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, 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 insured by the
Federal Deposit Insurance Corporation up to the maximum amount permitted by law. 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, including first mortgages, home equity loans and lines of credit,
commercial loans, including multi-family and non-residential mortgage loans, construction loans and
business loans and lines of credit, as well as consumer loans. We also invest in mortgage-related
securities, including mortgage-backed pass through securities and collateralized mortgage 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 one- to four-family residential mortgage loans, commercial loans and consumer loans, as
well as 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. including a full service branch and our administrative headquarters, is located
in Bloomfield, New Jersey. We have four additional full service branch offices located in Cedar
Grove, Verona, Nutley and Clifton New Jersey. Our lending is concentrated in New Jersey and the
New York metropolitan area, and our predominant sources of deposits are the communities in which
our five 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 other 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 deposits
from investment products such as mutual funds, short-term money funds and corporate and government
securities.
Lending Activities
General.
Historically, we have focused on the origination of one- to four-family loans. Consequently, a majority of our total loan
portfolio comprises such loans as reflected in the table below. Notwithstanding, our business plan calls for significantly greater emphasis on
commercial lending which includes multifamily, nonresidential, construction and business loans. Toward that end, the Bank expanded its
commercial lending division with the hiring of several additional commercial lending officers and administrative support staff. While
outstanding balances in commercial loans still fall below those in the one- to four-family loan category, the table below shows the dollar and
percentage of portfolio growth trends in the commercial categories reflecting the Company's loan diversification strategy.
Loan Portfolio Composition.
The following table analyzes the composition of our loan portfolio by loan category at the dates indicated.
|
At September 30
|
2007
|
2006
|
2005
|
2004
|
2003
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|
(Dollars in thousands)
|
Type of Loans
:
|
One- to four-family
real estate
(1)
|
$278,183
|
60.92%
|
$283,469
|
68.05%
|
$267,052
|
78.09%
|
$251,531
|
80.17%
|
$215,984
|
81.59%
|
Multi-family and nonresidential
real estate
|
99,059
|
21.70
|
73,496
|
17.64
|
58,615
|
17.14
|
43,197
|
13.77
|
36,202
|
13.68
|
Land
|
3,341
|
0.73
|
534
|
0.13
|
-
|
-
|
-
|
-
|
-
|
-
|
Construction
|
48,561
|
10.64
|
33,155
|
7.96
|
1,450
|
0.42
|
7,175
|
2.29
|
1,233
|
0.47
|
Consumer
|
655
|
0.14
|
720
|
0.17
|
702
|
0.21
|
746
|
0.24
|
780
|
0.29
|
Home equity
|
19,756
|
4.33
|
19,122
|
4.59
|
13,413
|
3.92
|
10,666
|
3.40
|
8,893
|
3.36
|
Business
|
7,024
|
1.54
|
6,068
|
1.46
|
746
|
0.22
|
398
|
0.13
|
1,610
|
0.61
|
|
Total loans receivable
|
456,579
|
100.00%
|
416,564
|
100.00%
|
341,978
|
100.00%
|
313,713
|
100.00%
|
264,702
|
100.00%
|
|
Less:
|
Allowance for loan losses
|
(2,568)
|
|
(2,123)
|
|
(1,658)
|
|
(1,578)
|
|
(1,371)
|
|
Net deferred origination costs
|
1,084
|
|
1,100
|
|
1,036
|
|
935
|
|
796
|
|
Loans in process
|
(15,969)
|
|
(16,917)
|
|
(350)
|
|
(4,100)
|
|
(783)
|
|
|
Total loans receivable, net
|
$439,126
|
|
$398,624
|
|
$341,006
|
|
$308,970
|
|
$263,344
|
|
_____________
(1)
|
Includes loans held for sale of $1,243,346, $0, $280,250, $0, and $500,000 at September 30, 2007, September 30, 2006, September 30, 2005, September 30, 2004 and
September 30, 2003, respectively.
|
Loan Maturity Schedule.
