-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ls9EUWUL5ZA52zmEsEDQXMwfpF1MRuQ4TzU4ItcEtfpXF4lJeech/xYnGPS6OJea W7R+/NHLgTg1zvFc1JxwTQ== 0000946275-05-001255.txt : 20051228 0000946275-05-001255.hdr.sgml : 20051228 20051228121142 ACCESSION NUMBER: 0000946275-05-001255 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051228 DATE AS OF CHANGE: 20051228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN BANCORP OF NEW JERSEY INC CENTRAL INDEX KEY: 0001330039 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 550897507 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-51500 FILM NUMBER: 051288268 BUSINESS ADDRESS: STREET 1: 365 BROAD STREET CITY: BLOOMFIELD STATE: NJ ZIP: 07003-2798 BUSINESS PHONE: 973 748-3600 MAIL ADDRESS: STREET 1: 365 BROAD STREET CITY: BLOOMFIELD STATE: NJ ZIP: 07003-2798 10-K 1 f10k-093005_0147.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the fiscal year ended September 30, 2005 ------------------------------------------------- -OR- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . ----------- ------------- Commission File Number: 0-51500 ------- AMERICAN BANCORP OF NEW JERSEY, INC. ------------------------------------ (Exact Name of Registrant as Specified in its Charter) New Jersey 55-0897507 - ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 365 Broad Street, Bloomfield, New Jersey 07003 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (973) 748-3600 -------------------- Securities registered pursuant to Section 12(b) of the Exchange Act: None ---------- Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $0.10 per share --------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act (Rule 12b-2). [ ] Yes [X] No Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). [ ] Yes [X] No The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant on March 31, 2005 was $0. As of December 20, 2005, the Registrant had outstanding 14,169,469 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE: 1. Portions of the 2005 Annual Report to Stockholders. (Part II) PART I Forward-Looking Statements American Bancorp of New Jersey, Inc. (the "Company" or "Registrant") may from time to time make written or oral "forward looking statements," including statements contained in the Company's filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions that are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rates, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality as compared to competitors' products and services; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes; acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks resulting from these factors. The Company cautions that the listed factors are not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. Item 1. Business. General On October 5, 2005, American Savings, MHC (the "MHC") completed its reorganization into stock form and the Company succeeded to the business of ASB Holding Company, the MHC's former stock holding company subsidiary. Each outstanding share of common stock of the former mid-tier stock holding company (other than shares held by the MHC which were canceled) was converted into 2.55102 shares of common stock of the Company. As part of the second-step mutual to stock conversion transaction, the Company sold a total of 9,918,750 shares to eligible depositors of American Bank of New Jersey (the "Bank") in a subscription offering at $10.00 per share, including 793,500 shares purchased by the Bank's employee stock ownership plan with funds borrowed from the Company. The Company is a New Jersey corporation that was incorporated in May 2005 for the purpose of being a holding company for the Bank, a federally-chartered stock savings bank. The Company is a unitary savings and loan holding company and conducts no significant business or operations of its own. References in this Annual Report on Form 10-K to the Company generally refer to the consolidated entity, 2 which includes the Bank, unless the context indicates otherwise. References to "we," "us," or "our" refer to the Bank or Company, or both, as the context indicates. The Bank was originally founded in 1919 as the American-Polish Building & Loan Association of Bloomfield, New Jersey. It became a state-chartered savings and loan association in 1948 and converted to a federally chartered savings bank in 1995. The Bank's deposits are federally insured by the Savings Association Insurance Fund as administered by the Federal Deposit Insurance Corporation. The Bank is regulated by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. Our core business is using retail deposits in order to fund a variety of mortgage and consumer loan products. We operate as a traditional community bank, offering retail banking services, one- to four-family residential mortgage loans, home equity loans and lines of credit, multi-family and non-residential mortgage loans, business and consumer loans. We also invest in mortgage-backed securities, collateralized mortgage-backed obligations and other investment securities. The principal source of funds for our lending and investing activities is retail deposits, supplemented with Federal Home Loan Bank borrowings. Our results of operations depend primarily on our 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. Market Area Our main office is located in Bloomfield, New Jersey, and our branch office is located in Cedar Grove, New Jersey. Our lending is concentrated in northern New Jersey, and our predominant sources of deposits are the communities in which our two offices are located as well as the neighboring communities. Our business of attracting deposits and making loans is primarily conducted within our market area. A downturn in the local economy could reduce the amount of funds available for deposit and the ability of borrowers to repay their loans. As a result, our profitability could decrease. Competition We face substantial competition in our attraction of deposits, which are our primary source of funds for lending, and in our origination of loans. Many of our competitors are significantly larger institutions and have greater financial and managerial resources. Our ability to compete successfully is a significant factor affecting our profitability. Our competition for deposits and loans historically has come from other insured financial institutions such as local and regional commercial banks, savings institutions, and credit unions located in our primary market area. We also compete with mortgage banking companies for real estate loans, and commercial banks and savings institutions for consumer loans; and we face competition for funds from investment products such as mutual funds, short-term money funds and corporate and government securities. 3 Lending Activities General. We have traditionally focused on the origination of one- to four-family loans, which comprise a significant majority of our total loan portfolio. We also provide financing on multi-family dwellings, mixed-use properties and other commercial real estate. Commercial business loans, construction loans, home equity loans and consumer loans make up the rest of the total loan portfolio. Loan Portfolio Composition. The following table analyzes the composition of our loan portfolio by loan category at the dates indicated.
At September 30 ----------------------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ----------------- ------------------ ----------------- ------------------ ----------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in thousands) Type of Loans: Mortgage loans One- to four-family real estate(1)............. $267,052 78.09% $251,531 80.17% $215,984 81.59% $167,564 79.06% $131,513 76.18% Multi-family and commercial real estate................ 58,615 17.14 43,197 13.77 36,202 13.68 29,503 13.92 24,903 14.42 Construction................... 1,450 0.42 7,175 2.29 1,233 0.47 4,875 2.30 9,402 5.45 Consumer....................... 702 0.21 746 0.24 780 0.29 795 0.38 540 0.31 Home equity.................... 13,413 3.92 10,666 3.40 8,893 3.36 6,904 3.26 5,863 3.40 Commercial..................... 746 0.22 398 0.13 1,610 0.61 2,298 1.08 417 0.24 -------- ------- --------- ------- --------- ------- --------- ------- --------- ------ Total loans receivable.... 341,948 100.00% 313,713 100.00% 264,702 100.00% 211,939 100.00% 172,638 100.00% ====== ====== ====== ====== ====== Less: Allowance for loan losses.... (1,658) (1,578) (1,371) (1,117) (1,009) Net deferred origination costs 1,036 935 796 673 532 Loans in process............. (350) (4,100) (783) (3,121) (5,839) -------- -------- -------- -------- -------- Total loans receivable, net $341,006 $308,970 $263,344 $208,374 $166,322 ======== ======== ======== ======== ========
- -------------- (1) Includes loans held for sale of $280,250 and $500,000 at September 30, 2005 and September 30, 2003, respectively. 4 Loan Maturity Schedule. The following table sets forth the maturity of our loan portfolio at September 30, 2005. Demand loans, loans having no stated maturity, and overdrafts are shown as due in one year or less. This table shows contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may differ.
At September 30, 2005 ----------------------------------------------------------------------------------------------------- Multi-family One- to Four- and Family Commercial Real Estate Real Estate Construction Consumer Home Equity Commercial Total ----------- ------------ ------------ -------- ----------- ---------- ----- (In thousands) Amounts Due: Within 1 Year .......... $ 35 $ 939 $ 1,100 $ 685 $ -- $ 617 $ 3,376 -------- -------- -------- -------- -------- -------- -------- After 1 year: 1 to 5 years ......... 2,191 1,391 -- 17 71 70 3,740 5 to 10 years ........ 29,224 4,963 -- -- 2,189 59 36,435 10 to 15 years ....... 59,212 17,367 -- -- 6,398 -- 82,977 Over 15 years ........ 176,390 33,955 -- -- 4,755 -- 215,100 -------- -------- -------- -------- -------- -------- -------- Total due after one year 267,017 57,676 -- 17 13,413 129 338,252 -------- -------- -------- -------- -------- -------- -------- Total amount due ....... $267,052 $ 58,615 $ 1,100 $ 702 $ 13,413 $ 746 $341,628 ======== ======== ======== ======== ======== ======== ========
5 The following table sets forth the dollar amount of all loans at September 30, 2005 due after September 30, 2006, which have fixed interest rates and which have floating or adjustable interest rates.
Floating or Fixed Rates Adjustable Rates Total ----------- ---------------- ----- (In thousands) One- to four-family real estate ......... $146,145 $120,872 $267,017 Multi-family and commercial real estate.. 21,123 36,553 57,676 Construction ............................ -- -- -- Consumer ................................ 17 -- 17 Home equity ............................. -- 13,413 13,413 Commercial .............................. 53 76 129 -------- -------- -------- Total ................................. $167,338 $170,914 $338,252 ======== ======== ========
One- to Four-Family Mortgage Loans. Our primary lending activity historically has consisted of the origination of one- to four-family mortgage loans, most of which are secured by property located in northern New Jersey. While this type of loan will continue to be the most significant component of our total loan portfolio, we intend to emphasize the origination of commercial real estate loans, including construction loans, and commercial and industrial loans. We will generally originate a one- to four-family mortgage loan in an amount up to 80% of the lesser of the appraised value or the purchase price of a mortgaged property. For loans exceeding this guideline, private mortgage insurance on the loan is typically required. Our residential loans are generally originated with fixed or adjustable rates and have terms of ten to thirty years. We also offer mortgage loans with bi-weekly payments and recently began offering mortgage loans with terms up to forty years as well as fully amortizing, adjustable rate loans with interest only payments for the first three to five years. The majority of our adjustable rate loan products provide for an interest rate that is tied to the one-year Constant Maturity U.S. Treasury index and have terms of up to thirty years with initial fixed rate periods of one, three, five, seven, or ten years according to the terms of the loan. We also offer an adjustable rate loan with a rate that adjusts every three years to the three-year Constant Maturity U.S. Treasury index. The fixed rate mortgage loans that we originate generally meet the secondary mortgage market standards of the Federal National Mortgage Association. For the purposes of interest rate risk management, we sell qualifying one- to four-family residential mortgages in the secondary market to the Federal National Mortgage Association and other investors without recourse and with servicing retained, and we have entered into a master selling and servicing agreement with the Federal National Mortgage Association under which the Bank sold $2.4 million in the year ended September 30, 2005, $4.8 million in the year ended September 30, 2004 and $9.4 million in the year ended September 30, 2003. Loan sales may increase or decrease in the future in connection with interest rate risk management. Substantially all of our residential mortgages include "due on sale" clauses, which are provisions giving us the right to declare a loan immediately payable if the borrower sells or otherwise transfers an interest in the property to a third party. Property appraisals on real estate securing our one- to four-family residential loans are made by state certified or licensed independent appraisers approved by the Board of Directors. Appraisals are performed in accordance with applicable regulations and policies. We require title insurance policies on all first mortgage real estate loans originated. Homeowners, liability, fire and, if required, flood insurance policies are also required. 6 Multi-family and Commercial Mortgage Loans. We also originate loans on multi-family and commercial real estate properties, including loans on apartment buildings, retail/service properties, and other income-producing properties such as mixed-use properties combining residential and commercial space. We generally require no less than a 25% down payment or equity position for these mortgage loans. Typically these loans are made with amortization terms of up to twenty-five years. The majority of these loans are on properties located within northern New Jersey and all are within the state. The multi-family and commercial mortgage loan portfolio has grown in recent years, however, the growth of one- to four-family loans has kept pace so multi-family and commercial mortgage loans as a percentage of the total loan portfolio has remained fairly constant. We are currently pursuing strategies to grow this portfolio. Multi-family and commercial mortgage loans generally are considered to entail significantly greater risk than that which is involved with one- to four-family real estate lending. The repayment of these loans typically is dependent on the successful operations and income stream of the borrower and the real estate securing the loan as collateral. These risks can be significantly affected by economic conditions. In addition, commercial loans may carry larger balances to single borrowers or related groups of borrowers than one- to four-family loans. Furthermore, this type of real estate lending generally requires substantially greater evaluation and oversight efforts compared to one-to-four family mortgage lending. Construction Lending. Essentially all of our construction lending is in northern New Jersey. Our construction lending includes loans to individuals for construction of a primary residence as well as loans to builders and developers for single family, multi-unit and multi-house projects. We have no formal limits as to the number of projects a builder may have under construction or development, and make a case by case determination on loans to builders and developers who have multiple projects under development. In some cases, we convert a construction loan to the permanent end mortgage loan upon completion of construction. Construction lending is generally considered to involve a higher degree of credit risk than long-term permanent financing of residential properties. If the estimate of construction cost proves to be inaccurate, we may be compelled to advance additional funds to complete the construction with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. If we are forced to foreclose on a project prior to completion, there is no assurance that we will be able to recover all of the unpaid portion of the loan. In addition, we may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. Fluctuations in the outstanding principal balance of our construction loan portfolio over the last several years resulted primarily from our decision during that time to reduce our origination of construction loans following the retirement of the loan officer who had primarily overseen this portfolio. However, with the Bank's increasing strategic emphasis in commercial real estate lending, we expect that our construction lending will grow, particularly with respect to construction loans to builders and developers for multi-unit or multi-house projects. Consumer Loans. Consumer loans consist of savings secured loans and unsecured consumer loans. We will generally lend up to 90% of the account balance on a savings secured loan. At September 30, 2005, we had $72,000 of unsecured consumer loans. 7 Consumer loans generally have shorter terms and higher interest rates than residential loans. The consumer loan market can be helpful in improving the spread between the average loan yield and the cost of funds and at the same time improve the matching of rate sensitive assets and liabilities. Unsecured consumer loans, and consumer loans secured by collateral other than savings accounts, entail greater risks than residential mortgage loans. Consumer loan repayment is dependent on the borrower's continuing financial stability and is more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Finally, the application of various federal laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on consumer loans in the event of a default. Our underwriting standards for consumer loans include a determination of the applicant's credit history and an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan. The stability of the applicant's monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. Home Equity Loans. Our home equity loan portfolio includes home equity lines of credit and second mortgage term loans. Home equity lines of credit are prime-based loans that are adjusted monthly. Home equity loans are primarily originated in our market area and are generally made in amounts of up to 80% of value on term loans and up to 80% of value on home equity lines of credit. During 2001, we began offering home equity loans on investment properties in addition to loans on primary residences. Loans on investment properties are made in amounts of up to 65% of value on term loans and up to 60% of value of home equity lines of credit. Generally, our second mortgage loans have fixed rates for terms of up to fifteen years. Second mortgages and home equity lines of credit do not require title insurance but do require homeowner, liability, fire and, if required, flood insurance policies. Commercial Loans. We also originate commercial and industrial business loans to a variety of professionals, sole proprietorships and small businesses, primarily in our market area. We have recently hired a commercial lender and intend to increase our commercial lending. These loans are generally secured by real estate. We generally require the personal guarantee of the business owner. Commercial lending products include term loans and lines of credit. Our commercial term loans generally have terms from one to five years and are mostly fixed rate loans. Our commercial lines of credit have terms from one to three years and are mostly adjustable rate loans. Unlike single-family residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment. Commercial business loans, therefore, have greater credit risk than residential mortgage loans. In addition, commercial loans may carry larger balances to single borrowers or related groups of borrowers than one- to four-family loans. In addition, commercial lending generally requires substantially greater evaluation and oversight efforts compared to residential or non-residential real estate lending. 