to achieve our business plan.
During 2005, we commenced payment of a regular quarterly dividend,
which was an important step in our evolution as a public company that began with
the completion of the initial 30% stock offering by ASB Holding Company in 2003.
The Board was pleased to continue providing a return to stockholders, and
American Bancorp paid its first quarterly dividend of $0.04 per share in
December 2005.
In addition to our continued development as a public company, during
2005 we also expanded our management team as we welcomed our new President and
Chief Operating Officer Fred G. Kowal. We believe that Mr. Kowal has the skills
and background necessary to assist us as we pursue the goals of our business
plan, which includes expanding our deposit branch network and commercial lending
activities.
Movements in market interest rates present a challenge for financial
institutions and 2005 was no exception as rates continued to increase from the
historical lows of prior periods. Through the first half of fiscal 2005, we
realized improvements in our net interest margin as increases in yields on our
interest-earning assets outpaced the increases in costs of our interest
bearing-liabilities. However, that trend reversed in the latter half of 2005
when upward pressure on our cost of deposits resulted in greater increases in
the cost of our interest-bearing liabilities than in the yield on our interest
earning assets. On the whole, during 2005 we saw our average yield on
interest-earning assets improve to 4.84% from 4.68% while our average cost of
interest-bearing liabilities increased to 2.56% from 2.41%. Thus, our net
interest margin remained unchanged at 2.60% for 2005, the same as 2004. Our net
interest spread also remained constant at 2.28%. Average interest-earning assets
grew by $36.9 million to $425.9 million for fiscal 2005, while average
interest-bearing liabilities grew by $36.3 million to $372.6 million.
1
Loans receivable, net grew by 10.4% to $341.0 million at September 30,
2005 from $309.0 million at September 30, 2004. Deposits increased by 5.6% to
$340.9 million at September 30, 2005 from $322.7 million at September 30, 2004.
This overall growth in loans and deposits contributed significantly to a
$956,000, or 9.5%, improvement in net interest income. This, however, was more
than offset by higher noninterest expense which increased by $1.3 million, or
16.5% primarily due to salaries and benefits expense and legal, professional and
consulting fees.
On behalf of the Board of Directors and the employees, I thank you for
your investment and your continued confidence. We are excited about our vision
for American Bank of New Jersey, and we are committed to steady progress toward
our #1 goal - enhancing your investment in us.
Sincerely,
/s/Joseph Kliminski
Joseph Kliminski
Chief Executive Officer
2
FINANCIAL HIGHLIGHTS
At September 30,
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(In thousands)
SELECTED FINANCIAL DATA:
Total assets $555,860 $424,944 $427,066 $334,879 $258,208
Cash and cash equivalents 125,773 8,034 38,365 17,330 22,109
Securities available-for-sale 62,337 89,495 107,391 90,134 52,022
Securities held-to-maturity 7,824 2,794 2,839 6,970 10,187
Loans held for sale 280 - 500 - -
Loans receivable, net 341,006 308,970 262,844 208,374 166,322
Federal Home Loan Bank stock 3,119 2,890 3,150 2,200 2,300
Deposits 340,925 322,716 292,826 264,587 188,828
Stock subscriptions received 115,201 - 52,137 - -
Total borrowings 53,734 57,491 55,000 44,000 46,000
Total equity 39,506 39,314 22,339 21,872 20,155
Years ended
September 30,
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
(In thousands)
SELECTED OPERATING DATA:
Total interest income $ 20,601 $ 18,204 $ 17,476 $ 17,578 $ 16,052
Total interest expense 9,546 8,105 8,870 8,829 9,140
-------- -------- -------- -------- --------
Net interest income 11,055 10,099 8,606 8,749 6,912
Provision for loan losses 81 207 254 105 2
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 10,974 9,892 8,352 8,644 6,910
Noninterest income 1,196 1,298 718 595 458
Noninterest expense 8,924 7,657 6,862 6,274 4,923
-------- -------- -------- -------- --------
Income before income taxes 3,246 3,533 2,208 2,965 2,445
Income tax provision 1,203 1,371 805 1,075 888
-------- -------- -------- -------- --------
Net income $ 2,043 $ 2,162 $ 1,403 $ 1,890 $ 1,557
======== ======== ======== ======== ========
3
At or for the year ended
September 30,
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
SELECTED FINANCIAL DATA*:
Performance Ratios:
Return on average assets (1) 0.46% 0.54% 0.39% 0.63% 0.68%
Return on average equity (2) 5.30 5.77 6.48 9.30 8.28
Net interest rate spread (3) 2.28 2.28 2.14 2.63 2.49
Net interest margin (4) 2.60 2.60 2.44 3.00 3.10
Operating (noninterest) expense to
average total assets 2.02 1.92 1.89 2.09 2.16
Efficiency ratio (5) 72.84 67.18 73.60 67.14 66.80
Average interest-earning assets to
average interest-bearing liabilities 114.30 115.67 111.69 112.30 115.01
Capital Ratios:
Equity to total assets at end of period 7.11 9.25 5.23 6.53 7.81
Average equity to average assets 8.74 9.37 5.98 6.78 8.24
Asset Quality Ratios:
Non-performing loans to total
loans (6) 0.34 0.17 0.20 0.27 0.36
Non-performing assets to total
assets (6) 0.21 0.12 0.12 0.17 0.24
Net charge-offs to average loans
outstanding 0.00 0.00 0.00 0.00 0.00
Allowance for loan losses to
non-performing loans (6) 142.62 304.05 265.18 195.96 160.67
Allowance for loan losses to total
loans 0.48 0.50 0.52 0.53 0.58
PER SHARE DATA:
Earnings per share: (7)
Basic $0.38 $0.40 $0.36 $0.49 $0.40
Diluted $0.37 $0.40 $0.36 $0.49 $0.40
Cash Dividends Paid $0.93 $0.00 $0.00 $0.00 $0.00
* Certain ratios were significantly affected by stock subscriptions received
pending completion of the Company's first and second public offerings. At
September 30, 2003, stock subscriptions received relating to the Company's
first public offering which closed October 3, 2003 totaled $52.1 million.
At the time of closing, approximately $15.3 million, less offering
expenses, became capital of the Company with the remainder returned on
oversubscriptions. At September 30, 2005, stock subscriptions received
relating to the Company's second public offering which closed October 5,
2005 totaled $115.2 million. At the time of closing, approximately $91.3
million, less offering expenses, became capital of the Company with the
remainder returned on oversubscriptions.
(1) Net income divided by average total assets.
(2) Net income divided by average total equity.
(3) Difference between weighted average yield on interest-earning assets and
weighted average cost of interest-bearing liabilities.
(4) Net interest income as a percentage of average interest-earning assets.
(5) Noninterest expense divided by the sum of net interest income and
noninterest income.
(6) Nonperforming loans consist of nonaccrual loans and loans greater than 90
days delinquent and still accruing.
(7) Earnings per share for the fiscal years ended September 30, 2003, 2002 and
2001 have been restated to reflect the conversion of 100 shares of Bank
stock into 3,888,150 shares of Company stock representing 100% ownership of
the Bank prior to the minority stock offering which closed on October 3,
2003.
4
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 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; real estate values in northern New Jersey;
legislative/regulatory provisions; monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board; the quality or composition of the loan or investment portfolios; demand
for loan products; deposit flows; competition; demand for financial services in
the Company's market area; and accounting principles, policies, and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements, and undue reliance should not be placed on such statements.
Business Strategy
Our business strategy has been to operate as a well-capitalized
independent financial institution dedicated to providing convenient access and
quality service at competitive prices. During recent years, we have experienced
significant growth, with total loans receivable, net growing from $208.4 million
at September 30, 2002 to $341.0 million at September 30, 2005 and total deposits
growing from $264.6 million at September 30, 2002 to $340.9 million at September
30, 2005.
Our current strategy seeks to continue the growth of the last several
years. The highlights of our business strategy include the following:
o Grow and diversify the deposit mix by emphasizing non-maturity
account relationships acquired through de novo branching and
existing deposit growth. We currently plan to open up to five de
novo branches over approximately the next three years.
o Grow and diversify the loan mix by (i) increasing commercial real
estate and business lending capacity and (ii) enhancing the
Bank's one-to-four family mortgage loan origination capacity.
5
o Grow and diversify noninterest income through supplemental
deposit and lending related services and strategies.
o Explore alternative loan and deposit product and service delivery
channels.
o Broaden and strengthen customer relationships by bolstering cross
marketing strategies and tactics with a focus on multiple
account/service relationships.
o Utilize capital markets tools to grow capital and enhance
shareholder value.
Summary
The Company's results of operations depend primarily on its net
interest income. Net interest income is the difference between the interest
income we earn on our interest-earning assets and the interest we pay on
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.
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.
Through the first half of fiscal 2005, the Company continued to realize
improvements in its net interest margin as increases in earning asset yields
continued to outpace those of its
6
interest bearing-liabilities. However, that trend reversed in the latter half of
2005 when upward pressure on the Company's cost of deposits resulted in an
increase in the Company's cost of interest-bearing liabilities greater than the
increase in the yield of its interest earning assets. For the year ended
September 30, 2005, the Company experienced a 16 basis point increase in its
yield on earning assets to 4.84% from 4.68% for year ended September 30, 2004.
This increase was attributable to a 22 basis point increase in the yield on
investment securities and a 207 basis point increase in the yield on
interest-bearing deposits and other earning assets. These increases were offset
by a 7 basis point decline in the yield on loans. Offsetting this overall
improvement in earning asset yields was an equivalent 15 basis point increase in
the cost of interest-bearing liabilities to 2.56%from 2.41%. This increase
resulted, in part, from a 26 basis point increase in the cost of
interest-bearing deposits. This increase was offset by an 18 basis point
decrease in the cost of borrowings resulting primarily from increased
utilization of overnight borrowings. In total, the Company's net interest margin
remained unchanged at 2.60% for fiscal 2005 and 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 0.21% of total assets at
September 30, 2005 from 0.12% of total assets at September 30, 2004. However,
management did not perceive this increase in nonperforming assets to require
additional loan loss provisions. Consequently, loan loss provisions in the
current year continue to be made primarily in connection with 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 0.27% for the year ended
September 30, 2005 matching that of fiscal 2004.
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 fiscal 2004. More recently, benefit costs have increased as the Company
7
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, noninterest
expense as a percentage of average assets totaled 2.02% for the year ended
September 30, 2005 - an increase of 13 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. 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 fiscal 2005. Additionally, during fiscal
2005 the Company recorded higher consulting and professional fees associated
with evaluating and executing the Company's balance sheet growth and
diversification strategies.
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 year ended September 30,
2005, both occupancy and equipment and data processing costs have been reduced
as an absolute dollar amount as well as a percentage of average assets when
compared with fiscal 2004. Together, reductions in these expenses totaled 4
basis points which partially offset the 17 basis point combined increase in all
other noninterest 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 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. As discussed in our financial
statements, we have identified three specific sites for de novo branches while
we continue to evaluate and pursue additional retail branching opportunities.
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 lending and administrative operations in order to add the personnel called
for by our growth plans.
In total, our return on average assets decreased 8 basis points to
0.46% for the year ended September 30, 2005 from 0.54% for fiscal 2004 while
return on average equity decreased 47 basis points to 5.30% 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 year ended September 30,
2005 would have been 0.52% and 5.99%, respectively.
8
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 half of fiscal 2005, further increases in
interest rates from current levels could trigger increases in the Bank's cost of
interest-bearing liabilities that continue to outpace that of its yield on
earning assets causing further net interest margin compression. Such compression
occurred during the three months ended September 30, 2005 when our net interest
spread shrank 10 basis point to 2.14% from 2.24% for the three-month period
ended June 30, 2005. This net interest spread compression was due, in part, to
yield on earning assets decreasing from 4.91% for the June quarter to 4.84% for
the September quarter. This reduction resulted largely from the increased
investment in short term, liquid assets funded by the receipt of stock
subscriptions. That reduction was exacerbated by a 4 basis point increase in the
cost of interest-bearing liabilities from 2.67% to 2.71% during the same
comparative period. This increased cost was largely attributable to the
disintermediation of lower cost, non-maturity deposits into higher cost
certificates of deposit whose impact on earnings was diminished by the balance
of stock subscriptions held during the period on which the Bank paid a passbook
savings rate of interest.
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.
Comparison of Financial Condition at September 30, 2005 and September 30, 2004
Our total assets increased by $130.9 million, or 30.8%, to $555.9
million at September 30, 2005 from $424.9 million at September 30, 2004. The
increase reflected growth in cash and cash equivalents, securities held to
maturity, and loans receivable, net offset by declines in securities available
for sale.
At September 30, 2005, the Bank's total assets were inflated by $115.2
million of stock subscriptions held pending the closing of the Company's second
step conversion. To better reflect the allocation of the Company's interest
earning assets and interest costing liabilities, the 2005 information presented
in the tables below utilizes the pro forma balance of total assets discussed in
Note 2 of the financial statements in percentage of total assets calculations.
Cash and cash equivalents increased by $117.8 million, or 1,472.5%, to
$125.8 million at September 30, 2005 from $8.0 million at September 30, 2004.
The increase in cash and cash equivalents is largely attributable to the $115.2
million of stock subscriptions held at September 30, 2005 pending the closing of
the Company's second step conversion.
9
Securities classified as available-for-sale decreased $27.2 million, or
30.4%, to $62.3 million at September 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 $5.0 million or 178.6% to $7.8
million at June 30, 2005 from $2.8 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 September 30, 2005 and September 30, 2004. Amounts reported exclude
unrealized gains and losses on the available for sale portfolio.