The following table sets forth the maturity of our loan portfolio at September 30, 2007. 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 repayment of loan balances will vary significantly from their contractual maturities due to
amortization and prepayments.
|
At September 30, 2007
|
|
One- to Four-
Family
Real Estate
|
Multi-family
and
Nonresidential
Real Estate
|
Land
|
Construction
|
Consumer
|
Home Equity
|
Business
|
Total
|
|
(Dollars in thousands)
|
Amounts Due:
|
Within 1 Year
|
$ 1,124
|
$ 447
|
$ 2,815
|
$ 27,335
|
$ 655
|
$ -
|
$ 4,626
|
$ 37,002
|
After 1 year:
|
1 to 5 years
|
3,523
|
3,274
|
-
|
5,257
|
-
|
521
|
2,398
|
14,973
|
5 to 10 years
|
33,353
|
36,510
|
526
|
-
|
-
|
1,513
|
-
|
71,902
|
10 to 15 years
|
44,177
|
15,334
|
-
|
-
|
-
|
2,110
|
-
|
61,621
|
Over 15 years
|
196,006
|
43,494
|
-
|
-
|
-
|
15,612
|
-
|
255,112
|
Total due after one
year
|
277,059
|
98,612
|
526
|
5,257
|
-
|
19,756
|
2,398
|
403,608
|
Total amount due
|
$ 278,183
|
$ 99,059
|
$ 3,341
|
$ 32,592
|
$ 655
|
$ 19,756
|
$ 7,024
|
$ 440,610
|
The following table sets forth the dollar amount of all loans at September 30, 2007 due after
September 30, 2008, which have fixed interest rates and which have floating or adjustable interest
rates.
|
Fixed Rates
|
Floating or
Adjustable Rates
|
Total
|
|
(In thousands)
|
|
One- to four-family real estate
|
$ 129,414
|
$ 147,645
|
$ 277,059
|
Multi-family and non-residential real
estate
|
50,822
|
47,790
|
98,612
|
Land
|
526
|
-
|
526
|
Construction
|
-
|
5,257
|
5,257
|
Consumer
|
-
|
-
|
-
|
Home equity
|
-
|
19,756
|
19,756
|
Business
|
1,210
|
1,188
|
2,398
|
Total
|
$ 181,972
|
$ 221,636
|
$ 403,608
|
One- to Four-Family Real Estate Loans.
As noted above, 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. 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 previously offered mortgage loans with bi-weekly payments and terms up to
forty years. However, we discontinued offering those products during fiscal 2007. Regarding
adjustable rate loans, we offer fully amortizing, adjustable rate loans with initial fixed rate periods
ranging from one to ten years. Additionally, we offer adjustable rate loans with interest only payments
for the first five, seven or ten years that fully amortize after the initial interest-only period. We
previously offered mortgage loans with interest only payments for the first three years but discontinued
offering that product during fiscal 2007. Loans with interest only payments are generally considered to
entail greater risk than loans whose terms require the payment of both interest and principal over the
life of the loan. Of particular concern are borrowers' abilities to meet their payment obligations when
the interest rate on the loan resets for the first time while, simultaneously, scheduled principal
amortization begins to be collected over the loan's remaining term to maturity. These concurrent
factors may result in significant increases to a borrower's monthly payment obligations.
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. During fiscal
2007 and earlier, we offered an adjustable rate loan with a rate that adjusts every three years to the
three-year Constant Maturity U.S. Treasury index. However, we discontinued offering that product
during the first quarter of fiscal 2008.
One- to four-family mortgage loans are generally grouped by the Bank into one of three
categories based upon underwriting criteria: "Prime", "Alt-A" and "Sub-prime" mortgages.