8 Loans to One Borrower. Under federal law, savings institutions have, subject to certain exemptions, lending limits to one borrower or a group of related borrowers in an amount equal to the greater of $500,000 or 15% of the institution's unimpaired capital and surplus. Accordingly, as of September 30, 2005, our loans to one borrower limit was approximately $5.7 million. Subsequent to September 30, 2005, the limit increased to approximately $12.5 million as a result of the additional capital from the second step conversion. At September 30, 2005, our largest group of related borrowers had an aggregate balance of approximately $4.8 million, representing 4 loans on condominium units, 9 loans secured by multi-family properties and 2 single-family residential loans. At the same date, our second largest group of related borrowers had an aggregate balance of approximately $3.0 million, representing 4 loans secured by apartment buildings ranging from six units to 58 units. Our third largest group of related borrowers at that date had an aggregate balance of approximately $2.4 million, representing 2 loans secured by apartment buildings, 1 loan on a mixed use commercial and residential property1 loan on a multi-family property and 1 single-family residential loan. At September 30, 2005, we had 4 additional lending relationships exceeding $2.0 million, with outstanding balances at that date ranging from $2.0 million to $2.2 million. All of these lending relationships were current and performing in accordance with the terms of their loan agreements as of September 30, 2005. Loan Originations, Purchases, Sales, Solicitation and Processing. Our customary sources of loan applications include repeat customers, referrals from realtors and other professionals, and "walk-in" customers. We primarily originate our own loans and retain them in our portfolio. Gross loan originations totaled $96.5 million for the year ended September 30, 2005. Net of principal repayments, loan growth totaled approximately $34.6 million for the year ended September 30, 2005. During the year ended September 30, 2004, we purchased $3.3 million of adjustable rate mortgage loans. We did not purchase any whole loans during the years ended September 30, 2005 or 2003. During the years ended September 30, 2005, 2004 and 2003, we sold loans totaling $2.4 million, $4.8 million and $9.6 million, respectively. Loan sales are part of our interest rate risk management strategy and may increase or decrease in the future. We generally sell loans on a non-recourse basis, with servicing retained. At September 30, 2005, loans serviced for the benefit of others totaled $15.9 million. We occasionally purchase participations in loans originated through other lending institutions. At September 30, 2005, we had participations totaling $4.8 million from a New Jersey thrift institution and $1.6 million from the Thrift Institutions Community Investment Corporation of New Jersey ("TICIC"). Our participations through these entities are secured by one-to-four family properties as well as multi-family or other non-one- to-four family properties, such as assisted living facilities. We may also sell participation interests in multi-family, commercial and other real estate loans or construction loans. Loan Commitments. We give written commitments to prospective borrowers on all residential and non-residential mortgage loans. The total amount of commitments to extend credit for mortgage and consumer loans as of September 30, 2005, was approximately $21.3 million, excluding commitments on unused lines of credit of $16.0 million and undisbursed portions of construction loans totaling $350,000. Loan Approval Procedures and Authority. Our lending policies and loan approval limits are recommended by senior management and approved by the Board of Directors. Our loan origination underwriter has loan authority to approve one-to four-family loans up to $359,600, the Federal National Mortgage Association conforming loan limit. Our loan origination Manager has loan authority to approve 9 one-to four-family loans up to $500,000 with Federal National Mortgage Association automated underwriting approvals. Our Loan Committee consists of Officers Kliminski, Kowal, Bzdek and Bringuier. Each of these officers has authority to approve one-to four-family loans up to $750,000. One-to-four family loans between $750,000 and $1,000,000 require two signatures from members of the Loan Committee. One-to four-family loans greater than $1,000,000 require the approval of the Board of Directors. Loans other than one-to four-family loans up to $750,000 require two signatures from members of Loan Committee. Approval of a separate loan sub-committee of the Board is required for non one-to four- family loans over $750,000, or when aggregate exposure exceeds $1.5 million. Management expects that the Bank's lending policies and loan approval limits will be modified in fiscal 2006 to reflect our growing strategic emphasis in commercial and business lending. As with existing policies and limits, any such changes recommended by management will be subject to Board of Director approval. Asset Quality Loan Delinquencies and Collection Procedures. The borrower is notified by both mail and telephone when a loan is sixteen days past due. If the delinquency continues, subsequent efforts are made to contact the delinquent borrower and additional collection notices and letters are sent. When a loan is ninety days delinquent, it is referred to an attorney for repossession or foreclosure. All reasonable attempts are made to collect from borrowers prior to referral to an attorney for collection. In certain instances, we may modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his financial affairs, and we attempt to work with the borrower to establish a repayment schedule to cure the delinquency. As to mortgage loans, if a foreclosure action is taken and the loan is not reinstated, paid in full or refinanced, the property is sold at judicial sale at which we may be the buyer if there are no adequate offers to satisfy the debt. Any property acquired as the result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold or otherwise disposed of. When real estate owned is acquired, it is recorded at the lower of the unpaid principal balance of the related loan or its fair market value less estimated selling costs. The initial writedown of the property is charged to the allowance for loan losses. Adjustments to the carrying value of the properties that result from subsequent declines in value are charged to operations in the period in which the declines occur. At September 30, 2005, we held no real estate owned. Loans are reviewed on a regular basis and are placed on non-accrual status when they are more than ninety days delinquent. Loans may be placed on a non-accrual status at any time if, in the opinion of management, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. At September 30, 2005, we had approximately $1.2 million of loans that were held on a non-accrual basis. 10 Non-Performing Assets. The following table provides information regarding our non-performing loans and other non-performing assets as of the dates indicated.
At September 30, -------------------------------------------------- 2005 2004 2003 2002 2001 ---- ---- ---- ---- ---- (Dollars in thousands) Loans accounted for on a non-accrual basis: One- to four-family ................................. $ 952 $ 445 $ 147 $ 147 $ 309 Multi-family, commercial and other .................. 101 74 369 423 287 Construction ........................................ -- -- -- -- -- Consumer ............................................ 62 -- 1 -- 21 Home equity ......................................... 48 -- -- -- 11 Commercial .......................................... -- -- -- -- -- ------ ------ ------ ------ ------ Total ............................................ $1,163 $ 519 517 570 628 Accruing loans contractually past due 90 days or more.. -- -- -- -- -- ------ ------ ------ ------ ------ Total non-performing loans ............................ 1,163 519 517 570 628 Real estate owned ..................................... -- -- -- -- -- Other non-performing assets ........................... -- -- -- -- -- ------ ------ ------ ------ ------ Total non-performing assets ........................... $1,163 $ 519 $ 517 $ 570 $ 628 ====== ====== ====== ====== ====== Allowance for loan losses to non-performing loans..... 142.62% 304.05% 265.18% 195.96% 160.67% Total non-performing loans to total loans ............ 0.34% 0.17% 0.20% 0.27% 0.36% Total non-performing loans to total assets ........... 0.21% 0.12% 0.12% 0.17% 0.24% Total non-performing assets to total assets .......... 0.21% 0.12% 0.12% 0.17% 0.24%
During the year ended September 30, 2005, gross interest income of $51,000 would have been recorded on loans accounted for on a non-accrual basis if those loans had been current, and $17,000 of interest on such loans was included in income for the year ended September 30, 2005. Classified Assets. Management, in compliance with Office of Thrift Supervision ("OTS") guidelines, has instituted an internal loan review program, whereby non-performing loans are classified as substandard, doubtful or loss. It is our policy to review the loan portfolio, in accordance with regulatory classification procedures, on at least a quarterly basis. When a loan is classified as substandard or doubtful, management evaluates the loan for impairment. When management classifies a portion of a loan as loss, a reserve equal to 100% of the loss amount is allocated against the loan. An asset is considered "substandard" if it is inadequately protected by the paying capacity and net worth of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions, and values. Assets, or portions thereof, classified as "loss" are considered uncollectible and of so little value that their continuance as assets without the allocation of an impairment reserve is not warranted. Assets which do not currently expose the insured institution to a sufficient degree of risk to warrant classification in one of the 11 aforementioned categories but which have credit deficiencies or potential weaknesses are required to be designated "special mention" by management. Management's classification of assets is reviewed by the Board on a regular basis and by the regulatory agencies as part of their examination process. The following table discloses our classification of assets and designation of certain loans as special mention as of September 30, 2005. At September 30, 2005, all of the classified assets and special mention designated assets were loans. At September 30, 2005 ------------------ (In thousands) Special Mention..................... $ 1,295 Substandard......................... 1,110 Doubtful............................ 174 Loss................................ - ------- Total............................. $ 2,579 ======= At September 30, 2005, approximately $1.1 million of loans classified as "substandard" were accounted for as non-performing loans. At September 30, 2005, no loans classified as "special mention" or "doubtful" were accounted for as non-performing loans. Allowance for Loan Losses. The allowance for loan losses is a valuation account that reflects our estimation of the losses in our loan portfolio to the extent they are both probable and reasonable to estimate. The allowance is maintained through provisions for loan losses that are charged to income in the period they are established. We charge losses on loans against the allowance for loan losses when we believe the collection of loan principal is unlikely. Recoveries on loans previously charged-off are added back to the allowance. Our methodology for calculating the allowance for lease and loan losses is based upon FAS 5 and FAS 114. Under FAS 114, we identify and analyze certain loans for impairment. If an impairment is identified on a specific loan, a loss allocation is recorded in the amount of that impairment. Loan types subject to FAS 114 are construction loans, multi-family mortgage loans, non-residential mortgage loans and commercial (non-mortgage) loans. We also conduct a separate review of all loans on which the collectibility of principal may not be reasonably assured. We evaluate all classified loans individually and base our determination of a loss factor on the likelihood of collectibility of principal including consideration of the value of the underlying collateral securing the loan. Under our implementation of FAS 5, we segregate loans by loan category and evaluate homogeneous loans as a group. The loss characteristics of aggregated homogeneous loans are examined using two sets of factors: (1) annual historical loss experience factors that consider the net charge-off history of both the Bank and that of its regional peer group and (2) environmental factors. Although there may be other factors that also warrant consideration, we consider the following environmental factors: o levels and trends of delinquencies and impaired loans; o levels and trends of charge-offs and recoveries; o trends in volume and terms of loans; o changes to lending policies, procedures and practices; o experience, ability and depth of lending management and staff; o national, regional and local economic trends and conditions; 12 o industry conditions; and o changes in credit concentration. In recent years, our charge-offs have been low and, consequently, our estimation of the amount of losses in the loan portfolio both probable and reasonable to estimate has been more reflective of other factors. Our allowance estimation methodology utilizes historical loss experience and environmental factors such as the local and national economy, loan growth rate, trends in delinquencies and non-performing loans, experience of lending personnel, and other similar factors. However, we have had significant growth in recent years. As a result of the significant loan growth, a large portion of our loan portfolio is considered "unseasoned," meaning that the loans were originated less than three years ago. Generally, unseasoned loans demonstrate a greater risk of credit losses than their seasoned counterparts. Moreover, in many cases, these unseasoned loans are obligations of borrowers with whom the Bank has had no prior payment experience. In the absence of adequate historical loss experience upon which the Bank can base its allowance calculations, the Bank includes peer group information in its evaluation of the allowance. The peer group information utilized by the Bank is that of OTS regulated thrifts in the northeast region. Management believes that the majority of thrifts in the northeast region have similar loan portfolio composition. This estimation is inherently subjective as it requires estimates and assumptions that are susceptible to significant revisions as more information becomes available or as future events change. Future additions to the allowance for loan losses may be necessary if economic and other conditions in the future differ substantially from the current operating environment. In addition, the OTS as an integral part of its examination process, periodically reviews our loan and foreclosed real estate portfolios and the related allowance for loan losses and valuation allowance for foreclosed real estate. The OTS may require the allowance for loan losses or the valuation allowance for foreclosed real estate to be increased based on its review of information available at the time of the examination, which would negatively affect our earnings. 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, 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 growing the 1-4 family mortgage loan portfolio 13 The following table sets forth information with respect to our allowance for loan losses for the periods indicated:
Year Ended September 30, ---------------------------------------------------------- 2005 2004 2003 2002 2001 --------- --------- --------- --------- --------- (Dollars in thousands) Allowance balance at beginning of period........ $ 1,578 $ 1,371 $ 1,117 $ 1,009 $ 1,003 Provision for loan losses ...................... 81 207 254 105 2 Charge-offs: One- to four-family real estate .............. -- -- -- -- -- Consumer ..................................... -- -- -- (1) -- --------- --------- --------- --------- --------- Total charge-offs ......................... -- -- -- (1) -- --------- --------- --------- --------- --------- Recoveries: Consumer ..................................... -- -- -- 4 4 --------- --------- --------- --------- --------- Total recoveries .......................... -- -- -- 4 4 --------- --------- --------- --------- --------- Net (charge-offs) recoveries ................... -- -- -- 3 4 --------- --------- --------- --------- --------- Allowance balance at end of period ............. $ 1,658 $ 1,578 $ 1,371 $ 1,117 $ 1,009 ========= ========= ========= ========= ========= Total loans outstanding at end of period........ $ 341,978 $ 313,713 $ 264,702 $ 211,939 $ 172,638 ========= ========= ========= ========= ========= Average loans outstanding during period........ $ 327,948 $ 278,632 $ 238,474 $ 186,974 $ 150,938 ========= ========= ========= ========= ========= Allowance as a % of total loans................ 0.48% 0.50% 0.52% 0.53% 0.58% Net loans charge-offs as a % of average loans.. 0.00% 0.00% 0.00% 0.00% 0.00%
14 Allocation of Allowance for Loan Losses. The following table sets forth the allocation of our allowance for loan losses by loan category and the percent of loans in each category to total loans receivable, net, at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total loan loss allowance is a valuation allocation applicable to the entire loan portfolio.