September 30, 2005 September 30, 2004
------------------ ------------------
Percent of
Pro Forma
--------- Percent of
Type of Securities Amount Total Assets Amount Total Assets
- ------------------ ------ ------------ ------ ------------
(Dollars in thousands)
Fixed rate MBS $13,007 2.49% $15,923 3.75%
ARM MBS 7,770 1.49 8,755 2.06
Fixed rate CMO 26,111 5.00 43,982 10.36
Floating rate CMO 2,809 0.54 435 0.10
ARM mutual fund 10,000 1.92 10,000 2.35
Fixed rate agency debentures 11,998 2.30 13,997 3.29
------- ----- ------- -----
Total $71,695 13.74% $93,092 21.91%
======= ===== ======= =====
Assuming no change in interest rates, the estimated average life of the
investment securities portfolio, excluding the ARM mutual fund, was 2.26 years
and 2.23 years at September 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 2.67
years and 3.12 years at September 30, 2005 and September 30, 2004, respectively.
Loans receivable, net increased by $32.0 million, or 10.4%, to $341.0
million at September 30, 2005 from $309.0 million at September 30, 2004. The
growth was primarily comprised of a $15.4 million net increase in multi-family
and commercial real estate loans coupled with a $15.6 million net increase in
one-to-four family mortgages.
10
The following table compares the composition of the Company's loan
portfolio by loan type as a percentage of total assets at September 30, 2005
with that of September 30, 2004. Amounts reported exclude allowance for loan
losses and net deferred origination costs.
September 30, 2005 September 30, 2004
------------------ ------------------
Percent of
Pro Forma
--------- Percent of
Type of Loans Amount Total Assets Amount Total Assets
- ------------- ------ ------------ ------ ------------
(Dollars in thousands)
Construction $ 1,100 0.21% $ 3,075 0.72%
1/1 and 3/3 ARMs 3,664 0.70 1,800 0.42
3/1 and 5/1 ARMs 115,878 22.22 89,694 21.11
5/5 and 10/10 ARMs 37,079 7.11 24,619 5.79
7/1 and 10/1 ARMs 1,743 0.33 1,675 0.40
15 year fixed or less 108,731 20.85 112,238 26.41
Greater than 15 year fixed 58,852 11.28 64,702 15.23
Home equity lines of credit 13,413 2.57 10,666 2.51
Consumer 702 0.13 746 0.18
Commercial 746 0.14 398 0.09
-------- ----- -------- -----
Total $341,908 65.54% $309,613 72.86%
======== ===== ======== =====
Total deposits increased by $18.2 million, or 5.6%, to $340.9 million
at September 30, 2005 from $322.7 million at September 30, 2004. The increase
was primarily due to increases in certificates of deposit, interest-bearing
checking deposits and non interest-bearing deposits, partially offset by a
decline in savings deposits. Certificate of deposit accounts increased $34.8
million or 29.5% to $152.8 million. This growth in certificates resulted, in
part, from the disintermediation of savings deposits which decreased by $20.1
million, or 14.0% to $123.3 million. Checking deposits, including demand, NOW
and money market checking accounts, increased $3.6 million or 5.8% to $64.8
million.
The following table compares the composition of the Company's deposit
portfolio by category as a percentage of total assets at September 30, 2005 with
that of September 30, 2004.
September 30, 2005 September 30, 2004
------------------ ------------------
Percent of
Pro Forma
--------- Percent of
Deposit category Amount Total Assets Amount Total Assets
- ---------------- ------ ------------ ------ ------------
(Dollars in thousands)
Money market checking $ 25,759 4.94% $ 25,834 6.08%
Other checking 39,088 7.49 35,461 8.34
Money market savings 32,736 6.28 44,880 10.56
Other savings 90,534 17.36 98,521 23.18
Certificates of deposit 152,808 29.29 118,020 27.78
-------- ----- -------- -----
Total $340,925 65.36% $322,716 75.94%
======== ===== ======== =====
FHLB advances decreased $3.8 million, or 6.6%, to $53.7 million at
September 30, 2005 from $57.5 million at September 30, 2004. The net decrease of
$3.8 million comprised a net
11
decrease of $2.7 million drawn on overnight repricing lines of credit, the
repayment of a maturing $1.0 million fixed rate term advance and $57,000 of
amortization on fixed rate amortizing advances.
The following table compares the composition of the Company's borrowing
portfolio by remaining term to maturity as a percentage of total assets at
September 30, 2005 with that of September 30, 2004. Scheduled principal payments
on amortizing borrowings are reported as maturities.
September 30, 2005 September 30, 2004
------------------ ------------------
Percent of
Pro Forma
--------- Percent of
Remaining Term Amount Total Assets Amount Total Assets
- -------------- ------ ------------ ------ ------------
(Dollars in thousands)
Overnight $ - -% $ 2,700 0.64%
One year or less 8,060 1.55 1,057 0.25
One to two years 8,062 1.55 8,060 1.90
Two to three years 12,065 2.30 8,062 1.90
Three to four years 7,547 1.45 12,065 2.84
Four to five years 6,000 1.15 7,547 1.77
More than five years 12,000 2.30 18,000 4.23
------- ----- ------- -----
Total $53,734 10.30% $57,491 13.53%
======= ===== ======= =====
Equity increased $192,000, or 0.50% to $39.5 million at September 30,
2005 from $39.3 million at September 30, 2004. The increase reflects net income
of $2.0 million for the fiscal year ended September 30, 2005, offset by
dividends paid of $1.4 million. In addition, the amount reclassified on ESOP
shares increased $421,000 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 11 to the consolidated financial statements. On October 5,
2005, the Company completed its second step offering (as discussed in Note 2 to
the consolidated financial statements). On October 6, 2005, the Company began
trading on Nasdaq which is considered to be an established market under ERISA
regulations. As a result, effective October 6, 2005, the Company is no longer
required to establish a liability to reflect this repurchase obligation.
Comparison of Operating Results for the Years Ended September 30, 2005 and 2004
General. Net income for the year ended September 30, 2005 was $2.0
million, a decrease of $119,000, or 5.5% from 2004. The decrease in net income
resulted from an increase in noninterest expense offset by an increase in net
interest income coupled with decreases in non-interest income, the provision for
loan losses and the provision for income taxes.
Interest Income. Total interest income increased 13.2% or $2.4 million
to $20.6 million for the year ended September 30, 2005 from $18.2 million for
the year ended September 30, 2004. For those same years, the average yield on
interest-earning assets increased 16 basis points to 4.84% from 4.68% while the
average balance of interest-earning assets increased $37.0 million or 9.5% to
$425.9 million from $388.9 million.
12
Interest income on loans increased $2.5 million or 16.77%, to $17.5
million for the year ended September 30, 2005 from $15.0 million for 2004. This
increase was due, in part, to a $49.3 million increase in the average balance of
loans receivable to $327.9 million for the year ended September 30, 2005 from
$278.6 million 2004. The impact on interest income attributable to this growth
more than offset the 7 basis points decrease in the average yield on loans which
declined to 5.32% from 5.39% 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 and a growing strategic
emphasis on commercial real estate lending.
The rise in interest income on loans was partially offset by lower
interest income on securities, which decreased $391,000 or 12.5% to $2.7 million
for the year ended September 30, 2005 from $3.1 million for 2004. The decrease
was due in part, to a $19.4 million decline in the average balance of investment
securities to $84.6 million for the year ended September 30, 2005 from $104.0
million for 2004. The impact on interest income attributable to this decline was
partly offset by a 22 basis point increase in the average yield on securities
which grew to 3.23% from 3.01% 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 $346,000 to $408,000 for the year ended
September 30, 2005 from $62,000 for the same period in 2004. This increase was
due, in part, to an increase of $7.0 million in the average balance of these
assets to $13.3 million for the year ended September 30, 2005 from $6.3 for
2004. The impact on interest income attributable to this growth was further
augmented by a 207 basis point rise in the average yield on these assets which
increased to 3.06% from 0.98%.
Interest Expense. Total interest expense increased by $1.4 million or
17.8% to $9.5 million for the year ended September 30, 2005 from $8.1 million
for 2004. For those same comparative periods, the average cost of
interest-bearing liabilities increased 15 basis points from 2.41% to 2.56% while
the average balance of interest bearing liabilities increased 36.3 million or
10.8% to $372.6 million for fiscal 2005 from $336.2 million for 2004.
Interest expense on deposits increased $1.5 million or 27.8% to $6.7
million for the year ended September 30, 2005 from $5.2 million for 2004. This
increase was due, in part, to a $34.4 million increase in the average balance of
interest-bearing deposits to $310.5 million for the year ended September 30,
2005 from $276.1 million for 2004. The components of this net increase for the
comparative periods include an increase of $18.6 million in the average balance
of certificates of deposit, a $1.6 million increase in the average balance of
savings accounts and a $14.2 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 26 basis point increase in the average
cost of interest-bearing deposits to 2.16% for the year ended September 30, 2005
from 1.90% for 2004. The components of this increase include a 52 basis point
increase in the average cost of certificates of deposit and a 35 basis point
increase in the average cost of interest-bearing checking accounts while the
average cost of savings accounts remained the same at 1.55%.
13
Interest expense on FHLB advances decreased $15,000 to $2.8 million for
the year ended September 30, 2005 from $2.9 million for the same period in 2004.
This decrease was due, in part, to an 18 basis point decline in the average cost
of advances from 4.76% in 2004 to 4.58% in 2005. The impact on expense
attributable to this decrease in average cost was partly offset by a $1.9
million increase in the average balances to $62.1 million for the year ended
September 30, 2005 from $60.1 million for 2004. 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. Net interest income increased by $956,000 or 9.5%,
to $11.1 million for the year ended September 30, 2005 from $10.1 million for
the year ended September 30, 2004. The net interest rate spread remained the
same in fiscal 2005 at 2.28%, while the net interest margin also remained the
same at 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 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
September 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 $81,000 for the year ended
September 30, 2005 representing a decrease of $126,000 over 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
fiscal 2005. 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 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
14
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.
Specific changes to environmental factors used in the Bank's loss
provision calculations reflected the Company's strategic focus on commercial
real estate and construction lending. Environmental factors applied to the
outstanding balance of construction and commercial mortgages reflect increased
balances of unseasoned loans and concerns about potentially inflated real estate
values. However, the impact of these increases has been partially offset by
reductions in environmental factors attributable to the experience, ability and
depth of lending management and staff both of which were enhanced during the
year.
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 year ended September 30, 2005, loans
receivable, net increased 10.4% to $341.0 million from $309.0 million at
September 30, 2004. Total gross loan balances, excluding loans held for sale,
net deferred loan costs and the allowance for loan loss, grew $32.0 million or
10.3%. The growth was primarily comprised of net increases in multi-family and
commercial real estate loans totaling $15.4 million coupled with net increases
in one-to-four family mortgages totaling $15.5 million. Additional components of
the net change in gross loan balances included increases in home equity loans of
$2.7 million and net increases in commercial and consumer loans totaling
$304,000. This growth was offset by a decline in the disbursed balance of
construction loans totaling $1.9 million.
By comparison, loan growth for the year ended September 30, 2004
totaled $46.4 million or $14.0 million more 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 $36.3 million, an
increase of $7.0 million in multi-family and commercial real estate loans, an
increase of $2.6 million in the disbursed balances of construction loans and an
increase of $1.8 million in home equity loans, offset by net decreases in
consumer loans and commercial loans totaling $1.2 million.
In total, the allowance for loan losses as a percentage of gross loans
outstanding decreased 2 basis points to 0.48% at September 30, 2005 from 0.50%
at September 30, 2004. These ratios reflect allowance for loan loss balances of
$1.7 million and $1.6 million, respectively. The level of the allowance is based
on estimates and the ultimate losses may vary from those estimates.
Noninterest Income. Noninterest income decreased $102,000 to $1.2
million for the year ended September 30, 2005 compared to the same period in
2004. A significant portion of that decrease resulted from the absence in 2005
of $176,000 in gain on sale of other real estate that had been recorded during
2004. The remaining components of the decrease are attributable to a $16,000
loss on sale of available-for-sale securities coupled with a decline of $7,000
in deposit service fees resulting from reduced customer utilization of deposit
services introduced in the prior fiscal year. In addition, there was a decrease
of $11,000 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
15
insurance which grew $63,000 from $207,000 for the year ended September 30, 2004
to $270,000 for fiscal 2005 reflecting higher policy balances held by the
Company. Other non-interest income increased $45,000 from year to year primarily
due to collection of comparatively higher loan prepayment penalties.
Noninterest Expense. Noninterest expense increased $1.3 million, or
16.6% to $8.9 million for the year ended September 30, 2005 from $7.7 million
for the year ended September 30, 2004. The increase was primarily a result of
higher expenses for salaries and employee benefits, advertising and other
non-interest expenses, partially offset by decreases in occupancy and equipment,
data processing and borrowed funds prepayment penalty.
Salaries and employee benefits increased $1.1 million or 22.5% to $5.9
million for the year ended September 30, 2005 as compared to $4.8 million for
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, deferred compensation
benefits costs increased $207,000 due to the implementation of a restricted
stock plan during fiscal 2005 while expenses associated with the employee stock
ownership plan grew $54,000 due to increases in the market value of the shares
of Company's stock held by the plan. Salaries and wages including bonus and
payroll taxes, increased $324,000 or 9.3% due, in part, to executive and lending
staffing additions coupled with overall annual increases in employee
compensation. Finally, medical insurance benefit premiums increased $36,000 or
8.9%.
Occupancy and equipment expense decreased $23,000 to $830,000 for the
year ended September 30, 2005 as compared to $853,000 for 2004. This decrease is
primarily attributable to a $67,000 decrease in computer depreciation expense.