Sub-prime loans are generally defined by the Bank as loans to borrowers with deficient credit
histories and/or higher debt-to-income ratios. Loans falling within the Alt-A category, as
defined by the Bank, include loans to borrowers with blemished credit credentials that are less
severe than those characterized by sub prime loans but otherwise preclude the loan from being
considered Prime. Alt-A loans may also be characterized by other underwriting or
documentation exceptions such as reduced or limited loan documentation. Loans without the
deficiencies or
exceptions characterizing sub-prime and Alt-A loans are considered Prime and
comprise the significant majority of the one-to four-family mortgages originated and retained
by the Bank.
The Bank does not currently offer sub prime loan programs. Prior to fiscal 2007, the
Bank had offered a limited number of one-to four-family loan programs through which it
originated and retained sub-prime loans to borrowers with deficient credit histories or higher
debt-to-income ratios. At September 30, 2007, the remaining balance of these loans was
approximately $1.4 million representing a total of 11 loans. All 11 loans were current as of
September 30, 2007.
Through fiscal 2007, the Bank offered an Alt-A stated income loan program by which
it originated and retained loans to borrowers whose income was affirmatively stated at the time
of application, but not verified by the Bank. The Bank discontinued that program in the first
quarter of fiscal 2008. At September 30, 2007, the remaining balance of these loans was
approximately $8.5 million representing a total of 27 loans. All 27 loans were current as of
September 30, 2007.
The Bank continues to offer a limited Alt-A program through which it originates and
sells all such loans to FNMA under its Expanded Approval program on a non-recourse,
servicing retained basis. A significant portion of the loans originated under this remaining Alt-A program support the procurement of mortgage financing for first time home buyers.
The fixed rate mortgage loans that we originate generally meet the secondary mortgage market
standards of the Federal National Mortgage Association ("FNMA"). For the purposes of interest rate
risk management, we have historically sold a portion of our qualifying one- to four-family residential
mortgages into the secondary market without recourse on both a servicing retained and servicing
released basis. Toward that end, we sold loans totaling approximately $9.3 million in the year ended
September 30, 2007, $5.8 million in the year ended September 30, 2006 and $2.4 million in the year
ended September 30, 2005. Purchasers of our loans included, but were not limited to, FNMA and
Countrywide Home Loans.
Notwithstanding the loan sales in prior years, the Bank intends to discontinue the sale of
most one- to four-family mortgage loan originations for a period of time to augment the growth in
commercial loans through which the Bank will reinvest a portion of the balances of cash and cash
equivalents accumulated during fiscal 2007. Such balances resulted from significant growth in deposits
acquired through the Bank's de novo branches opened during the current year. Loans originated under
the Bank's FNMA Alt-A program noted above will continue to be sold into the secondary market. The
Bank will carefully monitor the earnings, liquidity, and balance sheet allocation impact of this strategy
and make interim adjustments, as necessary, to support achievement of the Company's business plan
goals and objectives.
Substantially all of our residential mortgages include a "due on sale" clause, which is a
provision 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.
Multi-Family and Non-Residential Real Estate Loans.
We originate and participate in
commercial loans on multi-family and non-residential real estate properties, including loans on
retail/service properties, small office buildings, strip malls and other income-producing properties. We
generally require 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 New Jersey and the New York metropolitan area.
Commercial real estate 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 real estate securing the loan as collateral and the successful operations of
the property and income stream of the borrower generated from the property. 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 Loans.
We originate and participate in construction loans throughout the New
Jersey and New York metropolitan area. Our construction lending includes loans to individuals for
construction of a primary residence as well as loans to builders and developers for single family homes,
multi-family homes, residential tract development, condominium projects, as well as other commercial
real estate 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.
Business Loans.
We also originate business loans to a variety of professionals, sole
proprietorships and small businesses, primarily in our market area. These loans are generally secured
by real estate. We generally require the personal guarantee of the business owner. Business lending
products include term loans and lines of credit. Our business term loans generally have terms from one
to five years and are mostly fixed rate loans. Our business 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, 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 business loans may be substantially
dependent on the success of the business itself and the general economic environment. Business loans,
therefore, have greater credit risk than residential mortgage loans. In addition, business lending
generally requires substantially greater evaluation and oversight efforts compared to residential or non-residential real estate lending.