At September 30 -------------------------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ------------------- ------------------ ----------------- ------------------ ------------------ Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in thousands) At end of period allocated to: One- to four-family real estate .................. $ 782 78.09% $ 777 80.17% $ 685 81.59% $ 531 79.06% $ 366 76.18% Multi-family and commercial real estate .............. 737 17.14 680 13.77 566 13.68 452 13.92 463 14.42 Construction ............... 12 0.42 21 2.29 3 0.47 13 2.30 55 5.45 Consumer ................... 4 0.21 4 0.24 3 0.29 3 0.38 2 0.31 Home equity ................ 63 3.92 43 3.40 37 3.36 29 3.26 36 3.40 Commercial ................. 16 0.22 9 0.13 34 0.61 46 1.08 11 0.24 Unallocated ................ 44 -- 44 -- 43 -- 43 -- 76 -- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total allowance ......... $1,658 100.00% $1,578 100.00% $1,371 100.00% $1,117 100.00% $1,009 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
15 Securities Portfolio General. Federally chartered savings banks have the authority to invest in various types of liquid assets. The investments authorized by the Bank's board approved investment policy include U.S. government and government agency obligations, mortgage-related securities of various U.S. government agencies or government-sponsored entities and private corporate issuers (including securities collateralized by mortgages), certificates of deposits of insured banks and savings institutions and municipal securities. Our policy does not permit corporate non-residential mortgage related securities. Our investment securities portfolio at September 30, 2005 did not contain securities of any issuer with an aggregate book value in excess of 10% of our equity, excluding those issued by the United States Government or its agencies, other than an investment in an adjustable rate mortgage mutual fund with a carrying value of approximately $9.7 million at September 30, 2005. Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," requires that securities be categorized as "held-to-maturity," "trading securities" or "available-for-sale," based on management's intent as to the ultimate disposition of each security. Statement No. 115 allows debt securities to be classified as "held-to-maturity" and reported in financial statements at amortized cost only if the reporting entity has the positive intent and ability to hold these securities to maturity. Securities that might be sold in response to changes in market interest rates, changes in the security's prepayment risk, increases in loan demand, or other similar factors cannot be classified as "held-to-maturity." We do not currently use or maintain a trading account. Securities not classified as "held-to-maturity" are classified as "available-for-sale." These securities are reported at fair value, and unrealized gains and losses on the securities are excluded from earnings and reported, net of deferred taxes, as a separate component of equity. All of our securities carry market risk insofar as changes in market rates of interest may cause a decrease in their market value. Investments in securities are made based on certain considerations, which include the interest rate, tax considerations, yield, settlement date and maturity of the security, our liquidity position, and anticipated cash needs and sources. The effect that the proposed security would have on our credit and interest rate risk and risk-based capital is also considered. We purchase securities to provide necessary liquidity for day-to-day operations, to aid in the management of interest rate risk and when investable funds exceed loan demand. Our investment policy, which is approved by the Board of Directors, is designed to foster earnings and liquidity within prudent interest rate risk guidelines, while complementing our lending activities. Generally, our investment policy is to invest funds in various categories of securities and maturities based upon our liquidity needs, asset/liability management policies, investment quality, marketability and performance objectives. The Asset/Liability Management Committee, comprised of Joseph Kliminski, the Bank's Chief Executive Officer, Fred Kowal, the Bank's President and Chief Operating Officer, Richard Bzdek, the Bank's Executive Vice President and Corporate Secretary, Eric Heyer, the Bank's Senior Vice President and Chief Financial Officer, Catherine Bringuier, the Bank's Senior Vice President and Chief Lending Officer, Josephine Castaldo, the Bank's Vice President of Branch Administration, and John Scognamiglio, the Bank's Vice President and Controller, is responsible for the administration of the securities portfolio. This committee conducts regular, informal meetings, generally on a weekly basis, and meets quarterly to formally review the Bank's securities portfolio. The results of the committee's quarterly review are reported to the full Board, which makes adjustment to the investment policy and strategies as it considers necessary and appropriate. 16 We do not currently participate in hedging programs, interest rate caps, floors or swaps, or other activities involving the use of off-balance sheet derivative financial instruments, but we may do so in the future as part of our interest rate risk management. Further, we do not invest in securities which are not rated investment grade. Actual maturities of the securities held by us may differ from contractual maturities because issuers may have the right to call or prepay obligations with and without prepayment penalties. Mortgage-related Securities. Mortgage-related securities represent a participation interest in a pool of one- to four-family or multi-family mortgages, although we focus primarily on mortgage-related securities secured by one- to four-family mortgages. Our mortgage-related securities portfolio includes mortgage-backed securities and collateralized mortgage obligations issued by U.S. government agencies or government-sponsored entities, such as Federal Home Loan Mortgage Corporation, the Government National Mortgage Association, and the Federal National Mortgage Association, as well as by private corporate issuers. The portfolio also includes an investment in an adjustable rate mortgage mutual fund, with a carrying value of approximately $9.7 million at September 30, 2005. The mortgage originators use intermediaries (generally government agencies and government-sponsored enterprises, but also a variety of private corporate issuers) to pool and repackage the participation interests in the form of securities, with investors such as us receiving the principal and interest payments on the mortgages. Securities issued or sponsored by U.S. government agencies and government-sponsored entities are guaranteed as to the payment of principal and interest to investors. Privately issued securities typically offer rates above those paid on government agency issued or sponsored securities, but lack the guaranty of those agencies and are generally less liquid investments. In the absence of an agency guarantee, our policy requires that we purchase only privately-issued mortgage-related securities that have been assigned the highest credit rating (AAA) by the applicable securities rating agencies. Limiting our purchases of privately-issued mortgage-related securities to those with a AAA rating reduces our added credit risk in purchasing non-agency guaranteed securities. Moreover, because there is a robust secondary market for AAA-rated privately-issued mortgage-related securities, much of the liquidity risk otherwise associated with our investment in non-agency securities is mitigated. Mortgage-backed securities are pass-through securities typically issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a specific range and have varying maturities. The life of a mortgage-backed security thus approximates the life of the underlying mortgages. Mortgage-backed securities generally yield less than the mortgage loans underlying the securities. The characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. Mortgage-backed securities are generally referred to as mortgage participation certificates or pass-through certificates. 17 Collateralized mortgage obligations are mortgage-derivative products that aggregate pools of mortgages and mortgage-backed securities and create different classes of securities with varying maturities and amortization schedules as well as a residual interest with each class having different risk characteristics. The cash flows from the underlying collateral are usually divided into "tranches" or classes whereby tranches have descending priorities with respect to the distribution of principal and interest repayment of the underlying mortgages and mortgage-backed securities as opposed to pass through mortgage-backed securities where cash flows are distributed pro rata to all security holders. Unlike mortgage-backed securities from which cash flow is received and prepayment risk is shared pro rata by all securities holders, cash flows from the mortgages and mortgage-backed securities underlying collateralized mortgage obligations are paid in accordance with a predetermined priority to investors holding various tranches of the securities or obligations. A particular tranche or class may carry prepayment risk which may be different from that of the underlying collateral and other tranches. Investing in collateralized mortgage obligations allows us to better manage the prepayment and extension risk associated with conventional mortgage-related securities. Management believes collateralized mortgage obligations represent attractive alternatives relative to other investments due to the wide variety of maturity, repayment and interest rate options available. At September 30, 2005, collateralized mortgage obligations comprised $28.3 million of our securities portfolio. Other Securities. In addition, at September 30, 2005 we held an approximate investment of $3.1 million in Federal Home Loan Bank of New York common stock (this amount is not shown in the securities portfolio). As a member of the Federal Home Loan Bank of New York, ownership of Federal Home Loan Bank of New York common shares is required. The following table sets forth the carrying value of our securities portfolio at the dates indicated. Securities that are held-to-maturity are shown at our amortized cost, and securities that are available-for-sale are shown at the current market value.
At September 30, -------------------------------------------------- 2005 2004 2003 ---- ---- ---- (In thousands) Securities Held-to-Maturity: - ---------------------------- U.S. government and federal agency obligation........ $ 2,000 $ -- $ -- Collateralized mortgage non-agency obligations....... 2,503 -- -- Collateralized mortgage agency obligations........... 76 107 193 Government National Mortgage Association............. 244 327 476 Federal Home Loan Mortgage Corporation............... 385 490 657 Federal National Mortgage Association................ 2,616 1,870 1,513 --------- --------- ---------- Total securities held-to-maturity.................. 7,824 2,794 2,839 --------- --------- ---------- Securities Available-for-Sale: - ------------------------------ U.S. government and federal agency obligation........ 9,805 13,840 13,484 Collateralized mortgage non-agency obligations....... -- 1,234 4,962 Collateralized mortgage agency obligations........... 25,763 42,870 61,685 Government National Mortgage Association............. 148 202 320 Federal Home Loan Mortgage Corporation............... 4,090 5,219 346 Federal National Mortgage Association................ 12,782 16,261 16,664 Mutual fund.......................................... 9,749 9,869 9,930 --------- --------- ---------- Total securities available-for-sale................ 62,337 89,495 107,391 --------- --------- ---------- Total.............................................. $ 70,161 $ 92,289 $ 110,230 ========= ========= ==========
18 The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of our investment and mortgage-backed securities portfolio at September 30, 2005. This table shows contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may differ.
At September 30, 2005 ----------------------------------------------------------------------------------------------------- One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Securities ---------------- ----------------- ----------------- ------------------- ---------------- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market Value Yield Value Yield Value Yield Value Yield Value Yield Value -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- ------ (Dollars in thousands) U.S. Government and Federal Agency .................... $ 4,947 2.08% $ 6,858 2.61% $ -- -- % $ -- --% $11,805 2.39% $11,767 Mortgage-backed non-agency obligations ............... -- -- 2,503 3.85 -- -- -- -- 2,503 3.85 2,434 Government National Mortgage Association ............... -- -- 4 6.90 -- -- 738 2.73 742 2.75 744 Federal Home Loan Mortgage Association ............... -- -- 1,246 3.24 6,570 2.95 14,422 3.28 22,238 3.18 22,239 Federal National Mortgage Association ............... -- -- -- -- 12,339 3.40 10,785 3.67 23,124 3.52 23,099 ------- ------- ------- ------- ------- ------- Total .................... $ 4,947 2.08% $10,611 2.98% $18,909 3.24% $25,945 3.40% $60,412 3.18% $60,283 ======= ======= ======= ======= ======= =======
19 Sources of Funds General. Deposits are our major source of funds for lending and other investment purposes. In addition, we derive funds from loan and mortgage-backed securities principal repayments, and proceeds from the maturity, call and sale of mortgage-backed securities and investment securities. Loan and securities payments are a relatively stable source of funds, while deposit inflows are significantly influenced by general interest rates and money market conditions. Borrowings (principally from the Federal Home Loan Bank) are also used to supplement the amount of funds for lending and investment. Deposits. Our current deposit products include checking, savings, money market, club accounts, certificates of deposit accounts ranging in terms from thirty days to ten years, and individual retirement accounts. Deposit account terms vary, primarily as to the required minimum balance amount, the amount of time that the funds must remain on deposit and the applicable interest rate. Deposits are obtained primarily from within New Jersey. Traditional methods of advertising are used to attract new customers and deposits, including print media, cable television, direct mail and inserts included with customer statements. We have not in the past utilized the services of deposit brokers, however, our current growth strategy includes a modest brokered CD program. Although we did offer special savings programs in connection with the opening of our Cedar Grove branch office, premiums or incentives for opening accounts are generally not offered. We periodically select particular certificate of deposit maturities for promotion. The determination of interest rates is based upon a number of factors, including: (1) our need for funds based on loan demand, current maturities of deposits and other cash flow needs; (2) a current survey of general market rates and rates of a selected group of competitors' rates for similar products; (3) our current cost of funds and yield on assets; and (4) the alternate cost of funds on a wholesale basis, in particular the cost of advances from the Federal Home Loan Bank. Interest rates are reviewed by senior management on a weekly basis. At September 30, 2005, $152.8 million or 44.8% of our deposits were in certificates of deposit. Our liquidity could be reduced if a significant amount of certificates of deposit, maturing within a short period of time, were not renewed. Historically, a significant portion of the certificates of deposit remain with us after they mature and we believe that this will continue. However, the need to retain these time deposits could result in an increase in our cost of funds. At September 30, 2005, we had approximately $24.2 million of municipal deposits at the Bank. Of these deposits, approximately $14.0 million represent funds held by municipalities associated with capital improvement projects. The Bank expects a significant portion of these funds to be withdrawn during calendar year 2006 as disbursements are made by the municipalities to fund the completion of such projects. 20 The following table sets forth the distribution of deposits at the Bank at the dates indicated and the weighted average nominal interest rates for each period on each category of deposits presented.