For the same comparative periods, data processing costs also decreased $19,000
from $652,000 to $633,000 due to the absence in the current period of
information technology conversion and upgrade expenses that were recognized
during 2004.
Legal fees increased $129,000 to $234,000 for the year ended September
30, 2005 from $105,000 for 2004. A portion of the increase in legal fees is
attributable to organizational and benefits related 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 $131,000 to $274,000 for the year ended September 30,
2005 as compared to 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.
The Bank did not prepay any borrowings during the year ended September
30, 2005. As such, no borrowed funds prepayment penalties were incurred during
the year. By comparison, in fiscal 2004 the Bank prepaid $3.0 million of FHLB
advances with a weighted average cost of 6.28% which resulted in prepayment
penalties totaling $125,000.
16
Finally, other noninterest expenses increased $85,000 for the year
ended September 30, 2005 as compared 2004 due, in large part, to increases in
net loan processing charges and other general and administrative expenses.
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
$168,000 for the year ended September 30, 2005 from 2004. The effective tax rate
was 37.1% and 38.8% for the years ended September 30, 2005 and 2004. 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 Years Ended September 30, 2004 and 2003
General. Net income for the year ended September 30, 2004 was $2.2
million, an increase of $759,000, or 54.1% from 2003. The increase in net income
resulted from an increase in net interest income and non-interest income, offset
by increases in non-interest expense and the provision for income taxes.
Interest Income. Total interest income increased by $728,000 or 4.2%,
to $18.2 million for the year ended September 30, 2004 from $17.5 million for
the year ended September 30, 2003. The primary factor for the increase in
interest income was an increase of $36.2 million or 10.3% in the average balance
of interest earnings assets for the year ended September 30, 2004 to $388.9
million from $352.7 million for the year ended September 30, 2003. This increase
in the average balance was partially offset by a 27 basis points decline in the
average yield to 4.68% in fiscal 2004 from 4.95% in fiscal 2003.
Interest income on loans increased $674,000 or 4.7%, to $15.0 million
for the year ended September 30, 2004 from $14.3 million for the 2003 period.
The average balance of loans receivable, net increased $40.2 million to $278.6
million for the year ended September 30, 2004, which more than offset the
decrease in the average yield on loans receivable, net from 6.01% in fiscal 2003
to 5.39% in fiscal 2004.
The increase in interest income on loans was offset by a decrease in
interest income on federal funds sold and other interest-bearing deposits, which
declined $153,000 or 71.2% to $62,000 for the year ended September 30, 2004. The
decrease resulted from declines in the average yield and average balance of
those assets. There was a 62 basis point decrease in the average yield on
federal funds sold and other interest-bearing deposits from 1.60% in fiscal 2003
17
to 0.98% in fiscal 2004. This decrease in interest income was exacerbated by a
decline in the average balance of federal funds sold and other interest-bearing
deposits from $13.5 million for fiscal 2003 to $6.3 million for fiscal 2004.
Interest income on securities increased $207,000 or 7.1% to $3.1
million for the year ended September 30, 2004. The average balance of securities
increased $3.2 million to $104.0 million for the year ended September 30, 2004
from $100.8 million for the year ended September 30, 2003. Additionally, the
average yield on securities increased 11 basis points in the current fiscal year
to 3.01% from 2.90% in fiscal 2003.
Interest Expense. Total interest expense decreased by $765,000 or 8.6%
to $8.1 million for the year ended September 30, 2004 from $8.9 million in 2003.
For those same periods, the average cost of interest-bearing liabilities
decreased 40 basis points from 2.81% to 2.41. This decline in the average cost
was offset by an increase of $20.4 million in the average balance of interest
bearing liabilities to $336.2 million in fiscal 2004 from $315.8 million in
fiscal 2003.
The average balance of interest bearing deposits increased $15.2
million or 5.8% for the year ended September 30, 2004. The average balance of
certificates of deposit decreased $4.4 million to $116.9 million in fiscal 2004
from $121.3 million in fiscal 2003. In addition, the average cost of
certificates of deposit decreased from 2.83% to 2.49%. The average cost of
savings accounts decreased from 1.97% in 2003 to 1.55% in 2004, which more than
offset the increase of $19.0 million or 16.3% in the average balance of savings
accounts.
Interest expense on FHLB advances increased $25,000 to $2.9 million as
a result of an increase in the average balance from $54.9 million in fiscal 2003
to $60.1 million in fiscal 2004. This was partially offset by a decrease in the
average cost of advances from 5.16% in 2003 to 4.76% in 2004. The lower average
cost is primarily due to utilization of overnight line of credit borrowings and
new term borrowings with an average cost that is less than those that matured or
were prepaid by the Company during the year.
Net Interest Income. Net interest income increased by $1.5 million or
17.4%, to $10.1 million for the year ended September 30, 2004 from $8.6 million
for the year ended September 30, 2003. The net interest rate spread increased 14
basis points to 2.28% in 2004 from 2.14% in 2003 while the net interest margin
increased 16 basis points to 2.60% from 2.44%. Both increases reflect
interest-bearing liabilities repricing downward slightly more rapidly than
assets.
Provision for Loan Losses. Provisions for loan losses are charged to
operations at a level required to reflect probable incurred credit losses in the
loan portfolio. The provision for loan losses decreased $47,000 to $207,000 for
the year ended September 30, 2004 compared to $254,000 for the year ended
September 30, 2003. Provisions for nonperforming assets and historical losses
based on net charge-offs were nominal due to a history of low charge-offs and
relative stability of nonperforming assets. 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 the year
ended September 30, 2004, total one-to-four family mortgages increased $36.3
million representing an increase of 16.8% and reflecting the majority of the
Bank's loan growth. Multi-family and commercial real estate loans increased $7.0
million or 19.3% and
18
commercial loans decreased $1.2 million or 75.3%. Consumer loans decreased
$34,000 or 4.4% and home equity loans increased $1.8 million or 19.9% while
construction loans, net of loans in process, increased $2.6 million or 581.1%.
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 two 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.
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. The allowance for loan losses as a percentage of
gross loans outstanding declined slightly to 0.50% for September 30, 2004
compared to 0.52% at September 30, 2003 reflecting balances of $1.6 million and
$1.4 million, respectively. Non-performing loans as a percentage of gross loans
was 0.17% at September 30, 2004 compared to 0.20% at September 30, 2003. The
level of the allowance is based on estimates and the ultimate losses may vary
from those estimates.
Noninterest Income. Noninterest income increased $580,000, or 80.8% to
$1.3 million for the year ended September 30, 2004 compared to 2003. A
significant portion of that increase resulted from the absence in 2004 of
$188,000 in loss on sale of available-for-sale securities that had been recorded
during 2003. Additionally, service charges on deposit accounts increased by
$245,000 primarily due to the implementation of new deposit services. Gains on
sale of held-for-sale loans decreased $124,000 to $27,000 for the year ended
September 30, 2004 from $151,000 for 2003. Income from cash surrender value of
life insurance decreased $20,000 for the comparative periods due to reduced
yields reflecting lower market interest rates. Finally, gain on sale of other
real estate owned increased $173,000 and other non-interest income increased by
$118,000, due in large part to collection of comparatively higher loan related
fees, which were primarily prepayment penalties.
Noninterest Expense. Noninterest expense increased $795,000, or 11.6%
to $7.7 million for the year ended September 30, 2004 from $6.9 million for the
year ended September 30, 2003. The increase was primarily a result of higher
expenses for salaries and employee benefits, occupancy and equipment, data
processing, advertising, and other non-interest expenses.
Salaries and benefits increased $305,000 or 6.8% for the year ended
September 30, 2004. A large portion of the increase was due to $215,000 in
employee stock ownership plan expense arising from the implementation of the
plan during the current fiscal year. Medical and related benefit plan premiums
increased $35,000 while salaries and wages including bonus and payroll taxes,
increased $178,000 or 5.3% for the year ended September 30, 2004 as compared to
the same period in 2003. These increases were offset by lower deferred
compensation plan benefit expenses of $98,000, which had been adjusted in the
prior year for a decrease in the discount rate used to calculate the liability
in a lower rate environment. In addition, expense for temporary help declined
$23,000 in 2004 as a result of decreased utilization of temporary services that
were required in 2003 to augment loan processing and accounting staff and due to
strong loan origination volume and extended staff absences.
19
Occupancy and equipment expense increased $31,000 to $853,000 for the
year ended September 30, 2004 as compared to $822,000 for 2003, due to higher
computer expenses primarily related to upgrades and enhancements to information
technology support and security services. Data processing costs also increased
$109,000 mainly due to increases in service bureau core processing costs
resulting from growth in deposit and loan accounts as well as non-recurring
costs associated with comprehensive system upgrades.
Advertising expenses were higher by $18,000 for 2004 resulting from
increased print, radio, and television ads, and higher agency fees. Professional
and consulting fees, including legal fees, increased $12,000 due to expenses
associated with being a public company.
The Bank recognized $125,000 in borrowed funds prepayment penalties for
the year ended September 30, 2004 compared to none in fiscal 2003. The current
year's expense resulted from the prepayment of $3.0 million of FHLB advances
with a weighted average cost of 6.28%.
Other non-interest expenses increased $195,000 for the year ended
September 30, 2004 as compared to 2003. General and administrative expenses
increased $74,000 consisting primarily of $38,000 in comparatively higher
expenses relating to printing and the bulk purchase of brochures and forms and
$25,000 in higher costs associated with new deposit service programs. Other
expense increases included $4,000 for corporate insurance, $9,000 in transfer
agent fees and $18,000 for regulatory fees resulting from increased regulatory
assessments due to asset growth and the establishment of a holding company.
These additional costs were offset by minor decreases in other miscellaneous
expenses. Further, net loan processing charges increased primarily due to
reduced recognition of loan modification fees offsetting related costs as a
result of the deferral of loan modification fees and related costs in the
current period.
Management expects increased expenses in the future resulting from the
ongoing expenses associated with the employee stock ownership plan and the
potential stock benefit plans, as well the ongoing costs associated with being a
public company such as periodic reporting, annual meeting materials, transfer
agent services, and accounting and other professional fees. Furthermore, we
intend to expand our branch office network in the future, and expenses related
to such expansion may impact earnings in future periods.
Provision for Income Taxes. The provision for income taxes increased
$566,000 for the year ended September 30, 2004 from the same period in 2003. The
effective tax rate was 38.8% and 36.5% for the years ended September 30, 2004
and 2003. The slight increase in the effective tax rate results primarily from
an increase in nondeductible expenses related to the employee stock ownership
plan.
Critical Accounting Policies
Note 1 to our Consolidated Financial Statements for the year ended
September 30, 2005 contains a summary of our significant accounting policies.
Various elements of our accounting policies, by their nature, are inherently
subject to estimation techniques, valuation assumptions and other subjective
assessments. The following is a description of our critical accounting policy
and an explanation of the methods and assumptions underlying its application.
20
ALLOWANCE FOR LOAN LOSSES
Our policy with respect to the methodologies used to determine the
allowance for loan losses is our most critical accounting policy. This policy is
important to the presentation of our financial condition and results of
operations, and it involves a higher degree of complexity and requires
management to make difficult and subjective judgments, which often require
assumptions or estimates about highly uncertain matters. The use of different
judgments, assumptions and estimates could result in material differences in our
results of operations or financial condition.
In evaluating the level of the allowance for loan losses, management
considers 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, 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
September 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 reasonably estimable.
Based on the allowance for loan loss methodology discussed above,
management expects provisions for loan losses to increase as a result of the net
growth in loans called for in the Company's business plan. Specifically, as
discussed earlier, our business strategy calls for increased strategic emphasis
in commercial real estate and business lending. The loss factors used in the
Bank's loan loss calculations are generally higher for such loans compared with
those applied to one-to-four family mortgage loans. Consequently, future net
growth in commercial real estate and business loans may result in required loss
provisions that exceed those recorded in prior years when comparatively greater
strategic emphasis had been placed on growing the 1-4 family mortgage loan
portfolio.
Liquidity and Commitments
We are required to have enough investments that qualify as liquid
assets in order to maintain sufficient liquidity to ensure a safe and sound
operation. Liquidity may increase or decrease depending upon the availability of
funds and comparative yields on investments in relation to the return on loans.
Historically, we have maintained liquid assets above levels believed to be
adequate to meet the requirements of normal operations, including potential
deposit outflows. Cash flow projections are regularly reviewed and updated to
assure that adequate liquidity is maintained.
21
The Bank's short term liquidity, represented by cash and cash
equivalents, is a product of its operating, investing and financing activities.
The Bank's primary sources of funds are deposits, amortization, prepayments and
maturities of outstanding loans and mortgage-backed securities, maturities of
investment securities and other short-term investments and funds provided from
operations. While scheduled payments from the amortization of loans and
mortgage-backed securities and maturing investment securities and short-term
investments are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by 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 investment 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 September 30, 2005, the
total approved loan origination commitments outstanding amounted to $21.3
million. At the same date, unused lines of credit were $16.0 million and
construction loans in process were $350,000. Certificates of deposit scheduled
to mature in one year or less at September 30, 2005, totaled $97.6 million.
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 September 30, 2005 to borrow an additional $85.2 million from the
Federal Home Loan Bank of New York as a funding source to meet commitments and
for liquidity purposes. In calculating our borrowing capacity, the Bank utilizes
the Federal Home Loan Bank's guideline, which generally limits advances secured
by residential mortgage collateral to 25% of the Bank's total assets. At
September 30, 2005, the Bank's total assets were inflated by $115.2 million of
stock subscriptions held pending the closing of the Company's second step
conversion, which increased the Bank's reported borrowing capacity by
approximately $28.7 million as of that date. Upon completion of the conversion,
$33.7 million of the $115.2 million was returned on oversubscriptions.