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. We offer 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 second mortgage term loans and up to 60% of value of home equity lines of credit.
Generally, our second mortgage term loans have fixed rates for terms of up to fifteen years.
Second mortgage term loans s and home equity lines of credit do not require title insurance but do
require homeowner, liability, fire and, if required, flood insurance policies.
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, 2007, we had $69,000 of unsecured consumer loans.
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 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.
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. As of September 30,
2007, our loans to one borrower limit was approximately $12.0 million.
At September 30, 2007, our largest group of related borrowers had an aggregate balance,
including unfunded commitments, of approximately $8.8 million, representing 9 loans on single
purpose commercial real estate, mixed use properties, one- to four-family and a construction loan for
residential properties.
At the same date, our second largest group of related borrowers had an aggregate balance
including total commitments of approximately $8.0 million, representing two loans secured by a
construction loan for a condominium project and a small unsecured line of credit. Our third largest
group of related borrowers at that date had an aggregate balance including total commitments of
approximately $7.2 million, representing seven loans secured by a catering facility, land, one- to four-family properties and receivables. At September 30, 2007 , we had 28 additional lending relationships
exceeding $2.0 million, with outstanding balances at that date ranging from $2.0 million to $5.7
million. All of these lending relationships were current and performing in accordance with the terms of
their loan agreements as of September 30, 2007.
Loan Originations, Purchases, Sales, Solicitation and Processing.
Our loan growth arises
primarily from the retail origination of our own loans and retaining such loans in portfolio. Our
sources of loan originations include repeat customers, referrals from realtors and other professionals,
such as attorneys, accountants and financial planners, as well as "walk-in" customers. Gross loan
originations totaled approximately $130.1 million for the year ended September 30, 2007. Net of
principal repayments, loan growth totaled approximately $40.5 million for the year ended September
30, 2007.
By contrast, our loan purchase activity has been limited in recent years. Toward that end, we
did not purchase any whole loans during the years ended September 30, 2007, 2006 and 2005.
During the years ended September 30, 2007, 2006 and 2005, we sold loans totaling $9.3
million, $5.8 million and $2.4 million, respectively. As noted earlier, we have sold these loans on a
non-recourse, servicing retained and non-recourse, servicing released basis. At September 30, 2007,
loans serviced for the benefit of others totaled $19.1 million.
Generally, loan sales have been part of our interest rate risk management strategy. However,
for the reasons noted earlier, the Bank intends to discontinue the sale of one- to four-family
mortgage loan originations for a period of time to augment the growth in commercial loans. The Bank
will carefully monitor the earnings, liquidity, and balance sheet allocation impact of this strategy and
make interim adjustments, as necessary, to support achievement of the Company's business plan goals
and objectives.
We occasionally purchase participations in loans originated through other lending institutions.
At September 30, 2007, we had participations with other institutions that had outstanding balances
totaling $12.1 million. An additional $1.9 million of unfunded commitments remain outstanding
related to those loans. Additionally, we have $1.7 million of outstanding loan balances from the Thrift
Institutions Community Investment Corporation of New Jersey ("TICIC"). Approximately $222,000 of
unfunded commitments remain outstanding related the TICIC loans. 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 provide written commitments to prospective borrowers on all one- to
four-family and commercial loans. The total amount of commitments to extend credit for these loans as
of September 30, 2007, was approximately $22.4 million, excluding commitments on unused lines of
credit of $29.2 million and undisbursed portions of construction loans totaling $16.0 million.
Loan Approval Procedures and Authority.