At September 30 ----------------------------------------------------------------------------------------------------- 2005 2004 2003 ------------------------------ -------------------------------- --------------------------------- Weighted Weighted Weighted Percent Average Percent Average Percent Average of Total Nominal of Total Nominal of Total Nominal Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate ------ -------- ---- ------ -------- ---- ------ -------- ---- Non-interest-bearing demand deposits........ $ 25,583 7.50% --% $ 22,599 7.00% --% $ 21,676 7.40% --% Interest-bearing demand deposits........ 39,264 11.52 1.87 38,696 11.99 1.06 21,721 7.42 0.98 Savings deposits.......... 123,270 36.16 1.68 143,401 44.44 1.60 127,720 43.62 1.60 Time deposits............. 152,808 44.82 3.45 118,020 36.57 2.65 121,709 41.56 2.55 --------- ------ ---- --------- ------ ---- --------- ------ ---- Total deposits....... $ 340,925 100.00% 2.37% $ 322,716 100.00% 1.81% $ 292,826 100.00% 1.79% ========= ====== ==== ========= ====== ==== ========= ====== ====
21 The following table shows the amount of our certificates of deposit of $100,000 or more by time remaining until maturity as of September 30, 2005. Certificates Remaining Time Until Maturity of Deposits ----------------------------- ----------- (In thousands) Within three months.................... $ 7,845 Three through six months............... 11,968 Six through twelve months.............. 11,813 21,030 Over twelve months..................... -------- Total $ 52,656 ======== Borrowings. To supplement our deposits as a source of funds for lending or investment, we borrow funds in the form of advances from the Federal Home Loan Bank. We regularly make use of Federal Home Loan Bank advances as part of our interest rate risk management, primarily to extend the duration of funding to match the longer term fixed rate loans held in the loan portfolio as part of our growth strategy. 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. Advances from the Federal Home Loan Bank are typically secured by the Federal Home Loan Bank stock we own and a portion of our residential mortgage loans and may be secured by other assets, mainly securities which are obligations of or guaranteed by the U.S. government. At September 30, 2005, our borrowing limit with the Federal Home Loan Bank was approximately $139 million. Additional information regarding our Federal Home Loan Bank advances is included under Note 8 of the Notes to the Financial Statements. The following table sets forth certain information regarding our borrowed funds. At or For the Year Ended September 30, ----------------------------- 2005 2004 2003 ------- ------- ------- Federal Home Loan Bank Advances: Average balance outstanding ............. $62,056 $60,125 $54,923 Maximum amount outstanding at any month-end during the period.... $72,853 $65,500 $61,800 Balance outstanding at end of period.... $53,734 $57,491 $55,000 Weighted average interest rate during The period ........................... 4.58% 4.76% 5.16% Weighted average interest rate at end Of period ............................ 4.84% 4.72% 5.13% 22 Subsidiary Activity In addition to American Bank of New Jersey, the Company has one other subsidiary, ASB Investment Corp., a New Jersey corporation, which was organized in June 2003 for the purpose of selling insurance and investment products, including annuities, to customers of the Bank and the general public through a third party networking arrangement. There has been very little activity at this subsidiary and sales are currently limited to the sale of fixed rate annuities. American Bank of New Jersey has one subsidiary, American Savings Investment Corp., which was formed in August 2004 under New Jersey law as an investment company subsidiary. The purpose of this subsidiary is to invest in stocks, bonds, notes and all types of equity, mortgages, debentures and other investment securities. Holding investment securities in this subsidiary reduces our New Jersey state income tax rate. Personnel As of September 30, 2005, we had 59 full-time employees and 15 part-time employees. The employees are not represented by a collective bargaining unit. We believe our relationship with our employees is satisfactory. Regulation Set forth below is a brief description of certain laws that relate to the regulation of the Bank and the Company. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. The Bank and the Company operate in a highly regulated industry. This regulation and supervision establishes a comprehensive framework of activities in which a federal savings bank may engage and is intended primarily for the protection of the deposit insurance fund and depositors. Any change in applicable statutory and regulatory requirements, whether by the OTS, the Federal Deposit Insurance Corporation ("FDIC") or the United States Congress, could have a material adverse impact on the Company and the Bank, and their operations. The adoption of regulations or the enactment of laws that restrict the operations of the Bank and/or the Company or impose burdensome requirements upon one or both of them could reduce their profitability and could impair the value of the Bank's franchise which could hurt the trading price of the Company's common stock. Regulation of the Bank General. As a federally chartered, SAIF-insured savings bank, the Bank is subject to extensive regulation by the OTS and the FDIC. This regulatory structure gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies regarding the classification of assets and the level of the allowance for loan losses. The activities of federal savings banks are subject to extensive regulation including restrictions or requirements with respect to loans to one borrower, the percentage of non-mortgage loans or investments to total assets, capital distributions, permissible investments and lending activities, liquidity management, transactions with affiliates and community reinvestment. Federal savings banks are also subject to reserve requirements of the Federal Reserve System. A federal savings bank's relationship with its depositors and borrowers is regulated by both state and federal law, especially in such matters as the ownership of savings accounts and the form and content of the bank's mortgage documents. 23 The Bank must file regular reports with the OTS and the FDIC concerning its activities and financial condition, and must obtain regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions. The OTS regularly examines the Bank and prepares reports to the Bank's Board of Directors on deficiencies, if any, found in its operations. Insurance of Deposit Accounts. The FDIC administers two separate deposit insurance funds. Generally, the Bank Insurance Fund ("BIF") insures the deposits of commercial banks and the Savings Association Insurance Fund ("SAIF") insures the deposits of savings institutions. The FDIC is authorized to increase deposit insurance premiums if it determines such increases are appropriate to maintain the reserves of either the BIF or SAIF or to fund the administration of the FDIC. In addition, the FDIC is authorized to levy emergency special assessments on BIF and SAIF members. In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation ("FICO"), an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds mature in 2017. Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) "Tier 1" or "core" capital equal to at least 4% (3% if the institution has received the highest possible rating on its most recent examination) of total adjusted assets, and (3) risk-based capital equal to 8% of total risk-weighted assets. At September 30, 2005 the Bank exceeded all regulatory capital requirements and was classified as "well capitalized." In addition, the OTS may require that a savings institution that has a risk-based capital ratio of less than 8%, a ratio of Tier 1 capital to risk-weighted assets of less than 4% or a ratio of Tier 1 capital to total adjusted assets of less than 4% (3% if the institution has received the highest rating on its most recent examination) take certain action to increase its capital ratios. If the savings institution's capital is significantly below the minimum required levels of capital or if it is unsuccessful in increasing its capital ratios, the OTS may restrict its activities. For purposes of the OTS capital regulations, tangible capital is defined as core capital less all intangible assets except for certain mortgage servicing rights. Tier 1 or core capital is defined as common stockholders' equity, non-cumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of consolidated subsidiaries, and certain non-withdrawable accounts and pledged deposits of mutual savings banks. The Bank does not have any non-withdrawable accounts or pledged deposits. Tier 1 and core capital are reduced by an institution's intangible assets, with limited exceptions for certain mortgage and non-mortgage servicing rights and purchased credit card relationships. Both core and tangible capital are further reduced by an amount equal to the savings institution's debt and equity investments in "non-includable" subsidiaries engaged in activities not permissible to national banks other than subsidiaries engaged in activities undertaken as agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies. The risk-based capital standard for savings institutions requires the maintenance of total capital of 8% of risk-weighted assets. Total capital equals the sum of core and supplementary capital. The components of supplementary capital include, among other items, cumulative perpetual preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt, intermediate-term preferred stock, the portion of the allowance for loan losses not designated for specific loan losses and up to 45% of unrealized gains on equity securities. The portion of the allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary 24 capital is limited to 100% of core capital. For purposes of determining total capital, a savings institution's assets are reduced by the amount of capital instruments held by other depository institutions pursuant to reciprocal arrangements and by the amount of the institution's equity investments (other than those deducted from core and tangible capital) and its high loan-to-value ratio land loans and non-residential construction loans. A savings institution's risk-based capital requirement is measured against risk-weighted assets, which equal the sum of each on-balance-sheet asset and the credit-equivalent amount of each off-balance-sheet item after being multiplied by an assigned risk weight. These risk weights range from 0% for cash to 100% for delinquent loans, property acquired through foreclosure, commercial loans, and other assets. OTS rules require a deduction from capital for savings institutions with certain levels of interest rate risk. The OTS calculates the sensitivity of an institution's net portfolio value based on data submitted by the institution in a schedule to its quarterly Thrift Financial Report and using the interest rate risk measurement model adopted by the OTS. The amount of the interest rate risk component, if any, deducted from an institution's total capital is based on the institution's Thrift Financial Report filed two quarters earlier. The OTS has indefinitely postponed implementation of the interest rate risk component, and the Bank has not been required to determine whether it will be required to deduct an interest rate risk component from capital. Prompt Corrective Regulatory Action. Under the OTS Prompt Corrective Action regulations, the OTS is required to take supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's level of capital. Generally, a savings institution that has total risk-based capital of less than 8.0%, or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%, is considered to be undercapitalized. A savings institution that has total risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized." A savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be "critically undercapitalized." Generally, the banking regulator is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within forty-five days of the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, numerous mandatory supervisory actions become immediately applicable to the institution, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The OTS may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Dividend and Other Capital Distribution Limitations. The OTS imposes various restrictions or requirements on the ability of savings institutions to make capital distributions, including cash dividends. A savings institution that is a subsidiary of a savings and loan holding company, such as the Bank, must file an application or a notice with the OTS at least thirty days before making a capital distribution. A savings institution must file an application for prior approval of a capital distribution if: (i) it is not eligible for expedited treatment under the applications processing rules of the OTS; (ii) the total amount of all capital distributions, including the proposed capital distribution, for the applicable calendar year would exceed an amount equal to the savings bank's net income for that year to date plus the institution's retained net income for the preceding two years; (iii) it would not adequately be capitalized after the capital distribution; or (iv) the distribution would violate an agreement with the OTS or applicable regulations. 25 The Bank is required to file a capital distribution notice or application with the OTS before paying any dividend to the Company. However, capital distributions by the Company, as a savings and loan holding company, are not subject to the OTS capital distribution rules. The OTS may disapprove a notice or deny an application for a capital distribution if: (i) the savings institution would be undercapitalized following the capital distribution; (ii) the proposed capital distribution raises safety and soundness concerns; or (iii) the capital distribution would violate a prohibition contained in any statute, regulation or agreement. In addition, a federal savings institution cannot distribute regulatory capital that is required for its liquidation account. Qualified Thrift Lender Test. Federal savings institutions must meet a qualified thrift lender ("QTL") test or they become subject to the business activity restrictions and branching rules applicable to national banks. To qualify as a QTL, a savings institution must either (i) be deemed a "domestic building and loan association" under the Internal Revenue Code by maintaining at least 60% of its total assets in specified types of assets, including cash, certain government securities, loans secured by and other assets related to residential real property, educational loans and investments in premises of the institution or (ii) satisfy the statutory QTL test set forth in the Home Owners' Loan Act by maintaining at least 65% of its "portfolio assets" in certain "Qualified Thrift Investments" (defined to include residential mortgages and related equity investments, certain mortgage-related securities, small business loans, student loans and credit card loans, and 50% of certain community development loans). For purposes of the statutory QTL test, portfolio assets are defined as total assets minus intangible assets, property used by the institution in conducting its business, and liquid assets equal to 20% of total assets. A savings institution must maintain its status as a QTL on a monthly basis in at least nine out of every twelve months. The Bank met the QTL test as of September 30, 2005 and in each of the last twelve months and, therefore, qualifies as a QTL. Transactions with Affiliates. Generally, federal banking law requires that transactions between a savings institution or its subsidiaries and its affiliates must be on terms as favorable to the savings institution as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the savings institution's capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the savings institution. In addition, a savings institution may not extend credit to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of any affiliate that is not a subsidiary. The OTS has the discretion to treat subsidiaries of savings institutions as affiliates on a case-by-case basis. Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every insured depository institution, including the Bank, has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the OTS to assess the depository institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, such as a merger or the establishment of a branch office by the Bank. An unsatisfactory CRA examination rating may be used as the basis for the denial of an application by the OTS. The Office of Thrift Supervision assigned the Bank an overall rating of "Satisfactory" in its most recent CRA evaluation. Federal Home Loan Bank ("FHLB") System. The Bank is a member of the FHLB of New York, which is one of twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by financial institutions and 26 proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members pursuant to policies and procedures established by the board of directors of the FHLB. As a member, the Bank is required to purchase and maintain stock in the FHLB of New York in an amount equal to the greater of 1% of our aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of FHLB advances. We are in compliance with this requirement. The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate related collateral to 30% of a member's capital and limiting total advances to a member. The FHLBs are required to provide funds for the resolution of troubled savings institutions and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. Federal Reserve System. The Federal Reserve System requires all depository institutions to maintain non-interest-bearing reserves at specified levels against their checking accounts and non-personal certificate accounts. The balances maintained to meet the reserve requirements imposed by the Federal Reserve System may be used to satisfy the OTS liquidity requirements. Savings institutions have authority to borrow from the Federal Reserve System "discount window," but Federal Reserve System policy generally requires savings institutions to exhaust all other sources before borrowing from the Federal Reserve System. Regulation of the Company General. The Company is a savings and loan holding company, subject to regulation and supervision by the OTS. In addition, the OTS has enforcement authority over the Company and any non-savings institution subsidiaries. This permits the OTS to restrict or prohibit activities that it determines to be a serious risk to the Company. This regulation is intended primarily for the protection of the depositors and not for the benefit of stockholders of the Company. Activities Restrictions. As a savings and loan holding company formed after May 4, 1999, the Company is not a grandfathered unitary savings and loan holding company under the Gramm-Leach-Bliley Act (the "GLB Act"). As a result, the Company and its non-savings institution subsidiaries are subject to statutory and regulatory restrictions on their business activities. Under the Home Owners' Loan Act, as amended by the GLB Act, the non-banking activities of the Company are restricted to certain activities specified by OTS regulation, which include performing services and holding properties used by a savings institution subsidiary, activities authorized for savings and loan holding companies as of March 5, 1987, and non-banking activities permissible for bank holding companies pursuant to the Bank Holding Company Act of 1956 (the "BHC Act") or authorized for financial holding companies pursuant to the GLB Act. Furthermore, no company may acquire control of American Bank of New Jersey unless the acquiring company was a unitary savings and loan holding company on May 4, 1999 (or became a unitary savings and loan holding company pursuant to an application pending as of that date) or the company is only engaged in activities that are permitted for multiple savings and loan holding companies or for financial holding companies under the BHC Act as amended by the GLB Act. Mergers and Acquisitions. The Company must obtain approval from the OTS before acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company or 27 acquiring such a savings institution or savings and loan holding company by merger, consolidation or purchase of its assets. In evaluating an application for the Company to acquire control of a savings institution, the OTS would consider the financial and managerial resources and future prospects of the Company and the target institution, the effect of the acquisition on the risk to the insurance funds, the convenience and the needs of the community and competitive factors. Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act"). The Securities and Exchange Commission ("SEC") has promulgated new regulations pursuant to the Act and may continue to propose additional implementing or clarifying regulations as necessary in furtherance of the Act. The passage of the Act, and the regulations implemented by the SEC subject publicly-traded companies to additional and more cumbersome reporting regulations and disclosure requirements. Compliance with the Act and corresponding regulations may increase the Company's expenses. Item 2. Properties. At September 30, 2005, our net investment in property and equipment totaled $4.1 million. We use an outside service company for data processing. The following table sets forth the location of our main office, separate drive-up facility and branch office, the year opened for each and the net book value of each. Additionally, at September 30, 2005, we had purchase deposits and other professional fees totaling $584,000 in connection with de novo branch site acquisitions. Year Facility Leased or Net Book Value at Office Location Opened Owned September 30, 2005 - --------------- ------ ----- ------------------ (In thousands) Main Office 365 Broad Street Bloomfield, New Jersey 07003 1965 Owned $ 1,316 Main Office Drive Up Facility 16 Pitt Street Bloomfield, New Jersey 07003 1998 Owned $ 339 Full Service Branch 310 Pompton Avenue Cedar Grove, New Jersey 07009 2001 Owned $ 1,892 Item 3. Legal Proceedings. From time to time the Company and its subsidiaries are parties to routine litigation, which arises in the normal course of business, such as claims to enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and servicing of real property loans, and other issues incident to the business of the Bank. In the opinion of management, there were no lawsuits pending or known to be contemplated at September 30, 2005 that would have a material effect on operations or income. Item 4. Submission of Matters to a Vote of Security Holders. None. 28 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. (a) Market for Common Equity. The common stock of American Bancorp of New Jersey, Inc. is traded on the Nasdaq National Market under the symbol "ABNJ." Trading commenced on October 6, 2005 upon completion of the second step conversion. As of December 10, 2005, there were 935 registered holders of record, including brokerage firms, banks and registered clearing agents acting as nominees for an beneficial "street name" holders. (b) Use of Proceeds. The Company commenced its stock offering in connection with the second-step conversion of American Savings, MHC from the mutual holding company form of organization to a full stock corporation on August 22, 2005 and completed the offering and conversion on October 5, 2005. Keefe, Bruyette & Woods, Inc. assisted the Company in its selling efforts on a best efforts basis. The Company sold 9,918,750 shares of its common stock, par value $0.10 per share, at $10.00 per share, representing the super-maximum of the offering range. In addition, each share of common stock held by the public stockholders of ASB Holding Company, the former middle-tier stock holding company, was converted into 2.55102 shares of common stock of the Company, resulting in an aggregate of 4,250,719 exchange shares. Accordingly, upon completion of the Conversion, the Company had 14,169,469 total shares outstanding. Shares of the Company began trading on October 6, 2005 on the Nasdaq National Market under the symbol "ABNJ." The Company paid an underwriting commission to Keefe, Bruyette & Woods, Inc. of 1% of the aggregate amount of common stock sold, not counting exchange shares issued to holders of ASB Holding Company common stock and excluding (i)305,861 shares purchased in the offering by directors, officers and employees of the Company and its subsidiaries and (ii) 793,500 shares purchased in the offering by the Bank's employee stock ownership plan. Offering expenses, excluding underwriting commissions of $882,000, totaled $781,000 and net proceeds of the offering were $97.5 million. The Company used $7.9 million of the net proceeds to make a loan to the Bank's employee stock ownership plan for the plan's purchase of 793,500 shares in the offering. (c) Issuer Purchases of Equity Securities.