22
The following tables disclose our contractual obligations and
commercial commitments as of September 30, 2005. Scheduled principal payments on
amortizing borrowings are reported as maturities.
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
----- ------ --------- --------- -------
(In thousands)
Time Deposits $ 152,808 $ 97,646 $ 38,563 $ 6,518 $ 10,081
Federal Home Loan Bank
advances(1) 53,734 8,060 20,127 13,547 12,000
----------- ---------- ----------- ----------- -----------
Total $ 206,542 $ 105,706 $ 58,690 $ 20,065 $ 22,081
=========== ========== =========== =========== ===========
(1) At September 30, 2005, the total collateralized borrowing limit was
$140 million of which we had $53.7 million outstanding.
Total
Amounts Less Than Over
Committed 1 Year 1-3 Years 4-5 Years 5 Years
----- ------ --------- --------- -------
(In thousands)
(In thousands)
Lines of credit(1) $ 15,956 $ 1,273 $ 311 $ 149 $ 14,223
Construction loans in
process 350 350 - - -
Other commitments to
extend credit 21,284 21,284 - - -
----------- ---------- ----------- ----------- -----------
Total $ 37,590 $ 22,907 $ 311 $ 149 $ 14,223
=========== ========== =========== =========== ===========
(1) Represents amounts committed to customers.
In addition to the above commitments, the Company has financial
obligations regarding outstanding contracts for sale relating to future branch
sites. As of September 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.
23
Capital
Consistent with its goals to operate a sound and profitable financial
organization, American Bank of New Jersey actively seeks to maintain a "well
capitalized" institution in accordance with regulatory standards. The Bank's
total equity was $35.1 million at September 30, 2005, or 6.33% of total assets
on that date. As of September 30, 2005, the Bank exceeded all capital
requirements of the Office of Thrift Supervision. The Bank's regulatory capital
ratios at September 30, 2005 were as follows: core capital 6.49%; Tier I
risk-based capital, 13.54%; and total risk-based capital, 14.13%. The regulatory
capital requirements to be considered well capitalized are 5.0%, 6.0% and 10.0%,
respectively.
Impact of Inflation
The consolidated financial statements presented herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturity structure of our
assets and liabilities are critical to the maintenance of acceptable performance
levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
Recent Regulatory and Accounting Developments
FAS 123(R) (As Amended) - Share Based Payments
FAS 123(R) 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 during fiscal
2005. The
24
pro forma cost and impact on earnings per share for the year ended September 30,
2005 are presented in Note 1 to the Consolidated Financial Statements.
We will begin to record compensation costs for stock options granted
during fiscal 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 58,278
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.
25
Average Balances, Interest, and Average Yields/Cost
The following table presents certain information at and for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs. The yields and costs for the periods indicated are derived by dividing
income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. Average balances were derived from
average daily balances.
At September 30,
Years Ended --------------------------------Years Ended September 30,------------------------
-------2005------ -------------2005----------- -------------3004---------- ----------2003----------
Interest Average Interest Average Interest Average
Yield/ Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Cost Balance Paid Cost Balance Paid Cost Balance Paid Cost
------- ---- ------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) $ 341,286 5.38% $327,948 $17,459 5.32% $278,632 $ 15,017 5.39% $ 238,474 $14,343 6.01%
Investment securities(2) 70,161 3.27 84,565 2,734 3.23 103,978 3,125 3.01 100,787 2,918 2.90
Other interest-earning
assets(3) 108,970 3.74 13,343 408 3.06 6,302 62 0.98 13,462 215 1.60
--------- ---- -------- ------- ---- -------- -------- ---- -------- ------- ----
Total interest-earning assets 520,417 4.75 425,856 20,601 4.84 388,912 18,204 4.68 352,723 17,476 4.95
Non-interest-earning assets 35,443 15,286 ------- 10,755 -------- 9,459 -------
--------- -------- -------- --------
Total assets $ 555,860 $441,142 $399,667 $362,182
========= ======== ======== ========
Interest-bearing liabilities:
NOW & money market $ 39,264 1.87% $ 37,243 490 1.32% $ 23,086 225 0.97% $ 22,511 $ 290 1.29%
Savings deposits(4) 238,471 1.13 137,723 2,130 1.55 136,100 2,109 1.55 117,052 2,307 1.97
Certificates of deposit 152,808 3.45 135,547 4,082 3.01 116,926 2,912 2.49 121,310 3,439 2.83
--------- ---- -------- ------- ---- -------- -------- ---- -------- ------- ----
Total interest-bearing
deposits 430,543 2.02 310,513 6,702 2.16 276,113 5,246 1.90 260,873 6,036 2.31
FHLB advances 53,734 4.84 62,056 2,844 4.58 60,125 2,859 4.76 54,923 2,834 5.16
--------- ---- -------- ------- ---- -------- -------- ---- -------- ------- ----
Total interest-bearing
liabilities 484,277 2.33 372,569 9,546 2.56 336,238 8,105 2.41 315,796 8,870 2.81
Non-interest-bearing deposits 25,583 23,954 ------- 22,080 -------- 20,303 -------
Other non-interest-bearing
liabilities 6,494 6,070 3,884 4,441
--------- -------- -------- --------
Total liabilities 516,354 402,593 362,202 340,540
Accumulated other
comprehensive income (959) (649) (508) 74
Retained earnings &
other equity 40,465 39,198 37,973 21,568
--------- -------- -------- --------
Total liabilities and
equity $ 555,860 $441,142 $399,667 $362,182
========= ======== ======== ========
Net interest spread(5) 2.42% $11,055 2.28% $ 10,099 2.28% $ 8,606 2.14%
==== ======= ==== ======== ==== ======= ====
Net interest margin(6) 2.58% 2.60% 2.60% 2.44%
==== ==== ==== ====
Ratio of interest-earning
assets to interest-bearing
liabilities 107.46% 114.30% 115.67% 111.69%
====== ====== ====== ======
- --------------------
(1) Calculated net of deferred fees and loss reserves. Non-accruing loans have
been included as loans carrying a zero yield. Includes loans held for sale.
(2) Calculated based on amortized cost excluding FAS 115 market value
adjustment.
(3) Includes Federal Home Loan Bank stock at cost and term deposits with other
financial institutions.
(4) 2003 average balances include money market savings accounts and stock
subscriptions received in connection with the Company's first public
offering which closed October 3, 2003. 2005 average balances include money
market savings accounts and stock subscriptions received in connection with
the Company's second public offering which closed October 5, 2005.
(5) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
26
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes
on the interest income and interest expense of the Company. The rate column
shows the effects attributable to changes in rate (changes in rate multiplied by
prior volume). The volume column shows the effects attributable to changes in
volume (changes in volume multiplied by prior rate). The rate/volume column
shows changes attributable to changes in both rate and volume, which cannot be
segregated.
2005 - 2004
-----------
Increase (Decrease)
Rate/
Volume Rate Volume Net
------ ---- ------ ---
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ 2,658 $ (183) $ (32) $ 2,442
Securities (583) 236 (44) (391)
Other interest-earning assets 69 131 146 346
------- ------- ------- -------
Total interest-earning assets 2,144 184 70 2,397
Interest-bearing liabilities:
NOW and money market accounts 138 79 48 265
Savings accounts 25 (4) - 21
Certificates of deposit 464 609 97 1,170
------- ------- ------- -------
Total interest bearing deposits 627 684 145 1,456
Federal Home Loan Bank advances 92 (104) (3) (15)
------- ------- ------- -------
Total interest-bearing liabilities 719 580 142 1,441
------- ------- ------- -------
Increase (decrease) in net interest income $ 1,425 $ (396) $ (72) $ 956
======= ======= ======= =======
2004 - 2003
-----------
Increase (Decrease)
Rate/
Volume Rate Volume Net
------ ---- ------ ---
(Dollars in thousands)
Interest-earning assets:
Loans receivable $ 2,416 $(1,491) $ (251) $ 674
Securities 91 112 4 207
Other interest-earning assets (114) (83) 44 (153)
------- ------- ------- -------
Total interest-earning assets 2,393 (1,462) (203) 728
Interest-bearing liabilities:
NOW and money market accounts 7 (70) (2) (65)
Savings accounts 375 (493) (80) (198)
Certificates of deposit (124) (418) 15 (527)
------- ------- ------- -------
Total interest bearing deposits 258 (981) (67) (790)
Federal Home Loan Bank advances 268 (222) (21) 25
------- ------- ------- -------
Total interest-bearing liabilities 526 (1,203) (88) (765)
------- ------- ------- -------
Increase (decrease) in net interest income $ 1,867 $ (259) $ (115) $ 1,493
======= ======= ======= =======
27
Management of Interest Rate Risk and 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 September 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.
Tables presenting the composition and allocation of the Company's
interest earning assets and interest costing liabilities from an interest rate
risk perspective are presented in the preceding section of this report titled
"Comparison of Financial Condition at September 30, 2005 and September 30,
2004". These tables present the Company's investment securities, loans, deposits
and borrowings by categories that reflect the contractual repricing
characteristics of the underlying assets or liabilities. Presented as a
percentage of total assets, the year-to-year comparative data presents changes
in the repricing characteristics of the Company's balance sheet - an important
component of interest rate risk.
Our net interest rate spread, which is the difference between the
yields we receive on assets and the rates we pay on liabilities, remained flat
during fiscal 2005 after increasing from 2003 levels during fiscal 2004. For the
years ended September 30, 2005 and September 30, 2004, our net interest rate
spread was 2.28%, as compared to 2.14% for the year ended September 30,
28
2003. In large part, the improvement in net interest rate spread in 2004
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.
As noted earlier, through the first half of fiscal 2005, the Company
continued to realize improvements in its net interest margin as increases in
earning asset yields continued to outpace increases in the cost of its interest
bearing-liabilities. However, that trend reversed in the latter half of 2005
when upward pressure on the Company's cost of deposits resulted in greater
increases in the Company's cost of interest-bearing liabilities than those of
its interest earning assets.
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
hybrid ARMs that are fixed rate for an initial period of time. At September 30,
2005, excluding allowance for loan losses and net deferred origination costs and
including loans held for sale, loans totaled $341.6 million comprising 61.5% of
total assets. Of those loans, fixed rate mortgages totaled $167.6 million or
30.1% of total assets while hybrid ARMs, including 3/1, 5/1, 7/1 and 10/1 ARMs
totaled $158.4 million of 28.5% 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 the Bank's Chief Executive Officer, the Bank's President
and Chief Operating Officer, the Bank's Executive Vice President and Corporate
Secretary, the Bank's Senior Vice President and Chief Financial Officer, the
Bank's Senior Vice President and Chief Lending Officer, the Bank's Vice
President of Branch Administration, and 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.
29
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, construction and business 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.
Quantitative Aspects of Market Risk. The following table presents
American Bank of New Jersey's net portfolio value as of September 30, 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 as % of Board
Net Portfolio Value Present Value of Assets Established Limits
------------------- ----------------------- ------------------
Net Net
Portfolio Basis Portfolio Basis
Changes in Value Point Value Point
Rates (1) $ Amount $ Change % Change Ratio Change Ratio Change
--------- -------- -------- -------- ----- ------ ----- ------
(Dollars in thousands)
+300 bp 46,276 -14,300 -24% 8.32% -213 bp 5.00% -450 bp
+200 bp 51,487 -9,089 -15% 9.12% -132 bp 6.00% -300 bp
+100 bp 56,389 -4,187 -7% 9.85% -59 bp 7.00% -150 bp
0 bp 60,576 10.44% 8.00%
-100 bp 62,471 1,895 +3% 10.68% +22 bp 7.00% -150 bp
-200 bp 60,645 69 +0% 10.32% -12 bp 6.00% -300 bp
- ----------------------
(1) The -300bp scenario is not shown due to the low prevailing interest rate
environment.
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
30
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 year ended September
30, 2005, we sold a total of $2.4 million of loans to the Federal National
Mortgage Association. Gains on sales of mortgage loans held for sale totaled
$16,000 for 2005. Such sales contributed to a 9% or $5.9 million reduction in
the balance of fixed rate mortgage loans with original maturities exceeding
fifteen years during 2005.
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 September 30, 2005, the Bank had
two outstanding contracts to sell long term, fixed rate mortgage loans totaling
$640,000 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%.
Although no such prepayments were transacted in fiscal 2005, 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.
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
ASB Holding Company
Bloomfield, New Jersey
We have audited the accompanying consolidated statements of financial condition
of ASB Holding Company and subsidiaries as of September 30, 2005 and 2004, and
the related consolidated statements of income, changes in equity, and cash flows
for the three years ended September 30, 2005, 2004 and 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ASB Holding Company and
subsidiaries as of September 30, 2005 and 2004, and the results of its
operations and its cash flows for the three years ended September 30, 2005, 2004
and 2003 in conformity with U.S. generally accepted accounting principles.