(c) Total Number (d) Maximum Number of Shares (or Units) (or Approximate Dollar (b) Purchased as Part Value) of Shares (or (a) Total Number Average of Publicly Units) that May Yet Be of Shares (or Paid per Share Announced Plans Purchased Under Period Units) Purchased (or Unit) or Programs Plans or Programs - ------ ---------------- --------- -------------------- ----------------------- Quarter ended -- N/A -- 208,293 (1) September 30, 2005
- ------------------------- (1) As of September 30, 2005, the Company had not commenced its repurchase of shares to fund stock awards previously made under the American Bank of New Jersey 2005 Restricted Stock Plan. Purchases to fund the restricted stock plan will be made from time to time in the open market, based on stock availability, price and the Company's financial performance. 29 Item 6. Selected Financial Data. The information contained in the table captioned "Selected Consolidated Financial and Other Data" in the portions of the Annual Report filed as Exhibit 13 to this Form 10-K is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report filed as Exhibit 13 to this Form 10-K is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information contained in the section captioned "Management of Interest Rate Risk and Market Risk" in the Annual Report filed as Exhibit 13 to this Form 10-K is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The Company's financial statements listed under Item 15 of this Form 10-K and included in Exhibit 13 to this Form 10-K are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. Item 9A. Controls and Procedures. (a) Evaluation of disclosure controls and procedures. Based on their evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the Company's principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Annual Report on Form 10-K such disclosure controls and procedures are effective. (b) Changes in internal controls. During the last quarter of the year under report, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Item 9B. Other Information. Not applicable. 30 PART III Item 10. Directors and Executive Officers of the Registrant. Section 16(A) Beneficial Ownership Reporting Compliance The Common Stock of the Company is registered pursuant to Section 12(g) of the Securities and Exchange Act of 1934, as amended. The officers and directors of the Company and beneficial owners of greater than 10% of the Company's Common Stock ("10% beneficial owners") are required by Section 16(a) of such act to file reports of ownership and changes in beneficial ownership of the Common Stock with the SEC and NASDAQ and to provide copies of those reports to the Company. The Company is not aware of any beneficial owner, as defined under Section 16(a), of more than 10% of its Common Stock. To the Company's knowledge, all Section 16(a) filing requirements applicable to its officers and directors were complied with during the 2005 fiscal year. Directors and Executive Officers The Company's certificate of incorporation requires that the Board of Directors be divided into four classes, as nearly equal in number as possible, each class to serve for a four-year period, with approximately one-fourth of the directors elected each year. The Board of Directors currently consists of eight members. The following table sets forth the ages of the directors and executive officers of the Company and the terms and length of service of the directors.
Age at Year First Elected or Current Name September 30, 2005 Appointed(1) Term Expires - ---- ------------------- ------------ ------------ Robert A. Gaccione 64 2003 2007 Joseph Kliminski 62 1986 2009 Fred G. Kowal 52 2005 2008 H. Joseph North 73 1991 2006 Stanley Obal 83 1981 2009 W. George Parker 80 1967 2006 Vincent S. Rospond 73 1981 2008 James H. Ward, III 56 1991 2007 Richard M. Bzdek 52 N/A N/A Eric B. Heyer 43 N/A N/A Catherine M. Bringuier 42 N/A N/A
- ---------------------- (1) Indicates the year the individual first became a director of American Bank of New Jersey or ASB Holding Company, the former mid-tier stock holding company that was replaced by American Bancorp of New Jersey, Inc. Each director of ASB Holding Company became a director of American Bancorp of New Jersey, Inc. upon its formation in 2005. The business experience of each of our directors and executive officers is set forth below. Each has held his or her present position for at least the past five years, except as otherwise indicated. 31 Robert A. Gaccione has been a member of the Board since 2003. He has been a senior partner of the law firm of Gaccione, Pomaco & Malanga, P.C. in Belleville, New Jersey for thirty years. He is a former Federal Bureau of Investigation agent. Mr. Gaccione also serves as an Essex County Tax Board Commissioner. He served as a director of Franklin Community Bank, a commercial bank located in Nutley, New Jersey for three years. Mr. Gaccione is a member and the past president of the Belleville Rotary Club, is the president of the Clara Maass Foundation and is a member of the Belleville Foundation. Joseph Kliminski serves as Chief Executive Officer and has been a member of the Board since 1986. He has been employed by the Bank since 1967 and became President and Chief Executive Officer in 1987. In 2005, Mr. Fred Kowal replaced Mr. Kliminski as President. Mr. Kliminski is a member and past president of the Bloomfield Lions Club, is president of the Advisory Board to the Bloomfield Town Council, chairman of the Bloomfield Education Foundation, and former chairman of the Deborah Hospital Children of the World Golf Tournament. Mr. Kliminski also serves on the Executive Committee of the Bloomfield Center Alliance, and is a member and former president of the Board of Trustees of the Bloomfield Public Library. He is also a former member of the Board of Governors of the New Jersey League of Community Bankers and past president of the Essex County Savings League. Fred G. Kowal serves as President and Chief Operating Officer and has been a member of the Board since 2005. He joined the Bank in March 2005. Mr. Kowal was previously Chairman and Chief Executive Officer of Warwick Community Bancorp, Inc. until its merger into Provident Bancorp, Inc. in October 2004. He joined Warwick Community Bancorp, Inc. in 1999 and also served as Chairman of the Board of Directors of The Warwick Savings Bank and as Chairman of the Board, President and Chief Executive Officer of The Towne Center Bank, a de novo commercial bank formed by Warwick Community Bancorp, Inc. in 1999. Prior to joining Warwick, he served as Senior Vice President of First Union National Bank, where he worked for 16 years, and as Senior Vice President of PNC Bank. H. Joseph North has been a member of the Board since 1991. Mr. North retired in 1987 as Town Administrator of Bloomfield, New Jersey after 20 years of service as the municipality's Chief Administrative Officer. Mr. North began his service to the Town of Bloomfield in 1958 as Town Clerk where his duties included that of Corporation Secretary to the Municipality and Executive Secretary to the Planning Board and Zoning Board of Adjustment. Mr. North is a past president and a lifetime member of the New Jersey Municipal Management Association and is a former member of the International City Management Association. Mr. North is also a former president of the Bloomfield Lions Club, Bloomfield Fifth Quarter Club and Bloomfield Tennis Federation and a former member of the Board of Trustees of Bloomfield College. Stanley Obal has been a member of the Board since 1981. Mr. Obal retired in 1982 and was the owner of Obal's Inn, a tavern and restaurant in Bloomfield, New Jersey. W. George Parker has been a member of the Board since 1967 and Chairman since 1990. Mr. Parker is the owner, president and chief executive officer of Adco Chemical Company, located in Newark, New Jersey. Vincent S. Rospond has been a member of the Board since 1981. He is an attorney and the majority stockholder of the law firm of Rospond, Rospond & Conte, P.A. in Bloomfield, New Jersey. Rospond, Rospond & Conte serves as general counsel to the Bank. Mr. Rospond is the president and a trustee of United Way of Bloomfield, is a member and the former legal counsel of Bloomfield Chamber of Commerce, and is a member and the treasurer of North Jersey Manufacturer's & Businessmen 32 Association. He is also a member of the Cornell Club of New Jersey, the Essex County Bar Association, the Newark Art Museum, the Bloomfield Music Federation and the New Jersey Bar Association. James H. Ward, III has been a member of the Board since 1991 and Vice Chairman since 2003. From 1998 to 2000, he was the majority stockholder and Chief Operating Officer of Rylyn Group, which operated a restaurant in Indianapolis, Indiana. Prior to that, he was the majority stockholder and Chief Operating Officer of Ward and Company, an insurance agency in Springfield, New Jersey, where he was employed from 1968 to 1998. He is now a retired investor. Richard M. Bzdek serves as Executive Vice President and Secretary and has been employed by the Bank in various capacities since 1975. Mr. Bzdek is the former president and a current director of the Bloomfield Chamber of Commerce. He is a member of the Financial Managers Society and serves as Vice Chairman on the Operations and Technology Committee of the New Jersey League of Community Bankers. He is also the treasurer and a trustee of United Way of Bloomfield and is a director and co-founder of the Bloomfield Center Alliance. Eric B. Heyer serves as Senior Vice President, Treasurer and Chief Financial Officer and has been employed by the Bank in various capacities since 1993. He was previously the chief financial officer of Monarch Savings Bank in Kearny, New Jersey, where he was employed from 1986 to 1993. Mr. Heyer is a member of the Financial Managers Society. He has previously served as a trustee of Kingston United Methodist Church and currently serves as vice chairman of the stewardship and finance committee of Princeton United Methodist Church. Mr. Heyer also serves as a board member of the Mental Health Clinic of Passaic in Clifton, New Jersey. Catherine M. Bringuier serves as Senior Vice President and Chief Lending Officer and has been employed by the Bank in various capacities since 1990. Ms. Bringuier currently serves as a member of the Commercial Lending Committee, Loan Servicing Committee, and the Residential Lending & Affordable Housing Committee of the New Jersey League of Community Bankers. Ms. Bringuier was also appointed to the Mortgage Steering Committee of the New Jersey League. Ms. Bringuier is a member of the Commercial Loan Committee and the Residential Lending Committee of the Mortgage Bankers Association of New Jersey. She is a member and prior Vice President of Sunny Acres Civic & Improvement Association in Cranford, New Jersey and is an Assistant Den Leader for Cub Scout Pack 103, in Cranford, New Jersey. Audit Committee The Audit Committee consists of Directors Parker, North and Ward, each of whom is independent under the rules of the Nasdaq Stock Market. Each member of the Audit Committee is qualified under the rules of the Nasdaq Stock Market to serve as a member of the Audit Committee, however, none qualifies as an audit committee financial expert within the meaning of the regulations of the Securities and Exchange Commission. This committee meets quarterly and as needed with the internal auditor and the external auditors. This committee's main responsibilities include oversight of the internal auditor and the external auditors and monitoring of management and staff compliance with the Board's audit policies, and applicable laws and regulations. Code of Ethics The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The 33 Company's Code of Ethics will be provided without charge upon request to the Corporate Secretary, American Bancorp of New Jersey, Inc., 365 Broad Street, Bloomfield, New Jersey 07003. Item 11. Executive Compensation. Director Compensation Board Fees. Directors are currently paid a fee of $500 per meeting for each regular and special meeting attended. Directors also receive an annual retainer of $2,500. No fees are paid for committee meetings other than audit committee meetings, for which directors receive a fee of $750 per meeting. Each director is also a director of American Bank of New Jersey and is paid $1,000 per meeting for each regular and special meeting of the Bank's Board attended. Bank directors also receive an annual retainer of $8,000. Directors who also serve as employees do not receive compensation as directors. Directors Consultation and Retirement Plan. The Directors Consultation and Retirement Plan provides retirement benefits to directors on their retirement date. "Retirement date" means the date of termination of service as a director following a participant's completion of not less than twelve years of service as a director, or not less than six years of service following a change in control; provided however, the retirement date with regard to directors serving as of August 27, 1996 who have completed not less than five years of service as of August 27, 1996 shall be the date of termination of service as a director without regard to whether the twelve years of service requirement has been fulfilled. Upon death or disability, a director shall be deemed to have terminated service as of that date. If a director agrees to become a consulting director to our board upon retirement, he will receive a monthly payment for life but in no event for less than 144 months, equal to 0.0833 times the highest aggregate annual fees paid (including retainer fees and regular board meeting fees) during the most recently completed three calendar year periods ending on or before the retirement date. In the event of a change in control, all directors will be presumed to have reached the retirement date and each director will receive a lump sum payment equal to the present value of future benefits payable. Restricted Stock Awards. During the year ended September 30, 2005, each non-employee director was awarded 12,498 shares of restricted stock under the American Bank of New Jersey 2005 Restricted Stock Plan. Restricted stock awards are earned at the rate of 20% one year after the date of grant and 20% annually thereafter during periods of service as an employee, director or director emeritus. All awards become immediately 100% vested upon death or disability or termination of service following a change in control. The number of restricted shares awarded has been adjusted for the exchange ratio in connection with the second-step conversion completed in October 2005. Stock Option Awards. During the year ended September 30, 2005, each non-employee director was awarded 39,923 options to purchase shares of common stock under the 2005 Stock Option Plan, at an exercise price equal to the fair market value of the common stock on the date of grant. These options are first exercisable at a rate of 20% one year after the date of grant and 20% annually thereafter during continued service as an employee, director or director emeritus. Upon disability, death, or a change in control, these awards become 100% exercisable. The number of options and the exercise price have been adjusted in accordance with the exchange ratio in connection with the second-step conversion completed in October 2005. 34 Executive Compensation Summary Compensation Table. The following table sets forth the compensation awarded to or earned by the chief executive officer and certain other executive officers for the three fiscal years ended September 30, 2005. Mr. Kowal started his employment in March 2005.