/s/Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
Livingston, New Jersey
November 4, 2005
32
ASB HOLDING COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 2005 and 2004
(In thousands except share data)
- ----------------------------------------------------------------------------------------------
2005 2004
----------- -----------
ASSETS
Cash and cash equivalents
Cash and due from banks $ 2,622 $ 2,256
Interest-bearing deposits 105,851 5,778
Federal funds sold 17,300 -
----------- -----------
Total cash and cash equivalents 125,773 8,034
Securities available-for-sale 62,337 89,495
Securities held-to-maturity (fair value: 2005 - $7,694,
2004 - $2,806) 7,824 2,794
Loans held for sale 280 -
Loans receivable, net of allowance for loan losses
2005 - $1,658; 2004 - $1,578 341,006 308,970
Premises and equipment 4,131 3,910
Federal Home Loan Bank stock, at cost 3,119 2,890
Cash surrender value of life insurance 7,512 6,242
Accrued interest receivable 1,468 1,359
Other assets 2,410 1,250
----------- -----------
Total assets $ 555,860 $ 424,944
=========== ===========
LIABILITIES AND EQUITY
Deposits
Non-interest-bearing $ 25,583 $ 22,599
Interest-bearing 315,342 300,117
----------- -----------
Total deposits 340,925 322,716
Stock subscriptions received 115,201 -
Advance payments by borrowers for taxes
and insurance 2,443 2,322
Federal Home Loan Bank advances 53,734 57,491
Accrued expenses and other liabilities 3,578 3,049
Common Stock in ESOP subject to contingent repurchase obligation 473 52
----------- -----------
Total liabilities 516,354 385,630
Commitments and contingent liabilities
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 17,242 15,687
Unearned ESOP shares (1,064) (1,200)
Unearned RSP shares (1,212) -
Retained earnings 25,417 24,806
Accumulated other comprehensive loss (959) (482)
Amount reclassified on ESOP shares (473) (52)
----------- -----------
Total equity 39,506 39,314
----------- -----------
Total liabilities and equity $ 555,860 $ 424,944
=========== ===========
- ----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
33
ASB HOLDING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 2005, 2004, and 2003
(In thousands except share data)
- --------------------------------------------------------------------------------------------
2005 2004 2003
---- ---- ----
Interest and dividend income
Loans, including fees $ 17,459 $ 15,017 $ 14,343
Securities 2,734 3,125 2,918
Federal funds sold and other 408 62 215
-------- -------- --------
Total interest income 20,601 18,204 17,476
Interest expense
NOW and money market 490 225 290
Savings 2,130 2,109 2,307
Certificates of deposit 4,082 2,912 3,439
Federal Home Loan Bank advances 2,844 2,859 2,834
-------- -------- --------
Total interest expense 9,546 8,105 8,870
-------- -------- --------
Net interest income 11,055 10,099 8,606
Provision for loan losses 81 207 254
-------- -------- --------
Net interest income after provision for loan losses 10,974 9,892 8,352
Noninterest income
Deposit service fees and charges 690 697 452
Income from cash surrender value of life insurance 270 207 227
Gain on sale of loans 16 27 151
Loss on sales of securities available-for- sale (16) - (188)
Gain on sale of other real estate owned - 176 3
Other 236 191 73
-------- -------- --------
Total noninterest income 1,196 1,298 718
Noninterest expense
Salaries and employee benefits 5,896 4,812 4,507
Occupancy and equipment 830 853 822
Data processing 633 652 543
Advertising 252 247 229
Professional & Consulting 274 143 129
Legal 234 105 107
Borrowed funds prepayment penalty - 125 -
Other 805 720 525
-------- -------- --------
Total noninterest expense 8,924 7,657 6,862
-------- -------- --------
Income before provision for income taxes 3,246 3,533 2,208
Provision for income taxes 1,203 1,371 805
-------- -------- --------
Net income $ 2,043 $ 2,162 $ 1,403
======== ======== ========
Earnings per share:
Basic $ 0.38 $ 0.40 $ 0.36
Diluted $ 0.37 $ 0.40 $ 0.36
- --------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
34
ASB HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years Ended September 30, 2005, 2004 and 2003
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Amount
Compre- Reclassified
Additional Unearned Unearned hensive on Compre-
Common Paid-in ESOP RSP Retained Income ESOP Total hensive
Stock Capital Shares Shares Earnings (Loss) Shares Equity Income
----- ------- ------ ------ -------- ------ ------ ------ ------
Balance at September 30, 2002 $ - $ - $ - $ - $ 21,341 $ 531 $ - $ 21,872
Initial funding of ASB Holding
Company - 100 - - (100) - - -
Comprehensive income
Net income - - - - 1,403 - - 1,403 $ 1,403
Unrealized holding loss on
securities available-for-sale,
net of reclassification and
tax effects - - - - - (936) - (936) (936)
-------
Total comprehensive income $ 467
--- ------ ------ -------- ------ ---- --- ------ =======
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 of common stock
in ESOP to contingent repurchase
obligation - - - - - (52) (52)
Comprehensive income
Net income - - - 2,162 - - 2,162 $ 2,162
Change in unrealized gain (loss)
on securities available-for-sale,
net of taxes - - - - (77) - (77) (77)
-------
Total comprehensive income $ 2,085
--- ------ ------ -------- ------ ---- --- ------ =======
Balance at September 30, 2004 555 15,687 (1,200) 24,806 (482) (52) 39,314
- ------------------------------------------------------------------------------------------------------------------------------------
(Continued)
35
ASB HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years Ended September 30, 2005, 2004 and 2003
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Amount
Compre- Reclassified
Additional Unearned Unearned hensive on Compre-
Common Paid-in ESOP RSP Retained Income ESOP Total hensive
Stock Capital Shares Shares Earnings (Loss) Shares Equity Income
----- ------- ------ ------ -------- ------ ------ ------ ------
RSP stock grants $ - $ 1,419 $ - $ (1,419) $ - $ - $ - $ -
RSP shares earned - - - 207 - - - 207
ESOP shares earned - 136 136 - - - - 272
Cash dividends paid -
$0.93 per share - - - - (1,432) - - (1,432)
Reclassification of
common stock in ESOP
to contingent repurchase
obligation - - - - - - (421) (421)
Comprehensive income
Net income - - - - 2,043 - - 2,043 $ 2,043
Change in unrealized
gain (loss) on securities
available-for-sale,
net of taxes - - - - - (477) - (477) (477)
-------
Total comprehensive
income $ 1,566
-------- ------- -------- -------- -------- -------- -------- -------- =======
Balance at September 30, 2005 $ 555 $17,242 $ (1,064) $ (1,212) $ 25,417 $ (959) $ (473) $ 39,506
======== ======= ======== ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
36
ASB HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 2005, 2004, and 2003
(In thousands)
- -------------------------------------------------------------------------------------------------------------
2005 2004 2003
---- ---- ----
Cash flows from operating activities
Net income $ 2,043 $ 2,162 $ 1,403
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 353 417 371
Net amortization of premiums and discounts 126 292 1,036
Losses on sales of securities available-for-sale 16 - 188
ESOP compensation expense 272 214 -
RSP compensation expense 207 - -
Provision for loan losses 81 207 254
Increase in cash surrender value of life insurance (270) (207) (227)
Gain on sale of other real estate owned - (176) (3)
Gain on sale of loans (16) (27) (151)
Proceeds from sales of loans 2,431 4,774 9,561
Origination of loans held for sale (2,695) (4,247) (9,910)
Decrease (increase) in accrued interest receivable (109) (104) 58
Decrease (increase) in other assets (732) 591 (979)
Change in deferred income taxes (174) (34) 142
Increase (decrease) in other liabilities 529 364 (22)
--------- --------- ---------
Net cash provided by operating activities 2,062 4,226 1,721
Cash flows from investing activities
Net increase in loans receivable (32,117) (46,542) (54,784)
Purchases of securities held-to-maturity (6,227) (922) -
Principal paydowns on securities held-to-maturity 1,183 954 4,133
Purchases of securities available-for-sale - (21,459) (111,503)
Sales of securities available-for-sale 1,984 - 21,026
Calls of securities available-for-sale 2,000 13,560 -
Principal paydowns on securities available-for-sale 22,315 25,387 70,435
Purchase of Federal Home Loan Bank stock (2,734) (2,222) (1,660)
Redemption of Federal Home Loan Bank stock 2,505 2,482 710
Purchase of bank-owned life insurance (1,000) (1,007) (324)
Purchase of premises and equipment (574) (388) (524)
Proceeds from sale of other real estate owned - 385 63
--------- --------- ---------
Net cash used in investing activities (12,665) (29,772) (72,428)
Cash flows from financing activities
Net increase in deposits 18,209 29,890 28,239
Stock subscriptions held for parent received (refunded or applied) 115,201 (52,137) 52,137
Net change in advance payments by borrowers for taxes and
insurance 121 243 366
Repayment of Federal Home Loan Bank of New York advances (16,057) (7,009) (4,000)
Federal Home Loan Bank of New York advances 15,000 6,800 15,000
Net change in Federal Home Loan Bank of New York overnight
lines of credit (2,700) 2,700 -
Cash dividends paid (1,432) - -
Net proceeds from stock issuance - 14,728 -
--------- --------- ---------
Net cash provided by (used in) financing activities 128,342 (4,785) 91,742
--------- --------- ---------
Net change in cash and cash equivalents 117,739 (30,331) 21,035
Cash and cash equivalents at beginning of year 8,034 38,365 17,330
--------- --------- ---------
Cash and cash equivalents at end of year $ 125,773 $ 8,034 $ 38,365
========= ========= =========
- -------------------------------------------------------------------------------------------------------------
(Continued)
37
ASB HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 2005, 2004, and 2003
(In thousands)
- -----------------------------------------------------------------------------------------------------------------
2005 2004 2003
---- ---- ----
Supplemental cash flow information:
Cash paid during the period for
Interest $ 9,544 $ 8,101 $ 8,839
Income taxes, net of refunds 1,675 1,166 1,049
Supplemental disclosures of noncash investing transactions:
Conversion of loans to other real estate owned $ - $ 209 $ 60
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
38
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: 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.
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.
After the sale of the stock, the MHC held 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 "well capitalized" capital
threshold.
On October 5, 2005, the Company completed a second step conversion at which time
ASB Holding Company ceased to exist and American Bancorp of New Jersey, Inc.
became the new holding company for the Bank. See Note 2 for further discussion.
The consolidated financial statements include ASB Holding Company and its wholly
owned subsidiaries, American Bank of New Jersey ("the Bank") and ASB Investment
Corp ("the Investment Corp"), together referred to as "the Company."
Intercompany transactions and balances are eliminated in consolidation.
The only 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 no activity to date.
The accounting and reporting policies of the Company are based upon accounting
principles generally accepted in the United States of America and conform to
predominant practices within the banking industry. Significant accounting
polices followed by the Company are presented below.
- --------------------------------------------------------------------------------
(Continued)
39
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates: In preparing the financial statements, management is required
to make estimates and assumptions that affect the amounts reported in the
financial statements and the disclosures provided. Actual results could differ
significantly from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for losses on loans, prepayment speed assumptions related to
mortgage-backed securities and collateralized mortgage obligations, and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.
A substantial portion of the Bank's loans are secured by real estate in the New
Jersey market. In addition, a substantial portion of real estate owned is
located in that same market. Accordingly, as with most financial institutions in
the market area, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of the carrying amount of real estate
owned are susceptible to changes in market conditions.
Cash and Cash Equivalents: For purposes of the statements of cash flows, cash
and cash equivalents include cash on hand and in banks; interest-bearing
deposits; and federal funds sold, which are generally sold for one-day periods.
Net cash flows are reported for customer loan and deposit transactions,
interest-bearing deposits in other financial institutions, and federal funds
purchased.
Securities: Debt securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Debt securities are classified as available for sale when they
might be sold before maturity. Equity securities, including mutual funds, with
readily determinable fair values are classified as available for sale.
Securities available for sale are carried at fair value, with unrealized holding
gains and losses reported in other comprehensive income, net of tax. Other
securities such as Federal Home Loan Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount. Premiums
and discounts are amortized using the level yield method. Gains and losses on
sales are based on the amortized cost of the security sold.
Declines in the fair value of securities below their cost that are other than
temporary are reflected as realized losses. In estimating other-than-temporary
losses, management considers: (1) the length of time and extent that fair value
has been less than cost, (2) the financial condition and near term prospects of
the issuer, and (3) the Company's ability and intent to hold the security for a
period sufficient to allow for any anticipated recovery in fair value.
- --------------------------------------------------------------------------------
(Continued)
40
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Mortgages on real estate and other loans are stated at the outstanding
principal amount of the loans, net of deferred loan fees and the allowance for
loan losses. Interest income on loans is accrued and credited to interest income
as earned. Loans are generally placed on nonaccrual status when they become
delinquent 90 days or more as to principal or interest or when it appears that
principal or interest is uncollectible. Interest accrued prior to a loan being
placed on nonaccrual status is subsequently reversed. Interest income on
nonaccrual loans is recognized only in the period in which it is ultimately
collected. Loans are returned to an accrual status when factors indicating
doubtful collectibility no longer exist.
The Bank defines the population of impaired loans to be all nonaccrual
commercial real estate, multi-family, and land loans. Impaired loans are
individually assessed to determine whether the loan's carrying value is not in
excess of the fair value of the collateral or the present value of the loan's
expected future cash flows. Smaller balance homogeneous loans that may be
collectively evaluated for impairment such as residential mortgage loans and
installment loans, are specifically excluded from the impaired loan portfolio.
Loans Held-For-Sale: Loans held-for-sale are carried at the lower of cost or
market, using the aggregate method. Gains and losses on sales of mortgage loans
are recognized at the time of sale.
Allowance For Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, peer group
information, the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions, and
other factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's judgment,
should be charged off. Loan losses are charged against the allowance when
management believes that the uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected. If a
loan is impaired, a portion of the allowance is allocated so that the loan is
reported net, at the present value of estimated future cash flow using the
loan's existing rate or at the fair value of collateral if repayment is expected
solely from the collateral.
Loan Fees: Loan fees and certain direct loan origination costs for originating
mortgage loans are deferred and the net fee or cost is recognized into interest
income using the interest method over the contractual lives of the loans.
- --------------------------------------------------------------------------------
(Continued)
41
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Owned: When properties are acquired through foreclosure, they are
transferred at the lower of the carrying value or estimated fair value of the
collateral and any required write-downs are charged to the allowance for loan
losses. Subsequently, such properties are carried at the lower of the adjusted
cost or fair value less estimated selling costs. Estimated fair value of the
property is generally based on an appraisal. The Bank maintains an allowance for
real estate owned losses for subsequent declines in estimated fair value.
Expenses of holding foreclosed properties, net of other income, are charged to
operations as incurred. Gains and losses from sales of such properties are
recognized at the time of sale.
Premises and Equipment: Land is carried at cost. Office properties and equipment
are carried at cost, less accumulated depreciation. Office buildings and
improvements are depreciated using the straight-line method with useful lives
ranging from 20 to 40 years. Furniture, fixtures, and equipment are depreciated
using the straight-line method with useful lives ranging from 3 to 10 years.
Mortgage Servicing Rights: Servicing assets represent the allocated value of
retained servicing rights on loans sold. Servicing assets are expensed in
proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the assets, using groupings
of the underlying loans as to interest rates and then, secondarily, as to
prepayment characteristics. Fair value is determined using prices for similar
assets with similar characteristics, when available, or based upon discounted
cash flows using market-based assumptions. Any impairment of a grouping is
reported as a valuation allowance. Mortgage servicing rights totaled $77,667 and
$80,930 at September 30, 2005 and 2004 and are included with other assets on the
balance sheet.
Income Taxes: The provision for income taxes is the total of the current year
income tax due or refundable and the change in the deferred tax assets and
liabilities. Deferred tax assets and liabilities are the estimated future tax
consequences attributable to differences between the financial statements'
carrying amounts of existing assets and liabilities and their respective tax
bases, computed using enacted tax rates. The realization of deferred tax assets
is assessed and a valuation allowance provided, when necessary, for that portion
of the asset which is not likely to be realized.
- --------------------------------------------------------------------------------
(Continued)
42
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Employee Stock Ownership Plan: The cost of shares issued to the ESOP, but not
yet allocated to participants, is shown as a reduction of shareholders' equity.
Compensation expense is based on the market price of shares as they are
committed to be released to participant accounts. Dividends on allocated ESOP
shares reduce retained earnings; dividends on unearned ESOP shares reduce debt
and accrued interest. Participants may put their ESOP shares back to the Company
upon termination, and an amount of equity equal to these shares times current
market price is reclassified out of shareholders' equity.
Stock-Based Compensation: Employee compensation expense under stock options is
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.
September 30, 2005
------------------
Net income as reported $ 2,043
Deduct: Stock-based compensation expense determined
under fair value based method 223
-----------
Pro forma net income $ 1,820
===========
Basic earnings per share as reported $ 0.38
Pro forma basic earnings per share $ 0.33
Diluted earnings per share as reported $ 0.37
Pro forma diluted earnings per share $ 0.33
For accounting purposes, the Bank is recognizing compensation expense for shares
of common stock awarded under the 2005 Restricted Stock Plan. Expense is
recognized over the vesting period of five years from the date of award at the
fair market value of the shares on the date they were awarded.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
ESOP shares are considered outstanding for this calculation unless unearned.
Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options and restricted stock
awards. The weighted average common shares outstanding were 5,445,820 for basic
and 5,474,122 for diluted for the year ended September 30, 2005 and 5,427,906
- --------------------------------------------------------------------------------
(Continued)
43
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
for the year ended September 30, 2004. Earnings per share for the year ended
September 30, 2003 has been restated to reflect the conversion of 100 shares of
Bank stock into 3,888,150 shares of Company stock representing 100% ownership of
the Bank prior to the minority stock offering. There were no potentially
dilutive securities for the years ended September 30, 2004 and 2003.
As described in Note 2, on October 5, 2005, the Company completed a public
offering associated with its second step conversion in which a total of
9,918,750 common shares were issued while each outstanding public share was
converted into 2.55102 shares of the new holding company. This transaction would
have materially changed the number of common shares outstanding if this change
had occurred before the end of the period.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income (loss). Other comprehensive income (loss) includes
unrealized gains and losses on securities available-for-sale, which are also
recognized as separate components of equity.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
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 year beginning after June 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
during fiscal 2005.
- --------------------------------------------------------------------------------
(Continued)
44
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
We will begin to record compensation costs for stock options granted during
fiscal 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
2007 223
2008 223
2009 223
2010 58
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.
NOTE 2 - SUBSEQUENT EVENT
On October 5, 2005, the Company completed a second step conversion in which the
3,888,150 shares of ASB Holding Company held by American Savings, MHC were
converted and sold in a subscription offering. Through this transaction, ASB
Holding company ceased to exist and was supplanted by American Bancorp of New
Jersey as the holding company for the Bank. A total of 9,918,750 shares of
common stock were sold in the offering at $10 per share through which the
Company received proceeds of $97,524,302 net of offering costs of $1,663,198.
The Company contributed $48,762,151 or approximately 50% of the net proceeds to
the Bank in the form of a capital contribution. The Company loaned $7,935,000 to
the Bank's employee stock ownership plan and the ESOP used those funds to
acquire 793,500 shares of common stock at $10 per share.
As part of the conversion, the 1,666,350 outstanding shares ASB Holding Company
were each exchanged for 2.55102 shares of American Bancorp of New Jersey, the
new holding Company of American Bank of New Jersey. This exchange resulted in an
additional 4,250,719 of outstanding shares of American Bancorp of New Jersey,
Inc. for a total of 14,269,469 outstanding shares.
The Company had stock subscriptions received totaling $115,201,806 at September
30, 2005 pending completion of the conversion and stock offering. At the time of
closing on October 5, 2005, approximately $91,252,500, less offering expenses,
became capital of the Company with the remainder returned on oversubscriptions.
The following table summarizes the pro forma impact of the conversion and stock
offering results on the Company's September 30, 2005 balance sheet.
- --------------------------------------------------------------------------------
(Continued)
45
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
Actual and Pro Forma Summary Consolidated Statement of Financial Condition
September 30, 2005
Actual Pro Forma
ASSETS
Cash and cash equivalents(1) $ 125,773 $ 92,166
Securities available-for-sale 62,337 62,337
Securities held-to-maturity 7,824 7,824
Loans held for sale 280 280
Loans receivable, net of allowance for loan losses 341,006 341,006
Premises and equipment 4,131 4,131
Federal Home Loan Bank stock, at cost 3,119 3,119
Cash surrender value of life insurance 7,512 7,512
Accrued interest receivable 1,468 1,468
Other assets 2,410 1,797
--------- ---------
Total assets $ 555,860 $ 521,640
========= =========
LIABILITIES AND EQUITY
Deposits(2) 340,925 331,167
Stock subscriptions received(3) 115,201 -
Advance payments by borrowers for taxes and insurance 2,443 2,443
Federal Home Loan Bank advances 53,734 53,734
Accrued expenses and other liabilities 3,578 4,629
Common stock in ESOP subject to contingent repurchase obligation(6) 473 -
--------- ---------
Total liabilities 516,354 391,973
Equity
Common stock and additional paid in capital(4) 17,797 115,420
Unearned ESOP shares(5) (1,064) (8,999)
Unearned RSP shares (1,212) (1,212)
Retained earnings 25,417 25,417
Accumulated other comprehensive loss (959) (959)
Amount reclassified on ESOP shares(6) (473) -
--------- ---------
Total equity 39,506 129,667
--------- ---------
Total liabilities and equity $ 555,860 $ 521,640
========= =========
(1) Pro forma balance reflects reduction of cash for funding the return of
approximately $33.7 million in oversubscriptions.
(2) Pro forma balance reflects approximately $9.8 million of deposit balances
withdrawn to purchase shares in the stock offering.
(3) Pro forma balance reflects refund of $33.7 million of oversubscriptions
plus the utilization of $81.5 million of subscriptions to purchase shares
in the stock offering.
(4) Pro forma balance reflects additional capital from deposits, subscriptions
and ESOP purchases of $9.8 million, $81.5 million and $7.9 million,
respectively. An additional $99,000 of capital was received through the
merger of American Savings, MHC into the Bank. These additions to capital
were offset by stock offering expenses of approximately $1.6 million.
(5) Pro forma balance reflects of the addition of $7.9 million of unearned
shares purchased by the ESOP during the stock offering.
(6) Pro forma balance reflects the elimination of ESOP contingent repurchase
obligation of $473,000.
- --------------------------------------------------------------------------------
(Continued)
46
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES
The fair value of securities available-for-sale was as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
2005
----
U.S. Government and federal agency $ 9,805 $ - $ (193)
Mortgage-backed
FHLMC 4,090 1 (25)
FNMA 12,782 9 (498)
GNMA 148 1 -
Collateralized mortgage obligations
Agency 25,763 2 (580)
Non-agency - - -
Mutual fund 9,749 - (251)
------------ --------- ---------
$ 62,337 $ 13 $ (1,547)
============ ========= =========
2004
----
U.S. Government and federal agency $ 13,840 $ - $ (157)
Mortgage-backed
FHLMC 5,219 20 (26)
FNMA 16,261 54 (359)
GNMA 202 1 -
Collateralized mortgage obligations
Agency 42,870 41 (246)
Non-agency 1,234 3 (3)
Mutual fund 9,869 - (131)
------------ --------- ---------
$ 89,495 $ 119 $ (922)
============ ========= =========
- --------------------------------------------------------------------------------
(Continued)
47
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
The amortized cost and fair value of securities held-to-maturity were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
2005
----
U.S. Government and federal agency $2,000 $ - $ (38) $1,962
Mortgage-backed
FHLMC 385 1 (1) 385
FNMA 2,616 6 (31) 2,591
GNMA 244 2 - 246
Collateralized mortgage obligations
Agency 76 1 - 77
Non-agency 2,503 - (70) 2,433
------ ---- ----- ------
$7,824 $ 10 $(140) $7,694
====== ==== ===== ======
2004
----
Mortgage-backed
FHLMC $ 490 $ 2 $ (1) $ 491
FNMA 1,870 11 (6) 1,875
GNMA 327 3 - 330
Collateralized mortgage obligations
Agency 107 3 - 110
------ ---- ----- ------
$2,794 $ 19 $ (7) $2,806
====== ==== ===== ======
Proceeds from sales of securities amounted to $1,983,620 and $21,026,000 during
the years ended September 30, 2005 and 2003 resulting in gross gains of $0 both
years and gross losses of $16,380 and $188,000. There were no securities sold
during the year ended September 30, 2004.
The fair value of debt securities and carrying amount, if different, at
September 30, 2005 by contractual maturity were as follows. Securities not due
at a single maturity date, primarily mortgage-backed securities, are shown
separately.
Available
Held-to-Maturity for Sale
Carrying Fair Fair
Amount Value Value
------ ----- -----
Due from one to five years $2,000 $1,962 $ 9,805
Mortgage-backed 5,824 5,732 42,783
Mutual fund - - 9,749
------ ------ -------
Total $7,824 $7,694 $62,337
====== ====== =======
- --------------------------------------------------------------------------------
(Continued)
48
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
Securities with carrying values of $11,805,048 and $11,386,213 at September 30,
2005 and 2004, respectively, were pledged to secure public deposits and advances
as required or permitted by law.
Available-for-sale securities with unrealized losses at September 30, 2005 not
recognized in income are presented below by length of time the securities have
been in an unrealized loss position:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
- ------------------------- ----- ---- ----- ---- ----- ----
U.S. Government and federal
agency $ - $ - $ 9,805 $ (193) $ 9,805 $ (193)
Mortgage backed 3,456 (70) 9,777 (453) 13,233 (523)
Collateralized mortgage
obligations 6,651 (89) 18,880 (491) 25,531 (580)
Mutual fund - - 9,749 (251) 9,749 (251)
--------- --------- --------- -------- ---------- ---------
Total temporarily impaired $ 10,107 $ (159) $ 48,211 $ (1,388) $ 58,318 $ (1,547)
========= ========= ========= ======== ========== =========
Available-for-sale securities with unrealized losses at September 30, 2004 not
recognized in income are presented below by length of time the securities have
been in an unrealized loss position:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
- ------------------------- ----- ---- ----- ---- ----- ----
U.S. Government and federal
agency $ 8,885 $ (112) $ 4,955 $ (45) $ 13,840 $ (157)
Mortgage backed 6,520 (80) 8,649 (305) 15,169 (385)
Collateralized mortgage
obligations 29,307 (209) 4,831 (40) 34,138 (249)
Mutual fund - - 9,869 (131) 9,869 (131)
--------- --------- --------- -------- ---------- ---------
Total temporarily impaired $ 44,712 $ (401) $ 28,304 $ (521) $ 73,016 $ (922)
========= ========= ========= ======== ========== =========
- --------------------------------------------------------------------------------
(Continued)
49
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
Held-to-maturity securities with unrealized losses at September 30, 2005 not
recognized in income are as follows:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
- ------------------------- ----- ---- ----- ---- ----- ----
U.S. Government and federal
agency $ 1,962 $ (38) $ - $ - $ 1,962 $ (38)
Mortgage-backed 1,538 (23) 382 (9) 1,920 (32)
Collateralized mortgage
obligations 2,434 (70) - - 2,434 (70)
--------- --------- --------- -------- ---------- ---------
Total temporarily impaired $ 5,934 $ (131) $ 382 $ (9) $ 6,316 $ (140)
========= ========= ========= ======== ========== =========
Held-to-maturity securities with unrealized losses at September 30, 2004 not
recognized in income are as follows:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
- ------------------------- ----- ---- ----- ---- ----- ----
Mortgage-backed $ 562 $ (6) $ 117 $ (1) $ 679 $ (7)
--------- --------- --------- -------- ---------- ---------
Total temporarily impaired $ 562 $ (6) $ 117 $ (1) $ 679 $ (7)
========= ========= ========= ======== ========== =========
The Company evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to the length of time and the extent to
which the fair value has been less cost, the financial condition and near-term
prospects of the issuer, and the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. In analyzing an issuer's financial
condition, the Company may consider whether the securities are issued by the
federal government or its agencies, whether downgrades by bond rating agencies
have occurred, and the results of reviews of the issuer's financial condition.