Annual Compensation(1) Long Term Compensation Awards ---------------------- ----------------------------- Restricted Securities All Fiscal Stock Underlying Other Name and Principal Position Year Salary Bonus Award(s)($)(2) Options/SARs(#) Compensation - --------------------------- ------------ ------ ----- --------------- --------------- ------------ Joseph Kliminski 2005 $256,730 $70,038 $338,031 164,899 $231,973(3) Chief Executive Officer 2004 250,000 0 0 0 188,101 2003 242,255 73,228 0 0 212,140 Fred G. Kowal (4) 2005 $125,481 $ 0 $ 0 0 $ 0 President and Chief Operating Officer Richard M. Bzdek 2005 $168,566 $38,080 $169,016 81,582 $63,194(5) Executive Vice President 2004 164,147 0 0 0 44,290 and Secretary 2003 162,244 30,492 0 0 46,498 Eric B. Heyer 2005 $148,904 $32,318 $154,940 74,639 $ 46,747(6) Senior Vice President, 2004 145,000 0 0 0 32,617 Treasurer and Chief 2003 139,615 50,322 0 0 31,019 Financial Officer Catherine M. Bringuier 2005 $138,840 $28,716 $154,940 74,639 $ 45,143(7) Senior Vice President and 2004 133,800 25,000 0 0 30,329 Chief Lending Officer 2003 123,269 45,478 0 0 20,910
- ------------ (1) All compensation set forth in the table, other than awards under the 2005 Stock Option Plan, was paid by the Bank. (2) Under the 2005 Restricted Stock Plan, shares of restricted stock were awarded during 2005 as follows: 49,990 shares to Mr. Kliminski, 24,995 shares to Mr. Bzdek, 22,912 shares to Mr. Heyer and 22,912 shares to Ms. Bringuier. As of September 30, 2005, no shares had vested and the value of the restricted shares held by each officer was as follows: Mr. Kliminski $548,100, Mr. Bzdek $274,050, Mr. Heyer $251,227 and Ms. Bringuier $251,227. (3) For 2005, consists of (i) an accrual of $187,878 under Mr. Kliminski's executive salary continuation agreement, (ii) an employer matching contribution to the 401(k) Plan for Mr. Kliminski of $6,259, (iii) an employer contribution to the Profit Sharing Plan for Mr. Kliminski of $15,933, and (iv) the award of shares under the ESOP valued at $21,903 based on the closing price on the date of award. (4) Mr. Kowal's employment commenced in March 2005, thus information presented for him does not reflect a full year. (5) For 2005, consists of (i) an accrual of $24,523 under Mr. Bzdek's executive salary continuation agreement, (ii) an employer matching contribution to the 401(k) Plan for Mr. Bzdek of $5,140, (iii) an employer contribution to the Profit Sharing Plan for Mr. Bzdek of $15,993, and (iv) the award of shares under the ESOP valued at $17,538 based on the closing price on the date of award. (6) For 2005, consists of (i) an accrual of $12,273 under Mr. Heyer's executive salary continuation agreement, (ii) an employer matching contribution to the 401(k) Plan for Mr. Heyer of $4,609, (iii) an employer contribution to the Profit Sharing Plan for Mr. Heyer of $14,373, and (iv) the award of shares under the ESOP valued at $15,492 based on the closing price on the date of award. (7) For 2005, consists of (i) an accrual of $10,937 under Ms. Bringuier's executive salary continuation agreement, (ii) an employer matching contribution to the 401(k) Plan for Ms. Bringuier of $4,324, (iii) an employer contribution to the Profit Sharing Plan for Ms. Bringuier of $15,437 and (iv) the award of shares under the ESOP valued at $14,445 based on the closing price on the date of award. 35 The following table sets forth information concerning options granted under the 2005 Stock Option Plan during the year ended September 30, 2005.
Option Grants in 2005 Fiscal Year Individual Grants --------------------------------------------------------- Percent of Total Options Number of Granted to Exercise Options Employees in Price Expiration Grant Date Name Granted Fiscal Year ($/Share) Date Present Value(1) - ---- ------- ----------- --------- ---- ---------------- Joseph Kliminski 164,899 36% 6.80 1/20/15 $307,045 Richard M. Bzdek 81,582 18% 6.80 1/20/15 $151,905 Eric B. Heyer 74,639 16% 6.80 1/20/15 $138,976 Catherine M. Bringuier 74,639 16% 6.80 1/20/15 $138,976
- ------------ (1) The dollar values listed in this column are based on the Black-Scholes option pricing model, using the following assumptions as of the grant date: (i) dividend yield of 0.00%; (ii) expected life of 5 years; (iii) expected stock price volatility of 22%; and (iv) risk-free interest rate of 3.67%. The following table sets forth information concerning options held as of September 30, 2005.
Aggregated Option Exercises in 2005 Fiscal Year and Fiscal Year End Option Values --------------------------------------------------------------------------------- Value of Shares Number of Options In-the-money Options Acquired on Value at Fiscal Year-End (#) at Fiscal Year-End ($) Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable - ---- ------------ ------------ ------------------------- ------------------------- Joseph Kliminski 0 N/A 0/164,899 0/$686,487 Richard M. Bzdek 0 N/A 0/81,582 0/$339,628 Eric B. Heyer 0 N/A 0/74,639 0/$310,720 Catherine M. Bringuier 0 N/A 0/74,639 0/$310,720
Employment Agreements. The Bank has entered into employment agreements with Mr. Kliminski, Mr. Kowal, Mr. Bzdek, Mr. Heyer and Ms. Bringuier. Mr. Kliminski's, Mr. Kowal's, Mr. Bzdek's. Mr. Heyer's and Ms. Bringuier's current base salaries are $258,750, $225,000, $169,892, $150,075, and $139,932, respectively. Mr. Kliminski's and Mr. Kowal's employment agreements have a term of three years while Mr. Bzdek's, Mr. Heyer's and Ms. Bringuier's 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 Mr. Kliminski and Mr. Kowal, and two years, in the case of Mr. Bzdek, Mr. Heyer and Ms. Bringuier. If the Bank terminates Mr. Kliminski or Mr. Kowal 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, but in no event for a period of less than two years. If the Bank terminates Mr. Bzdek, Mr. Heyer or Ms. Bringuier 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. Mr. Kliminski's and Mr. Kowal's employment agreements provide that if their employment is terminated without just cause within twenty-four months of a change in control, they will be paid an amount equal to 2.999 times their five-year average annual taxable cash compensation in either a lump sum or, at their option, in periodic payments over a three-year period or the remaining term of the agreement, whichever is less. Mr. Bzdek's, Mr. Heyer's and Ms. Bringuier's employment agreements provide that if their employment is 36 terminated without just cause within twelve months of a change in control, they will be paid an amount equal to 2.0 times their five-year average annual taxable cash compensation in either a lump sum or, at their option, in periodic payments over a two-year period or the remaining term of the agreement, whichever is less. If change in control payments had been made under the agreements as of September 30, 2005, the payments would have equaled approximately $792,311, $674,775, $347,630, $285,919 and $260,667 to Mr. Kliminski, Mr. Kowal, Mr. Bzdek, Mr. Heyer and Ms. Bringuier, respectively. Executive Salary Continuation Agreements. The Bank has implemented executive salary continuation agreements for the benefit of Officers Kliminski, Bzdek, Heyer and Bringuier. The executive salary continuation agreements will provide benefits at age 65 that would be comparable to approximately 50% of Mr. Kliminski's average base salary based upon the average of the three highest out of the last five years of employment, and 30% of average salary for Officers Bzdek, Heyer and Bringuier. The benefits will be paid in equal monthly installments until the death of the participant. If a participant terminates employment prior to age 65, then the retirement benefit equals the then accrued balance of the participant's liability reserve account, and the benefit is paid in equal monthly installments until the death of the participant. Upon disability, the participant will receive the then accrued balance of the participant's liability reserve account, and the benefit is payable either in a lump sum or in 180 monthly installments. Upon a change in control of the Bank, and the participant's termination, the participant will be deemed to reach age 65 and will receive full retirement benefits. As long as the agreement remains in effect, upon the death of a participant, the participant's beneficiary will be paid a death benefit under the terms of the Endorsement Method Split Dollar Life Insurance Agreement between the participant and the Bank. For fiscal 2005, we accrued $187,878 under Mr. Kliminski's executive salary continuation agreement, $24,253 under Mr. Bzdek's executive salary continuation agreement, $12,273 under Mr. Heyer's executive salary continuation agreement and $10,937 under Ms. Bringuier's executive salary continuation agreement. These accruals reflect the scheduled accruals under the plan in order for the retirement benefit provided by the plan to be fully accrued at the expected retirement date. The accrual for Mr. Kliminski is higher than that for the other officers due to the fewer number of months left to accrue the full retirement benefit that will be payable to Mr. Kliminski at his expected retirement date and also reflects a higher average base salary for Mr. Kliminski and a higher percentage of the base provided under the plan, 50% versus 30% for the other officers. When the plans were established for each officer, there were 78 months until the expected retirement date for Mr. Kliminski, compared to 196 months, 300 months and 298 months for Officers Bzdek, Heyer and Bringuier. The amounts required to accrue the present value of the retirement benefit provided for each individual are based upon assumptions for discount rate, salary projections and life expectancy. These assumptions are reviewed at least annually and provide the basis upon which monthly benefit accruals are recorded. These accruals are generally recorded in equal amounts from month to month with changes made to these amounts as required by assumption changes. Compensation Committee Report On Executive Compensation The Compensation Committee (the "Committee") has furnished the following report on executive compensation: The Compensation Committee of the Company (the "Compensation Committee") consists only of independent directors. The members of the Compensation Committee also serve on the Compensation Committee of the Bank. The Compensation Committee, at the direction of the Board of Directors, has prepared the following report. 37 The Compensation Committee is responsible for conducting periodic reviews of the executive compensation of senior executives, including the Chief Executive Officer ("CEO"). The Compensation Committee determines salary levels for senior executives and other officers and amounts of cash bonuses to be distributed to those individuals, if and as appropriate. The Compensation Committee also determines awards under the Company's stock option plan and a restricted stock program. This report is submitted by the Compensation Committee to the Board of Directors of the Company to summarize the Compensation Committee's involvement in the compensation decisions and policies adopted by the Bank and the Company for executive officers generally, and for the Chief Executive Officer, Joseph Kliminski, in particular, during the fiscal year ended September 30, 2005. General Policy. The executive compensation practices of the Company and the Bank are designed to reward and to provide an incentive for executives, based on the achievement of corporate and individual goals. Compensation levels for executives are established after considering measures that include, but are not limited to, financial performance of the Company and competitive labor market conditions. Furthermore, qualitative factors such as overall job performance, leadership, teamwork, and community involvement are considered in compensation deliberations. The Compensation Committee utilizes publicly available information to gather information related to compensation practices for executive officers of financial services companies with assets of between $300 million and $800 million located in New Jersey and in the surrounding states of New York and Pennsylvania within approximately 100 miles of Bloomfield, New Jersey. The Compensation Committee has complete access to all necessary Company personnel records, financial reports, and other data. Components of Compensation. In evaluating executive compensation, the Compensation Committee concentrates on three fundamental components: salary, incentive bonus compensation and retirement income opportunity. Salary levels for senior executives and other officers are reviewed by the Compensation Committee on an annual basis. Salary levels reflect an individual's job responsibilities, experience and performance and the Compensation Committee's analysis of competitive marketplace conditions. In the past, incentive bonuses based upon the Bank's Management Incentive Plan ("MIP") have been used to provide cash distributions to executives. MIP compensation considers a variety of factors relating to Company and individual performance in calculating incentive compensation. The specific criteria upon which each MIP participant's awards are based is determined by the Committee. For the fiscal year ended September 30, 2005, the MIP provided bonuses to selected officers of the Bank based upon the Company's return on equity ("ROE") and other performance targets including net loan growth and net deposit growth. Another component of the executive compensation strategy of the Company and the Bank is the retirement income opportunity. Presently, such retirement income opportunity involves the Bank's 401K plan and the Bank's Employee Stock Ownership Plan (the "ESOP"). In addition, senior officers of the Bank participate in a Salary Continuation Plan that provides additional retirement income to senior executives of the Bank who retire after attainment of age 65. Such benefit is comprised of a life annuity calculated as a percentage of the average base salary paid during the last three years of employment. In addition, during 2005 the Company added stock-based incentive programs as a further enhancement to our retirement income opportunity and long-term compensation strategy. Through the use of such stock-based incentive programs, executives may receive stock options and restricted stock awards that will offer them the possibility of future compensation opportunity depending on the executive's continued 38 employment with the Company and the Bank and the long-term price appreciation of the Company's Common Stock. Committee Review of Executive Compensation. In making its recommendations regarding executive compensation during the quarter ending December 31, 2004, the Compensation Committee was influenced by several positive factors. Primary among these were the financial performance of the Company and steps taken by the Company in executing its five year business plan and the significant role of the Company's executive officers in bringing it about. Additional accomplishments, less measurable in quantitative form but of equal importance to the Company and the Bank, included advances in strategic direction, strengthened internal controls, and regulatory compliance. Based upon these performance factors, the Company's executive officers were awarded salary increases to be effective as of January 1, 2005. Compensation of the Chief Executive Officer. In assessing appropriate types and amounts of compensation for the CEO, the Board evaluates both corporate and individual performance. Corporate factors included in such evaluation are: return on average assets, the level of the efficiency ratio, and the market performance of the Common Stock. Individual factors include the CEO's initiative and implementation of successful business strategies; maintenance of an effective management team; and various personal qualities, including leadership, commitment, and professional and community standing. After reviewing the Company's 2004 results, as well as his individual contributions, the Compensation Committee concluded that the CEO, Joseph Kliminski, performed with exceptional skill and diligence in 2004. The Company generated earnings and business growth in accordance with the Company's budget and operating plans, and Mr. Kliminski deserves a large measure of the credit for this leadership role in the Company's accomplishments. The Compensation Committee believes that Mr. Kliminski has made significant contributions to the ongoing success of the Company and the Bank, and continues to set the stage for their continued success. Accordingly, Mr. Kliminski's salary was increased by $8,750 or 3.5% from $250,000 to $258,750 effective January 1, 2005. For the fiscal year ended September 30, 2004, Mr. Kliminski was awarded an MIP bonus of $70,038 paid in the quarter ended December 31, 2004. The performance criteria for awards under the MIP for Joseph Kliminski included the Company's ROE, net loan growth and net deposit growth. The percentage of Mr. Kliminski's fiscal 2004 MIP attributable to each of these factors were 11% for ROE, 26% for net loan growth and 63% for net deposit growth. For the fiscal year ended September 30, 2005, Mr. Kliminski was awarded an MIP bonus of $30,284 paid in the quarter ending December 31, 2005. The performance criteria for awards under the MIP for Joseph Kliminski included the Company's ROE, net loan growth and net deposit growth. The percentage of Mr. Kliminski's fiscal 2005 MIP attributable to each of these factors were 25% for ROE, 31% for net loan growth and 44% for net deposit growth. Report delivered by the Compensation Committee: Robert A. Gaccione, H. Joseph North, Stanley Obal, W. George Parker, Vincent S. Rospond and James H. Ward, III 39 Stock Performance Graph No performance graph is presented for the Company's common stock because it did not commence trading until October 6, 2005 upon completion of the second step conversion. Compensation Committee Interlocks and Insider Participation The Compensation Committee of the Bank during the year ended September 30, 2005 consisted of Directors Gaccione, North, Obal, Parker, Rospond and Ward. During the year ended September 30, 2005, the Company had no "interlocking" relationships in which (i) an executive officer of the Company served as a member of the compensation committee of another entity, one of whose executive officers served on the compensation committee of the Company; (ii) an executive officer of the Company served as a director of another entity, one of whose executive officers served on the compensation committee of the Company; and (iii) an executive officer of the Company