- --------------------------------------------------------------------------------
(Continued)
50
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES (Continued)
At September 30, 2005, securities with unrealized losses had depreciated 2.4%
from the Company's amortized cost basis. The Company evaluated the near-term
prospects of the issuers in relation to the severity and duration of the
impairment. The Company concluded that the financial strength of the issuers of
its securities - primarily U.S. agencies - did not contribute to any impairment
of value. Rather, these unrealized losses related principally to changes in
market interest rates. The Company then evaluated the expected timeframe and
conditions within which a recovery of such impairments could be reasonably
forecasted. For example, the Company's debenture, mortgage backed security and
collateralized mortgage obligation portfolios are expected to reprice, amortize,
prepay or mature within a timeframe that is supported by the Company's ability
and intent to hold such securities. Forecasted repricing of the Company's
adjustable rate investments to market levels is one means by which an impairment
resulting from a security's "below market" yields can be recovered. Another
means of impairment recovery is through the timely return of principal invested.
Given the relatively short duration of these investment securities, the Company
can reasonably forecast a timely and full return of the principal invested
thereby recovering the impairment that had resulted from movements in market
interest rates.
The mutual fund held by the Company is also comprised primarily of adjustable
rate and other short duration mortgage-related securities. The fund's net asset
value directly reflects the market value of the securities underlying the fund.
The mutual fund itself generates no regular repayment of principal to the
investor. However, the securities underlying the fund regularly reprice and/or
amortize, prepay or mature. The principal proceeds received by the fund are
regularly reinvested into similar securities at current market yields. Given the
relatively short duration of the investment securities underlying the fund, the
Company can reasonably forecast a timely recovery of the impairment that had
resulted from movements in market interest rates.
Based on that evaluation and the Company's ability and intent to hold those
securities for a reasonable period of time sufficient for a forecasted recovery
of fair value, the Company does not consider those securities to be
other-than-temporarily impaired at September 30, 2005.
- --------------------------------------------------------------------------------
(Continued)
51
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS
Loans at period-end were as follows:
2005 2004
---- ----
Mortgage loans:
One-to-four-family $ 267,052 $ 251,531
Multi-family and commercial 58,615 43,197
Construction 1,450 7,175
Consumer 702 746
Home equity 13,413 10,666
Commercial 746 398
------------ ------------
Total loans 341,978 313,713
Allowance for loan losses (1,658) (1,578)
Net deferred loan costs 1,036 935
Loans in process (350) (4,100)
------------ ------------
Loans, net $ 341,006 $ 308,970
============ ============
Certain directors and officers of the Bank and companies with which they are
affiliated have obtained loans from the Bank on various occasions. A summary of
such loans made by the Bank is as follows:
2005 2004
---- ----
Beginning balance $ 1,007 $ 1,142
New loans 1 3
Effect of changes in related parties - 32
Repayments (86) (170)
------------ ------------
Ending balance $ 922 $ 1,007
============ ============
Mortgage loans serviced for others are not included in the accompanying
financial statements. At September 30, 2005 and 2004, the unpaid principal
balances of these loans totaled $15,898,971 and $16,936,826, respectively.
- --------------------------------------------------------------------------------
(Continued)
52
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 4 - LOANS (Continued)
Activity in the allowance for loan losses was as follows:
2005 2004 2003
---- ---- ----
Balance at beginning of year $1,578 $1,371 $1,117
Provision charged to income 81 207 254
Charge-offs - - -
Recoveries - - -
------ ------ ------
Balance at end of year $1,658 $1,578 $1,371
====== ====== ======
Impaired loans were as follows:
2005 2004 2003
---- ---- ----
Period-end loans with no allocated allowance
for loan losses $ - $ - $ 294
Period-end loans with allocated allowance
for loan losses 174 259 250
------ ------ ------
Total $ 174 $ 259 $ 544
====== ====== ======
2005 2004 2003
---- ---- ----
Amount of the allowance for loan losses allocated $ 87 $ 129 $ 125
Average of impaired loans during the period 225 398 623
Interest income recognized during impairment 10 19 18
Cash-basis interest income recognized 10 19 18
Nonperforming loans were as follows:
2005 2004 2003
---- ---- ----
Loans past due over 90 days still on accrual $ - $ - $ -
Nonaccrual loans 1,163 519 517
Nonperforming loans includes both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans.
- --------------------------------------------------------------------------------
(Continued)
53
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 5 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
2005 2004
---- ----
Securities $ 249 $ 307
Loans receivable 1,219 1,052
------ ------
$1,468 $1,359
====== ======
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
2005 2004
---- ----
Land $ 840 $ 840
Office buildings and improvements 3,295 3,206
Furniture and equipment 3,611 3,528
Future branch site costs 584 207
------ ------
8,330 7,781
Less accumulated depreciation 4,199 3,871
------ ------
Total $4,131 $3,910
====== ======
An agreement dated February 22, 2004 was signed to purchase real estate at a
cost of $1,700,000 for the acquisition of a future branch site in Essex County.
The above amounts include $249,381 incurred for a deposit on the contract of
sale and professional fees in connection with the acquisition. The balance of
$1,530,000 is due in cash at closing and will be recorded upon closing.
A second agreement dated December 17, 2004 was signed to purchase real estate
for the acquisition of a future branch site in Passaic County. Total purchase
price is $1,475,000. The March 31, 2005 amounts above include $158,651 incurred
for a deposit on the contract of sale and professional fees in connection with
the acquisition. The balance of $1,327,500 is due in cash at closing and will be
recorded upon closing.
A third agreement dated April 15, 2005 to purchase real estate was signed for
the acquisition of a future branch site in Essex County. Total purchase price is
$2,200,000. The September 30, 2005 amounts above include $107,195 incurred for a
deposit on the contract of sale and professional fees in connection with the
acquisition. The balance of $2,100,000 is due in cash at closing and will be
recorded upon closing.
- --------------------------------------------------------------------------------
(Continued)
54
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 6 - PREMISES AND EQUIPMENT (Continued)
The three agreements noted above are contingent on certain items as detailed in
the contract including but not limited to (i) Title to be conveyed shall be
marketable and insurable; (ii) Municipal and county approvals shall be obtained
by the buyer and the closing will be extended to the extent such approvals are
delayed by no fault of the buyer; and (iii) To the extent environmental
inspections result in a clean up or other action by governmental authorities the
seller will have completed all environmental requests made by the buyer
including removal of underground tanks at its own cost and expense and complete
any and all site investigation and remediation activities.
NOTE 7 - DEPOSITS
Deposit accounts are summarized as follows:
2005 2004
---- ----
Demand deposits $ 25,583 $ 22,599
NOW and money market accounts 39,264 38,696
Savings accounts 123,270 143,401
Certificates of deposit 152,808 118,020
---------- ----------
Total deposits $ 340,925 $ 322,716
========== ==========
Certificates of deposit accounts with balances over $100,000 totaled $47,856,093
and $31,536,775 at September 30, 2005 and 2004, respectively. All other deposit
accounts with balances over $100,000 totaled $97,558,011 and $97,668,361 at
September 30, 2005 and 2004, respectively. Generally, deposit balances over
$100,000 are not federally insured.
Scheduled maturities of certificates of deposit were as follows:
2006 $ 97,646
2007 30,961
2008 7,602
2009 5,391
2010 and thereafter 11,208
------------
$ 152,808
============
- --------------------------------------------------------------------------------
(Continued)
55
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 8 - FEDERAL HOME LOAN BANK OF NEW YORK ADVANCES
The Bank has multiple advances with the Federal Home Loan Bank with maturities
through 2013 and fixed rate rates ranging from 2.80% to 6.19% at September 30,
2005. None of the advances are callable prior to maturity. One advance for $1.7
million with a coupon of 4.57% has a five-year final maturity in June 2009, with
a twenty-year amortization schedule. The remaining $52 million of Federal Home
Loan Bank advances are non-amortizing term advances. The Bank also has an
overnight line of credit with the ability to borrow $42.2 million of which none
is drawn at September 30, 2005. Scheduled repayments and maturities of fixed
rate advances from the Federal Home Loan Bank are as follows:
Weighted
Average Rate
2005 2005 2004
---- ---- ----
Maturing in 2005 -% $ - $ 1,057
Maturing in 2006 3.51 8,060 8,060
Maturing in 2007 4.39 8,062 8,062
Maturing in 2008 5.51 12,065 12,065
Maturing in 2009 4.88 7,547 7,547
Maturing in 2010 5.15 6,000 6,000
Maturing in 2011 5.18 6,000 6,000
Maturing in 2012 5.22 5,000 5,000
Maturing in 2013 4.79 1,000 1,000
Overnight line of credit - - 2,700
---- ----------- -----------
4.84% $ 53,734 $ 57,491
==== =========== ===========
At September 30, 2005, advances are secured primarily by mortgage loans totaling
$120,845,601, and all stock in the Federal Home Loan Bank totaling $3,118,700
under a blanket collateral agreement for the amount of the notes outstanding.
Additionally, specific investment securities with a carrying value totaling
$11,766,890 also secure such advances. At September 30, 2005, the Bank's
borrowing limit with the Federal Home Loan Bank was approximately $85.2 million.
- --------------------------------------------------------------------------------
(Continued)
56
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
An analysis of the provision for income taxes is as follows:
2005 2004 2003
---- ---- ----
Current
Federal $ 1,227 $ 1,078 $ 687
State and local 228 327 205
----------- ----------- -----------
1,455 1,405 892
Deferred
Federal (224) (16) (64)
State and local (48) (18) (23)
----------- ----------- -----------
(272) (34) (87)
Change in valuation allowance 20 - -
----------- ----------- -----------
$ 1,203 $ 1,371 $ 805
=========== =========== ===========
A reconciliation of income tax expense at the statutory federal income tax rate
and the actual income tax expense was as follows:
2005 2004 2003
---- ---- ----
Federal income tax expense at statutory rate $ 1,104 $ 1,201 $ 751
Increase in taxes resulting from
State income taxes, net of federal benefit 132 204 120
Tax-exempt income from life insurance (92) (70) (77)
Nondeductible ESOP expense 46 28 -
Other, net 13 8 11
----------- ----------- -----------
Income tax expense $ 1,203 $ 1,371 $ 805
=========== =========== ===========
- --------------------------------------------------------------------------------
(Continued)
57
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
2005 2004
---- ----
Deferred tax assets
Unrealized loss on securities available-for-sale $ 575 $ 321
Provision for loan losses 662 630
Deferred loan origination fees 3 3
Accrued expenses and other liabilities 1,027 693
------- -------
Total gross deferred tax assets 2,267 1,647
Deferred tax liabilities
Depreciation (218) (203)
Deferred loan origination costs (703) (623)
Other (197) (198)
------- -------
Total gross deferred tax liabilities (1,118) (1,024)
Valuation allowance (20) -
------- -------
Net deferred tax asset $ 1,129 $ 623
======= =======
The valuation allowance consists of the tax effect of state net operating losses
of the stand-alone holding company which will not be utilized upon the
dissolution of the company upon completion of the second step conversion.
Retained earnings includes allocations for federal income tax purposes
representing tax bad debt deductions of approximately $1,500,000 through
September 30, 2005 on which no tax has been paid and no deferred federal income
taxes have been provided. The related amount of deferred tax liability is
approximately $599,000. Reductions of amounts so allocated for purposes other
than tax bad debt losses will create income for tax purposes only, which will be
subject to the then current corporate income tax rate.
NOTE 10 - BENEFIT PLANS
The Bank has a directors' retirement plan that provides retirement benefits to
all members of the Board of Directors vested under the plan in accordance with
the plan document. During the years ended September 30, 2005, 2004, and 2003 the
Bank accrued expenses related to the plan totaling $476,860, $55,179, and
$124,404, respectively.
- --------------------------------------------------------------------------------
(Continued)
58
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 10 - BENEFIT PLANS (Continued)
The Bank has a 401(k) profit sharing plan covering substantially all employees.
Contributions to the plan are made at the discretion of the Board of Directors
and charged to expense annually. The plan also allows participant salary
deferrals into the plan along with a matching contribution provided by the Bank.
Total expenses related to the plan, including employer match and profit sharing
contributions, were $247,906, $248,163, and $242,450 for the years ended
September 30, 2005, 2004, and 2003.
During 2002, the Bank implemented a supplemental executive retirement plan that
provides benefits to certain key officers in accordance with the plan document.
During the years ended September 30, 2005, 2004, and 2003, Bank expenses related
to the plan totaled $235,611, $204,632, and $233,332. During 2002, the Bank also
purchased bank-owned life insurance on the individuals covered by the
supplemental executive retirement plan.
The Bank has entered into employment agreements with its Chief Executive Officer
(CEO), President & Chief Operating Officer (COO), Executive Vice President
(EVP), and two Senior Vice Presidents (SVPs). The CEO's and President & COO's
employment agreements have a term of three years while the EVP's and SVPs'
agreements have a term of two years. Each of the agreements provides for an
annual one-year extension of the term of the agreement upon determination of the
Board of Directors that the executive's performance has met the requirements and
standards of the Board, so that the remaining term of the agreement continues to
be three years, in the case of the CEO and President & COO, and two years, in
the case of the EVP and SVPs. If the Bank terminates the officer without "just
cause" as defined in the agreement, they will be entitled to a continuation of
their salary from the date of termination through the remaining term of their
agreement at a minimum. The agreements also provide for various payouts if the
officer is terminated without just cause following a change in control.
The Company has also entered into an employment agreement with the Chief
Executive Officer with terms of which are substantially the same as the
employment agreement with the Bank. However, it provides that if employment is
terminated without just cause as defined in the agreement, he will be entitled
to a continuation of his salary for three years from the date of termination.
- --------------------------------------------------------------------------------
(Continued)
59
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 11 - ESOP PLAN
Employees participate in an employee stock option plan (ESOP). The ESOP borrowed
from the Company to purchase 133,308 shares of stock at $10.00 per share. The
Company makes discretionary contributions to the ESOP, as well as pays dividends
on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay
the loan. When loan payments are made, ESOP shares are allocated to participants
based on relative compensation and expense is recorded. Dividends on allocated
shares increase participant accounts.
Participants receive the shares at the end of employment. Under the terms of the
plan and in accordance with ERISA regulation, a participant may require stock
received to be repurchased unless the stock is traded on an established market.
The Over The Counter Bulletin Board is not considered to be an established
market for purposes of this regulation and a liability has been established to
reflect this repurchase obligation. On October 6, 2005, the Company began
trading on Nasdaq which is considered to be an established market under ERISA
regulations. As a result, effective October 6, 2005, the Company is no longer
required to establish a liability to reflect this repurchase obligation.
There were no discretionary contributions to the ESOP during the years ended
September 30, 2005 and September 30, 2004. ESOP expense for the years ended
September 30, 2005 and 2004 was $269,360 and $215,237, respectively.
Shares held by the ESOP were as follows:
2005 2004
---- ----
Allocated to participants $ 16,913 $ 3,333
Unearned 116,395 129,975
-------- --------
Total ESOP shares 133,308 133,308
-------- --------
Fair value of unearned shares $ 3,256 $ 2,015
======== ========
Fair value of allocated shares subject
to repurchase obligation $ 473 $ 52
======== ========
- --------------------------------------------------------------------------------
(Continued)
60
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 12 - 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
Savings Bank of NJ 2005 Restricted Stock Plan. Subject to regulatory approval,
272,171 options 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 at a strike price of $17.35 with the remaining
12,248 shares awarded on May 6, 2005 at a strike price of $17.83. The weighted
average strike price of options awarded is $17.37. 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. Options to buy stock are granted
to directors, officers and employees under the Company's Stock Option Plan.
Exercise price is the market price at date of grant, so there is no compensation
expense recognized in the income statement. The maximum option term is ten
years, and options vest over five years.
A summary of the activity in the plan for the period ended September 30, 2005 is
as follows.
Weighted
Average
Exercise
Shares Price
------ -----
Outstanding at beginning
of period - $ -
Granted 272,171 17.37
Exercised - -
Forfeited or expired - -
------- -----------
Outstanding at
end of period 272,171 $ 17.37
======= ===========
Options exercisable at
period end - -
======= ===========
Weighted average remaining
contractual life 9.3 years
- --------------------------------------------------------------------------------
(Continued)
61
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 12 - STOCK-BASED COMPENSATION (continued)
The fair value of options granted 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
---------------- -----------
Risk free interest rate 3.67% 3.95%
Expected option life 5.00 5.00
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
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to fund loans and previously approved
unused lines of credit. The Bank's exposure to credit loss in the event of
nonperformance by the parties to these financial instruments is represented by
the contractual amount of the instruments. The Bank uses the same credit policy
for commitments as it uses for on-balance-sheet items.
The contract amounts of these financial instruments are summarized as follows:
2005 2004
---- ----
Commitments to extend credit $ 21,284 $ 14,771
Unused lines of credit 15,956 13,130
Construction loans in process 350 4,100
Fixed rate loan commitments totaled $5,727,200 at September 30, 2005 and have
interest rates ranging from 4.99% to 8.25%.
Since many commitments expire without being used, the amounts above do not
necessarily represent future cash commitments. Collateral may be obtained upon
exercise of a commitment. The amount of collateral is determined by management
and may include commercial and residential real estate and other business and
consumer assets.
- --------------------------------------------------------------------------------
(Continued)
62
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 14 - EARNINGS PER SHARE (EPS)
The factors used in the earnings per share computation follow.
2005 2004 2003
---- ---- ----
Net income $2,043 $2,162 $1,403
====== ====== ======
Weighted average common shares
outstanding 5,446 5,428 3,888
Add: Dilutive effects of assumed
exercises of stock options 23 - -
Add: Dilutive effects of assumed
exercises of stock awards 5 - -
------ ------ ------
Average shares and dilutive potential
common shares 5,474 5,428 3,888
===== ===== =====
Basic earnings per common share $ .38 $ .40 $ .36
====== ====== ======
Diluted earnings per common share $ .37 $ .40 $ .36
====== ====== ======
NOTE 15 - REGULATORY CAPITAL REQUIREMENTS
ASB Holding Company as a unitary thrift holding company is not subject to
specific regulatory capital guidelines. The Bank is subject to various
regulatory capital requirements administered by the federal banking agencies.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
- --------------------------------------------------------------------------------
(Continued)
63
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 15 - REGULATORY CAPITAL REQUIREMENTS (Continued)
The Bank's actual and required capital amounts and ratios are presented below.
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action
------------------------ --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 2005
- ------------------------
Total capital (to risk-weighted
assets) $ 37,639 14.13% $ 21,308 8.00% $ 26,635 10.00%
Tier I capital (to risk-weighted)
assets) 36,068 13.54 10,654 4.00 15,981 6.00
Tier I (core) capital (to adjusted
total assets) 36,068 6.49 22,221 4.00 27,776 5.00
As of September 30, 2004
- ------------------------
Total capital (to risk-weighted
assets) $ 34,857 15.93% $ 17,505 8.0% $ 21,881 10.0%
Tier I capital (to risk-weighted)
assets) 33,279 15.21 8,752 4.0 13,129 6.0
Tier I (core) capital (to adjusted
total assets) 33,279 7.89 16,865 4.0 21,081 5.0
As of September 30, 2005, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the Bank's category.
Upon the closing of the second step conversion on October 5, 2005, approximately
$48.8 million - representing 50% of stock offering proceeds, net of offering
costs - were added to the Bank's capital. This growth in capital was partially
offset by the additional unearned ESOP which reduced capital by approximately
$7.9 million. In total, the second step conversion resulted in a net increase to
the Bank's capital totaling approximately $40.8 million. Had this additional
capital been recorded at September 30, 2005, the Bank's pro forma capital
amounts and ratios would be as follows:
Amount Ratio
------ -----
Total capital (to risk-weighted assets) $ 78,466 30.58%
Tier 1 capital (to risk-weighted assets) 76,895 29.97
Tier 1 capital (to adjusted total assets) 76,895 13.84
- --------------------------------------------------------------------------------
(Continued)
64
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 15 - REGULATORY CAPITAL REQUIREMENTS (Continued)
The following is a reconciliation of the Bank's equity under accounting
principles generally accepted in the United States of America ("GAAP") to
regulatory capital as of the dates indicated:
2005 2004
---- ----
GAAP equity $ 35,123 $ 32,818
Accumulated other comprehensive loss 945 461
--------- ---------
Tier I capital 36,068 33,279
General regulatory allowance for loan losses 1,571 1,578
--------- ---------
Total capital $ 37,639 $ 34,857
========= =========
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of financial instruments were as
follows:
2005 2004
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets
Cash and cash equivalents $ 125,773 $ 125,773 $ 8,034 $ 8,034
Securities available-for-sale 62,337 62,337 89,495 89,495
Securities held-to-maturity 7,824 7,694 2,794 2,806
Loans receivable, net 341,006 340,176 308,970 309,268
Loans held for sale 280 278 - -
Federal Home Loan Bank stock 3,119 3,119 2,890 2,890
Accrued interest receivable 1,468 1,468 1,359 1,359
Financial liabilities
Deposits 340,925 340,654 322,716 323,434
Stock subscriptions received 115,201 115,201 - -
Advance payments by
borrowers for taxes and
insurance 2,443 2,443 2,322 2,322
Federal Home Loan Bank
advances 53,734 54,307 57,491 59,959
Accrued interest payable 266 266 264 264
- --------------------------------------------------------------------------------
(Continued)
65
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The methods and assumptions used to estimate fair value are described as
follows:
Carrying amount is the estimated fair value for cash and cash equivalents,
Federal Home Loan Bank stock, accrued interest receivable and payable, demand
deposits, stock subscriptions received, short-term debt, and variable rate loans
or deposits that reprice frequently and fully. Security fair values are based on
market prices or dealer quotes and, if no such information is available, on the
rate and term of the security and information about the issuer. For fixed rate
loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk. Fair
values for impaired loans are estimated using discounted cash flow analysis or
underlying collateral values. Fair value of debt, including Federal Home Loan
Bank advances, is based on current rates for similar financing. The fair value
of off- balance-sheet items is based on the current fees or cost that would be
charged to enter into or terminate such arrangements. The fair value of these
off-balance-sheet items is not material.
NOTE 17 - OTHER COMPREHENSIVE LOSS
Other comprehensive loss components and related taxes were as follows.
2005 2004 2003
---- ---- ----
Unrealized holding losses on available-for-sale
Securities $ (810) $ (129) $(1,746)
Reclassification adjustments for losses later
recognized in income 16 - 188
------- ------- ----
Net unrealized gains and (losses) (794) (129) (1,558)
Tax effect 317 52 622
------- ------- ----
Other comprehensive income (loss) $ (477) $ (77) (936)
======= ======= ====
- --------------------------------------------------------------------------------
(Continued)
66
ASB HOLDING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005, 2004, and 2003
(Tables in Thousands)
- --------------------------------------------------------------------------------
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Earnings per Share
Interest Net Interest Net ------------------
Income Income Income Basic Fully Diluted
------ ------ ------ ----- -------------
2005
- ----
First quarter $ 4,904 $ 2,724 $ 610 $ 0.11 $ 0.11
Second quarter 5,089 2,846 584 0.11 0.11
Third quarter(1) 5,223 2,744 325 0.06 0.06
Fourth quarter 5,385 2,741 524 0.10 0.09
2004
- ----
First quarter $ 4,453 $ 2,367 $ 474 $ 0.09 $ 0.09
Second quarter 4,564 2,622 587 0.11 0.11
Third quarter 4,471 2,510 537 0.10 0.10
Fourth quarter 4,716 2,600 564 0.10 0.10
(1) Net income in the third quarter of fiscal 2005 included an after tax charge
of approximately $267,000 resulting from restructuring the Bank's director
retirement plan.
- --------------------------------------------------------------------------------
67
DIRECTORS AND OFFICERS
Directors of American Bancorp Officers of American Officers of American Bank
of New Jersey and American Bancorp of New Jersey of New Jersey
Bank of New Jersey -------------------- -------------
------------------
Joseph Kliminski Joseph Kliminski
Joseph Kliminski Chief Executive Officer Chief Executive Officer
Chief Executive Officer
Fred G. Kowal Fred G. Kowal
Fred G. Kowal President and Chief President and Chief
President and Chief Operating Officer Operating Officer
Operating Officer
Richard M. Bzdek Richard M. Bzdek
W. George Parker Executive Vice President, Executive Vice President,
Chairman of the Board Corporate Secretary Corporate Secretary
President and Chief
Executive Officer of Adco Eric B. Heyer Eric B. Heyer
Chemical Company Sr. Vice President, Treasurer Sr. Vice President, Treasurer
and Chief Financial Officer and Chief Financial Officer
James H. Ward III
Vice Chairman, Catherine M. Bringuier
Retired Investor Sr. Vice President and Chief
Lending Officer
Robert A. Gaccione
Partner of the law firm Josephine Castaldo
Gaccione, Pomaco & Vice President Branch
Malanga P.C. Administration
H. Joseph North John Scognamiglio
Retired Town Administrator Vice President Controller
of Bloomfield, NJ
Robert A. Gaccione, Jr.
Stanley Obal Vice President
Retired owner of Obal's Inn
tavern and restaurant Christopher R. Ford
Vice President
Vincent S. Rospond
Attorney and majority
stockholder of the law firm
Rospond, Rospond & Conte,
P.A.
68
INVESTOR AND CORPORATE INFORMATION
Stock Listing
American Bancorp of New Jersey common stock is listed on the Nasdaq National
Market under the symbol "ABNJ."
Stockholder and General Inquiries Transfer Agent
American Bancorp of New Jersey Registrar and Transfer Company
365 Broad Street 10 Commerce Drive
Bloomfield, New Jersey 07003 Cranford, New Jersey 07016
(973) 748-3600 (800) 525-7686
Attention: Eric B. Heyer
Investor Relations
Annual Reports
A copy of the Annual Report on Form 10-K without exhibits for the year ended
September 30, 2005, as filed with the Securities and Exchange Commission, may be
obtained without charge by contacting Eric B. Heyer, Investor Relations,
American Bancorp of New Jersey, 365 Broad Street, Bloomfield, New Jersey, 07003.
69
OFFICE LOCATIONS
Main Office
- -----------
365 Broad Street
Bloomfield, New Jersey 07003
(973) 748-3600
Main Office Drive Up Facility
16 Pitt Street
Bloomfield, New Jersey 07003
Cedar Grove Branch
- ------------------
310 Pompton Avenue
Cedar Grove, New Jersey 07009
(973) 239-6450
70