served as a member of the compensation committee of another entity, one of whose executive officers served as a director of the Company. Item 12. Security Ownership of Certain Beneficial Owners and Management. (a) and (b) Security Ownership of Certain Beneficial Owners and Management. The following table sets forth, as of November 30, 2005, the ownership of American Bank of New Jersey's employee stock ownership plan and the ownership of our executive officers and directors, individually and as a group. Other than as set forth in the table, management knows of no person or group that owns more than 5% of the outstanding shares of common stock as of November 30, 2005. The business address of each owner shown below is 365 Broad Street, Bloomfield, New Jersey 07003. Percent of Shares of Name and Address Number of Common Stock of Beneficial Owner Shares(1) Outstanding - ------------------- --------- ----------- American Bank of New Jersey Bank Employee Stock Ownership Plan Trust (the "ESOP") 1,133,571 8.00% Robert A. Gaccione 59,791 0.42% Joseph Kliminski 198,923 1.40% Fred G. Kowal 0 0.00% H. Joseph North 15,128 0.11% Stanley Obal 37,036 0.26% W. George Parker 209,021 1.47% Vincent S. Rospond 155,607 1.10% James H. Ward, III 209,616 1.48% Richard M. Bzdek 137,465 0.97% Eric B. Heyer 58,171 0.41% Catherine M. Bringuier 48,414 0.34% All directors and executive officers as a group (11 persons) (2) 1,129,172 7.90% -------------------------- * Less than 1%. (1) Includes shares of common stock held directly as well as by spouses or minor children, in trust and other indirect ownership. (2) Includes an aggregate of 120,808 shares underlying options and 36,657 shares of restricted stock that become exercisable or vested within 60 days of November 30, 2005. As of September 30, 2005, each non-employee director had 6,943 40 options becoming exercisable on January 20, 2006 and 2,083 shares of restricted stock vesting on January 20, 2006. As of September 30, 2005, Officers Kliminski, Bzdek, Heyer and Bringuier had 32,980, 16,316, 14,927 and 14,927 options and 9,997, 4,998, 4,582, and 4,582 shares of restricted stock, respectively, becoming exercisable or vested on January 20, 2006. (3) These shares are held in a suspense account and are allocated among participants annually on the basis of compensation as the ESOP debt is repaid. As of November 30, 2005, 43,147 shares have been allocated to ESOP participants. The Board of Directors appointed all non-employee directors to serve as ESOP Trustees and as members of the ESOP Plan Committee. The ESOP Plan Committee directs the vote of all unallocated shares and shares allocated to participants for which timely voting directions are not received. (c) Changes in Control. Management of the Registrant knows of no arrangements, including any pledge by any person of securities of the Registrant, the operation of which may at a subsequent date result in a change in control of the Registrant. (d) Securities Authorized for Issuance under Equity Compensation Plans. Set forth below is information as of September 30, 2005 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance. EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c) Number of securities Number of securities Weighted-average remaining available for to be issued exercise price of future issuance under equity upon exercise of outstanding compensation plans outstanding options, options, warrants (excluding securities warrants and rights and rights reflected in column (a)) -------------------- ----------------- ---------------------------- Equity compensation plans approved by security holders: 2005 Stock Option Plan 694,313 $6.80 0 2005 Restricted Stock Plan 208,293 0 0 Equity compensation plans not approved by security holders: None N/A N/A N/A ------- ----- --- TOTAL 902,606 $5.23 0 ======= ===== =
Item 13. Certain Relationships and Related Transactions. Other than as disclosed below, no directors, officers or their immediate family members were engaged in transactions with American Bancorp of New Jersey, Inc., ASB Holding Company, American Bank of New Jersey or any subsidiary involving more than $60,000 (other than through a loan with the Bank) during either of the two years ended September 30, 2005. Director Vincent S. Rospond is the majority stockholder of the law firm of Rospond, Rospond & Conte, P.A., which serves as general counsel to American Bank of New Jersey and to which the Bank paid approximately $35,000 and $40,000 in legal fees during the years ended September 30, 2005 and 2004. In addition, the Bank engages this law firm in connection with residential loan closings, and fees paid by 41 borrowers in loan closings handled by this law firm totaled approximately $30,000 and $48,000 during fiscal 2005 and 2004. Director Robert A. Gaccione is a senior partner of the law firm of Gaccione, Pomaco & Malanga, P.C. to which the Bank paid approximately $49,000 and $11,000 in legal fees during the years ended September 30, 2005 and 2004, respectively. In addition, the Bank engages this law firm in connection with commercial loan closings, and fees paid by borrowers in loan closings handled by this law firm totaled approximately $20,000 and $38,000 during fiscal 2005 and 2004, respectively. Management believes that the transactions described above were on terms at least as favorable to the Bank as it would have received in transactions with an unrelated party. The Bank makes loans to its officers, directors and employees in the ordinary course of business. The application fee is waived for mortgages to officers and employees on single-family owner-occupied homes or second homes. The Bank also reduces its application fee for mortgages on two-to-four family owner-occupied homes by the amount of the application fee for single family home mortgages and reduces its modification fee for one-to-four family owner-occupied home mortgages or second home mortgages by the amount of the application fee for single family home mortgages. Other than these application fee waivers and reductions to officers and employees, these loans are on substantially the same terms and conditions as those of comparable transactions prevailing at the time with other persons. These loans also do not include more than the normal risk of collectibility or present other unfavorable features. Item 14. Principal Accounting Fees and Services. Effective July 30, 2002, the Securities and Exchange Act of 1934 was amended by the Sarbanes-Oxley Act of 2002 to require all auditing services and non-audit services provided by an issuer's independent auditor to be approved by the issuer's audit committee prior to such services being rendered or to be approved pursuant to pre-approval policies and procedures established by the issuer's audit committee. The Company's Audit Committee has not established pre-approval procedures and instead specifically approves each service prior to the engagement of the auditor for all audit and non-audit services. All of the services listed below for 2005 and 2004 were approved by the Audit Committee prior to the service being rendered. There were no services that were not recognized to be non-audit services at the time of engagement that were approved after the fact. Audit Fees. The aggregate fees billed by Crowe Chizek for professional services rendered for the audit of the Company's annual consolidated financial statements and review of the quarterly consolidated financial statements for the fiscal years ended September 30, 2005 and 2004 were $71,500 and $64,000, respectively. Audit Related Fees. The aggregate fees billed by Crowe Chizek for assurance and related services related to the Company's Annual Report on Form 10-K for the years ended September 30, 2005 and 2004 were $8,000 and $7,500, respectively. Tax Fees. The aggregate fees billed by Crowe Chizek for professional services rendered for tax preparation services for the years ended September 30, 2005 and 2004 were $10,250 and $9,000, respectively. Additional tax-related services billed by Crowe Chizek for the years ended September 30, 2005 and 2004 were $2,175 and $0 respectively. Such additional tax-related services consisted of billings for tax 42 consultation services relating to the Company's change in tax year and related communications to tax authorities. All Other Fees. The aggregate fees billed by Crowe Chizek for professional services rendered for services or products other than those listed under the captions "Audit Fees," "Audit-Related Fees," and "Tax Fees" totaled $102,195 for the year ended September 30, 2005 and consisted of expenses related to the second-step conversion and stock offering completed in October 2005 and $13,625 for the year ended September 30, 2004, and consisted of expenses related to the minority stock offering completed in October 2003. PART IV Item 15. Exhibits, Financial Statement Schedules. (a) Listed below are all financial statements and exhibits filed as part of this Form 10-K. 1. The consolidated statements of financial condition as of September 30, 2005 and 2004 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the three years ended September 30, 2005, together with the related notes and the report of independent certified public accountants. 2. The following exhibits are either included with this Form 10-K or incorporated herein by reference: (a) List of Exhibits: 3(i) Certificate of Incorporation of American Bancorp of New Jersey, Inc.(1) 3(ii) Bylaws of American Bancorp of New Jersey, Inc. (1) 4 Specimen Stock Certificate of ASB Holding Company(1) 10.1 Employment Agreement between American Bank of New Jersey and Joseph Kliminski(2)+ 10.2 Employment Agreement between American Savings Bank of NJ and Richard M. Bzdek(2)+ 10.3 Employment Agreement between American Savings Bank of NJ and Eric B. Heyer(2)+ 10.4 Form of Executive Salary Continuation Agreement(2)+ 10.5 Employment Agreement between ASB Holding Company and Joseph Kliminski(3) + 10.6 Employment Agreement between American Bank of New Jersey and Fred G. Kowal(4) + 10.7 Employment Agreement between American Bank of New Jersey and Catherine M. Bringuier(1) + 10.8 2005 Stock Option Plan(5)+ 10.9 2005 Restricted Stock Plan(5)+ 13 Portions of the 2005 Annual Report to Stockholders 21 Subsidiaries 31 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 --------------- (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-125957) filed with the SEC on June 20, 2005. 43 (2) Incorporated by reference to the Registration Statement on Form SB-2 (File No. 333-105472) of ASB Holding Company filed with the SEC on May 22, 2003. (3) Incorporated by reference to the Form 10-KSB (File No. 000-31789) of ASB Holding Company filed with the SEC on December 24, 2003. (4) Incorporated by reference to the Form 8-K (File No. 000-31789) of ASB Holding Company filed with the SEC on April 18, 2005. (5) Incorporated by reference to the definitive proxy statement (File No. 000-31789) of ASB Holding Company filed with the SEC on December 28, 2004. + Management or compensatory plan required to be filed as an exhibit. 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of December 27, 2005. AMERICAN BANCORP OF NEW JERSEY, INC. By: /s/ Fred G. Kowal -------------------------------------- Fred G. Kowal President and Chief Operating Officer (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of December 27, 2005. /s/ W. George Parker /s/ Joseph Kliminski - ------------------------------------ ------------------------------------- W. George Parker Joseph Kliminski Chairman Chief Executive Officer and Director (Principal Executive Officer) /s/ Fred G. Kowal /s/ Eric B. Heyer - ------------------------------------ ------------------------------------- Fred G. Kowal Eric B. Heyer President, Chief Operating Officer Senior Vice President, Treasurer and and Director Chief Financial Officer (Principal Financial and Accounting Officer) /s/ H. Joseph North /s/ James H. Ward, III - ------------------------------------ ------------------------------------- H. Joseph North James H. Ward, III Director Vice Chairman /s/ Stanley Obal /s/ Robert Gaccione - ------------------------------------ ------------------------------------- Stanley Obal Robert Gaccione Director Director /s/ Vincent S. Rospond - ------------------------------------ Vincent S. Rospond Director EX-10 2 ex10-10.txt DIRECTORS CONSULTATION AND RETIREMENT PLAN AMERICAN BANK OF NEW JERSEY DIRECTORS CONSULTATION AND RETIREMENT PLAN AS AMENDED AND RESTATED WHEREAS, American Bank of New Jersey, Bloomfield, New Jersey (the "Savings Bank") previously implemented a Directors Consultation and Retirement Plan ("Plan") to reward the years of extensive service provided by the current members of the Board of Directors and to continue to attract and to retain the best talent available to serve on its Board of Directors; and WHEREAS, the corporate structure of the Savings Bank has change since the initial implementation of such Plan to include the mutual holding company for the Savings Bank ("American Savings, MHC" or "MHC") and the mid-tier holding company ("ASB Holding Company" or "Company") and the directors of the Savings Bank also serve as directors of such other entities and receive compensation for such services, and WHEREAS, the Board of Directors of the Savings Bank has determined that it is appropriate and advisable that the compensation paid by the Company and the MHC, if applicable, to its directors also be considered in determining benefits under the Plan, and WHEREAS, the Board of Directors of the Savings Bank has determined such program may best be accomplished by having the Savings Bank sponsor such a retirement plan, with benefits to be based upon annual retainers and regular Board meeting fees paid by the Savings Bank, the Company and the MHC, if applicable, and with the applicable costs of such a program and benefits thereunder to be allocated to the Company, the Savings Bank and the MHC. NOW THEREFORE, BE IT RESOLVED that the Plan, as previously approved and amended by the Savings Bank, be approved, amended and restated by the Savings Bank, and adopted and approved by the Company and the MHC, as of June 28, 2005, as follows: ARTICLE I DEFINITIONS The following words and phrases as used herein shall, for the purpose of the Plan and any subsequent amendment thereof, have the following meanings unless a different meaning is plainly required by the content: "Beneficiary" means the surviving spouse of the Participant (if any) as of the date of death of such Participant, and shall specifically include the Participant's estate, should the Participant have no surviving spouse. The term Beneficiary shall also specifically include the estate of a Participant's spouse, if such spouse shall survive the Participant. "Board" means the Board of Directors of the Savings Bank, the Company or the MHC, as constituted from time to time, and successors thereto. "Change in Control" means: (i) the execution of an agreement for the sale of all, or a material portion, of the assets of the Company or the Savings Bank; (ii) the execution of an agreement for a merger or recapitalization of the Company or the Savings Bank or any merger or recapitalization whereby the Company or the Savings Bank is not the surviving entity; (iii) a change of control of the Company or the Savings Bank, as otherwise defined or determined by the Office of Thrift Supervision, or regulations promulgated by it; or (iv) the acquisition, directly or indirectly, of the beneficial ownership (within the meaning of that term as it is used in Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder) of twenty-five percent (25%) or more of the outstanding voting securities of the Company or the Savings Bank by any person, trust, entity or group. This limitation shall not apply to the purchase of shares by underwriters in connection with a public offering of the Company or the Savings Bank stock (or a parent holding company's stock), or the purchase of shares of up to 25% of any class of securities of the Savings Bank by a tax-qualified employee stock benefit plan. The term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. A change in control shall not be deemed to have occurred as a result of a reorganization of the Savings Bank into a stock savings bank, the reorganization of the Savings Bank into the mutual holding company structure, or the reorganization of the MHC and the Company and simultaneous acquisition of 100% of the stock of the Savings Bank by a new parent savings and loan holding company or bank holding company. "Committee" means the Compensation Committee of the Savings Bank or the administrative committee as appointed by the Board pursuant to Section 6.11 herein. "Company" means the ASB Holding Company and any successor entity or any future parent corporation of the Savings Bank. "Director" means a member of the Board of the Savings Bank, the Company or the MHC who is not otherwise an employee of the Savings Bank, the Company orthe MHC, or any parent or subsidiary thereof. "Disability" means a mental or physical disability which prevents the Director from performing the normal duties of his or her position with the Savings Bank. The disability must have prevented the Director from performing his or her duties for at least three months, and a physician satisfactory to both the Director and the Savings Bank must certify that the Director is disabled from performing his or her normal duties with the Savings Bank thereafter. "Effective Date" means August 27, 1996, with such amendments as contained herein. "MHC"means American Savings, MHC, the mutual holding company of the Savings Bank. "Participant" means a Director serving on or after the Effective Date and electing to participate in the Plan. A Director's participation in the Plan shall continue as long as he or she fulfills all the requirements for participation subject to the right of termination, amendment, and modification of the Plan set forth herein. A Director who previously served as an employee of 2 the Bank and upon retirement as an employee was eligible to receive future retirement benefits under a defined benefit pension plan or a supplemental retirement plan, executive salary continuation agreement or similar deferred compensation arrangement maintained by the Bank shall not be eligible to be a Participant in this Plan. "Plan" means the American Bank of New Jersey Directors Consultation and Retirement Plan as set forth herein, and as may be amended from time to time by the Board. "Retirement Benefit Amount" means the benefit payable under the Plan in accordance Section 2.4 herein. "Retirement Date" means the date of termination of service as a Director following a Participant's completion of not less than 12 years of service as a Director, or not less than six years of service following a Change in Control; provided however, the Retirement Date with regard to Directors serving as of the Effective Date who have completed not less than five years of service as of the Effective Date shall be the date of termination of service as a Director without regard to the 12 years of service requirement. Upon death or Disability, a Director shall be deemed to have terminated service as of such date. A Director may attain the Retirement Date for Service completed at one corporate entity and not yet meet the requirements for the Retirement Date for another corporate entity. "Savings Bank" means American Bank of New Jersey, Bloomfield, New Jersey, or any predecessor or successor thereto. "Service" means all years of Service as a member of the Board and all predecessor entities; provided however, Service with "predecessor entities" refers only to predecessors of the Savings Bank prior to the Effective Date. A year of Service shall consist of twelve consecutive months of service. In calculating the Retirement Benefit Amount for Service to the Company, the Savings Bank and the MHC, years of Service may differ based upon actual Service as a member of the Board of the Company, the Savings Bank and the MHC. ARTICLE II BENEFITS 2.1 Retirement. Upon a Participant's termination from service as a Director of the Savings Bank, the Company or the MHC on or after his or her applicable Retirement Date for such corporate entity, the Savings Bank shall pay to the Participant the Retirement Benefit Amount, as described and in the amount set forth at Article II, Section 2.4; provided that such payments shall not commence prior to such Director's attainment of age 65, except in accordance with Sections 2.2, 2.3 or 2.5 herein. Payment of such Retirement Benefit Amount shall begin on the first business day of the month immediately following a Participant's Retirement Date or the first business day of the month immediately following such Participant's attainment of age 65, if later. The Retirement Benefit Amount will continue to be paid on the first business day of each subsequent month until all scheduled payments are made to the Participant or the Beneficiary. Except as provided at Article II, Sections 2.2, 2.3, and 2.5 herein, upon a Participant's 3 termination from service as a Director prior to his or her Retirement Date, the Savings Bank shall have no financial obligations to the Participant under the Plan. 2.2 Change in Control. (a) Benefits payable to a Participant that has terminated from service as a Director prior to the date of a Change in Control shall nevertheless remain payable thereafter without regard to such Change in Control. However, upon a Change in Control, all future benefits payable pursuant to Sections 2.1, 2.2, 2.3, and 2.5 of the Plan, shall be made in a lump sum payment equal to the present value of all future benefits payable to such Participant as soon as administratively feasible as of or immediately following such Change in Control. The interest rate in effect for a 3 year U.S. Treasury Note on the date of the lump sum payment as reported in the Wall Street Journal shall be used for purposes of calculating the present value of amounts payable in accordance with Section 2.4. (b) A Participant that has not terminated from service as a Director prior to the date of a Change in Control who as of the date of such Change in Control has reached such Retirement Date shall be immediately eligible to receive the Retirement Benefit Amount specified at Section 2.4 herein without regard to the actual termination of service as a Director or the age of such Director at such time. Such Retirement Benefit Amount shall be paid in the form of a lump sum payment equal to the present value of the Retirement Benefit Amount payable under Section 2.4 discounted as provided at Section 2.2(a). Payment of the lump sum amount shall be made to the Participant as soon as practicable as of or immediately following such Change in Control. 2.3 Total and Permanent Disability. In the event of the Disability of a Participant on or after the Retirement Date who as of the date of Disability otherwise meets the requirements set forth at Section 2.1 without regard to the age of such Director, such Participant will be paid the Retirement Benefit Amount specified at Article II, Section 2.4. Payment of such benefits shall commence on the first business day of the month immediately following the Savings Bank's receipt of a certification of such Participant's Disability. 2.4 Level of Benefit Payments. A Participant who retires as a Director on or after his or her Retirement Date in accordance with Sections 2.1, 2.2, 2.3 or 2.5 herein, and who enters into an agreement to be a consulting director of the Savings Bank, the Company and the MHC in accordance with Section 2.6 hereinafter shall receive the Retirement Benefit Amount set forth as follows: The Retirement Benefit Amount shall be equal to a monthly payment for a period of the life of the Participant, but in no event for a period of less than 144 consecutive calendar months, equal to the product of (.08333333) times 100% of the highest aggregate annual fees paid to a Participant during the most recently completed three calendar year periods ending on or before such Participant's Retirement Date; provided that annual fees paid for purposes of computation of the Retirement Benefit Amount shall include retainer 4 fees and fees paid for regular Board meetings attended (and excluding payment of fees for Special Meetings and Committee meetings) by the Savings Bank, the Company and the MHC. 2.5 Death of Participant. Upon the death of a Participant who is receiving benefit payments under the Plan prior to his or her death, the remaining monthly payments to be made under the Plan (if any) shall be paid to the Beneficiary after the Participant's death. Such remaining payments shall be made until the total number of monthly payments made directly to such Participant plus the number of monthly payments made to such Beneficiary shall equal a total of 144 monthly payments. Upon the death of a Participant who is not receiving benefit payments under the Plan prior to his or her death who as of the date of death otherwise meets the requirements set forth at Section 2.1, the Savings Bank shall pay to the Beneficiary the Retirement Benefit Amount set forth at Article II, Section 2.4 for a period of 144 monthly payments. If a Beneficiary dies prior to receiving all payments of the Retirement Benefit Amount, then the remaining monthly payments will continue to be paid to the Beneficiary's estate, and all obligations of the Savings Bank, the Company and the MHC under the Plan shall cease to exist with respect to such Beneficiary only after all such payments have been made. 2.6 Notice of Retirement. A director electing to participate in the Plan shall deliver written notice ("Notice") to the Board not less than thirty days prior to the actual Retirement Date that such Director elects to participate in the Plan. Such Notice, in a form similar to that contained at Schedule A hereto, shall specify the date of such retirement from the Board as a Director and the Participant's availability as a Consulting Director. A Participant who terminates service as a Director upon death, Disability, or a Change in Control shall not be required to deliver such Notice in order to be entitled to receive benefits under the Plan. ARTICLE III TRUST/NON-FUNDED STATUS OF PLAN 3.1 Trust/Non-Funded Status of Plan. Except as may be specifically provided, nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Savings Bank, the Company or the MHC and the Participant or any other person. Any funds which may be invested under the provisions of this Plan shall continue for all purposes to be a part of the general funds of the Savings Bank, the Company or the MHC. No person other than the Savings Bank shall by virtue of the provisions of this Plan have any interest in such funds. The Savings Bank shall not be under any obligation to use such funds solely to provide benefits hereunder, and no representations have been made to any Participant that such funds can or will be used only to provide benefits hereunder. To the extent that any person acquires a right to receive payments under the Plan, such rights shall be no greater than the right of any unsecured general creditor. ARTICLE IV VESTING 4.1 Vesting. All benefits under this Plan are deemed non-vested and forfeitable prior to a Participant meeting the requirements set forth at Sections 2.1, 2.2, 2.3 and 2.5 herein. All 5 benefits payable hereunder shall be deemed 100% vested and non-forfeitable by the Participant upon his or her meeting the requirements set forth at Sections 2.1, 2.2, 2.3 or 2.5 herein. No benefits shall be deemed payable hereunder for any period prior to the time that such benefits shall be deemed 100% vested and non-forfeitable. ARTICLE V TERMINATION 5.1 Termination. All the rights of a Participant shall terminate immediately upon the Participant ceasing to be in the active service of the Savings Bank, the Company or the MHC prior to the time that benefits payable under the Plan shall be deemed to be 100% vested and non- forfeitable in accordance with Article V. At the sole discretion of the Committee, a leave of absence approved by the Board shall not constitute a cessation of service within the meaning of this Section 5.1. ARTICLE VI GENERAL PROVISIONS 6.1 Other Benefits. Nothing in this Plan shall diminish or impair a Participant's eligibility, participation or benefit entitlement under any other benefit, insurance or compensation plan or agreement of the Savings Bank, the Company or the MHC now or hereinafter in effect. 6.2 No Effect on Employment or Service. This Plan shall not be deemed to give any Participant or other person in the employ or service of the Savings Bank, the Company or the MHC any right to be retained in the employment or service of the Savings Bank, the Company or the MHC, or to interfere with the right of the Savings Bank, the Company or the MHC to terminate any Participant or such other person at any time and to treat him or her without regard to the effect which such treatment might have upon him or her as a Participant in this Plan. 6.3 Legally Binding. The rights, privileges, benefits and obligations under this Plan are intended to be legal obligations of the Savings Bank and binding upon the Savings Bank, its successors and assigns. 6.4 Modification. The Savings Bank, by action of the Board of Directors, reserves the exclusive right to amend, modify, or terminate this Plan. Any such termination, modification or amendment shall not terminate or diminish any rights or benefits accrued by any Participant prior thereto without regard to whether such rights or benefits shall be deemed vested as of such date. The Savings Bank shall give thirty (30) days notice in writing to any Participant prior to the effective date of any amendment, modification or termination of this Plan. 6.5 Arbitration. Any controversy or claim arising out of or relating to the Plan or the breach thereof shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, with such arbitration hearing to be held at the offices of the American Arbitration Association ("AAA") nearest to the home office of the Savings Bank, unless otherwise mutually agreed to by the Participant and the Savings Bank, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. 6 6.6 Limitation. No rights of any Participant are assignable by any Participant or Beneficiary, in whole or in part, either by voluntary or involuntary act or by operation of law. The rights of a Participant or Beneficiary hereunder are not subject to anticipation, alienation, sale, transfer, assignment, pledge, hypothecation, encumbrance or garnishment by creditors of the Participant or Beneficiary. Further, a Participant's rights under the Plan are not subject to the debts, contracts, liabilities, engagements, or torts of any Participant. No Participant or Beneficiary shall have any right under this Plan or right against any assets held or acquired pursuant thereto other than the rights of a general, unsecured creditor of the Savings Bank pursuant to the unsecured promise of the Savings Bank to pay the benefits accrued hereunder in accordance with the terms of this Plan. The Savings Bank has no obligation under this Plan to fund or otherwise secure its obligations to render payments hereunder to a Participant or Beneficiary. No Participant or Beneficiary shall have any discretion in the use, disposition, or investment of any asset acquired or set aside by the Savings Bank to provide benefits under this Plan. 6.7 ERISA and IRC Disclaimer. It is intended that the Plan be neither an "employee welfare benefit plan" nor an "employee pension benefit plan" for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Further, it is intended that the Plan will not cause the interest of a Participant under the Plan to be includable in the gross income of such Participant prior to the actual receipt of a payment under the Plan for purposes of the Internal Revenue Code of 1986, as amended ("IRC"). 6.8 Regulatory Matters. (a) The Participant or Beneficiary shall have no right to receive compensation or other benefits in accordance with the Plan for any period after termination of service for Just Cause. Termination for "Just Cause" shall include termination because of the Participant's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of the Plan. (b) Notwithstanding anything herein to the contrary, any payments made to a Participant or Beneficiary pursuant to the Plan shall be subject to and conditioned upon compliance with 12 USC ss.1828(k) and 12 CFR 563.39 and any regulations promulgated thereunder. 6.9 Incompetency. If the Savings Bank shall find that any person to whom any payment is payable under the Plan is deemed unable to care for his or her personal affairs because of illness or accident, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, a child, a parent, or a brother or sister, or to any person deemed by the Savings Bank to have incurred expense for such person otherwise entitled to payment, in such manner and proportions as the Board may determine in its sole discretion. Any such payments shall constitute a complete discharge of the liabilities of the Savings Bank under the Plan. 7 6.10 Construction. The Committee shall have full power and authority to interpret, construe and administer this Plan and the Committee's interpretations and construction thereof, and actions thereunder, shall be binding and conclusive on all persons for all purposes. Directors of the Savings Bank, the Company or the MHC shall not be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Plan unless attributable to his or her own willful, gross misconduct or lack of good faith. 6.11 Plan Administration. The Board shall administer the Plan; provided, however, that the Board may appoint an administrative committee (i.e., the Committee) to provide administrative services or perform duties required by this Plan. The Committee shall have only the authority granted to it by the Board. 6.12 Governing Law. This Plan shall be construed in accordance with and governed by the laws of the State of New Jersey ("State"), except to the extent that federal law shall be deemed to apply. 6.13 Successors and Assigns. The Plan shall be binding upon any successor or successors of the Savings Bank, and unless clearly inapplicable, reference herein to the Savings Bank shall be deemed to include any successor or successors of the Savings Bank. 6.14 Sole Agreement. The Plan expresses, embodies, and supersedes all previous agreements, understandings, and commitments, whether written or oral, between the Savings Bank and any Participants hereto with respect to the subject matter hereof. 8 IN WITNESS WHEREOF, the Savings Bank has caused the Plan to be executed by its duly authorized officer. American Bank of New Jersey September 14, 2005 By: /s/Joseph Kliminski ---------------------------------- Date Title: Chief Executive Officer ---------------------------------- September 14, 2005 /s/Kathleen E. Walsh ---------------------------------- Date Witness EX-13 3 ex-13.txt ANNUAL REPORT 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 EX-21 4 ex-21.txt SUBSIDIARIES OF THE COMPANY Subsidiaries of the Company Percentage Jurisdiction of Subsidiaries Owned Incorporation - ------------ ----- ------------- American Bank of New Jersey 100% United States ASB Investment Corp 100% New Jersey American Savings Investment Corp. 100% New Jersey (indirect subsidiary, 100% owned by American Bank of New Jersey) EX-31 5 ex-31_0147.txt EXHIBIT 31 SECTION 302 CERTIFICATION I, Joseph Kliminski, Chief Executive Officer of American Bancorp of New Jersey, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of American Bancorp of New Jersey, Inc; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15d(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: (a) All significant deficiencies in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 27, 2005 /s/ Joseph Kliminski ------------------------------------ Joseph Kliminski Chief Executive Officer SECTION 302 CERTIFICATION I, Eric B. Heyer, Senior Vice President, Treasurer and Chief Financial Officer of American Bancorp of New Jersey, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of American Bancorp of New Jersey, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15d(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: (a) All significant deficiencies in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 27, 2005 /s/ Eric B. Heyer --------------------------------------- Eric B. Heyer Senior Vice President, Treasurer and Chief Financial Officer EX-32 6 ex-32_0147.txt EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SS 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of American Bancorp of New Jersey, Inc. (the "Company") on Form 10-K for the year ended September 30, 2005 as filed with the Securities and Exchange Commission (the "Report"), we, Joseph Kliminski, Chief Executive Officer, and Eric B. Heyer, Senior Vice President, Treasurer and Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Joseph Kliminski /s/ Eric B. Heyer - --------------------------------------- ------------------------------------ Joseph Kliminski Eric B. Heyer Chief Executive Officer Senior Vice President, Treasurer and (Principal Executive Officer) Chief Financial Officer (Principal Financial and Accounting Officer) Date: December 27, 2005 Date: December 27, 2005 -----END PRIVACY-ENHANCED MESSAGE-----