Our lending policies and loan approval limits are
recommended by senior management and approved by the Board of Directors. Regarding our one-to-four family mortgage and home equity loans, our Loan Underwriter has individual authority to approve
one-to four-family loans up to $417,000, the FNMA conforming loan limit. Our Loan Origination
Manager has individual authority to approve one-to four-family loans up to $500,000 with FNMA
automated underwriting approvals. The loan committee overseeing these lending activities consists of
Joseph Kliminski, CEO, Fred Kowal, President & COO, Richard Bzdek, SVP Corporate Secretary and
Catherine Bringuier, SVP Chief Lending Officer. Each of these officers has individual 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 approvals, at least one of which must be from a loan committee member while
the second may be from the Loan Underwriter or the Loan Origination Manager. One- to four-family
loans greater than $1,000,000 require two signatures from loan committee members, one of which
must be the President & COO or the SVP Chief Lending Officer.
Regarding our commercial loans, including multi-family and non-residential real estate,
construction and business loans, the loan committee overseeing these lending activities consists of
Joseph Kliminski, CEO, Fred Kowal, President & COO, Catherine Bringuier, SVP Chief Lending
Officer and Glenn Miller, SVP Commercial Real Estate. Loan approval authority within this
committee is limited to the CEO, President & COO and SVP Chief Lending Officer. Commercial
loans secured by real estate up to $750,000 require the approval of either the President & COO or SVP
Chief Lending Officer. Loans greater than $750,000 require two approvals from authorized members
of the loan committee.
In addition to the applicable loan committee member approvals, all loans in excess of certain
dollar thresholds must be presented to a subcommittee of the Board of Directors for review and
approval. The Board
of Director's loan committee currently comprises two outside directors - the
Chairman and Vice Chairman of the Board. Through the first half of fiscal 2007, all loans over
$1,750,000 required the approval of the Board of Director's loan committee. During the latter half of
fiscal 2007, the loan amount threshold requiring the Board of Director's loan committee approval was
increased from $1,750,000 to $2,500,000.
As with existing policies and limits, any changes recommended by management, regarding loan
authority, 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 write-down 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 during the period in which the declines occur.
At September 30, 2007, 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, 2007, we had approximately
$1.2 million of loans that were held on a non-accrual basis.
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,
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
(Dollars in thousands)
|
Loans accounted for on a non-accrual basis:
|
One- to four-family
|
$ 690
|
$ 691
|
$ 952
|
$ 445
|
$ 147
|
Multi-family and non residential
|
550
|
1,398
|
101
|
74
|
369
|
Construction
|
-
|
-
|
-
|
-
|
-
|
Consumer
|
-
|
-
|
62
|
-
|
1
|
Home equity
|
-
|
-
|
48
|
-
|
-
|
Business
|
9
|
-
|
-
|
-
|
-
|
Total
|
1,249
|
2,089
|
1,163
|
519
|
517
|
Accruing loans contractually past due 90 days or more
|
-
|
-
|
-
|
-
|
-
|
Total non-performing loans
|
1,249
|
2,089
|
1,163
|
519
|
517
|
Real estate owned
|
-
|
-
|
-
|
-
|
-
|
Other non-performing assets
|
-
|
-
|
-
|
-
|
-
|
Total non-performing assets
|
$ 1,249
|
$ 2,089
|
$ 1,163
|
$ 519
|
$ 517
|
Allowance for loan losses to non-performing loans
|
205.56%
|
101.64%
|
142.62%
|
304.05%
|
265.18%
|
Total non-performing loans to total loans
|
0.28%
|
0.52%
|
0.34%
|
0.17%
|
0.20%
|
Total non-performing loans to total assets
|
0.22%
|
0.41%
|
0.21%
|
0.12%
|
0.12%
|
Total non-performing assets to total assets
|
0.22%
|
0.41%
|
0.21%
|
0.12%
|
0.12%
|
During the year ended September 30, 2007, gross interest income of $45,510 would have been
recorded on loans accounted for on a non-accrual basis if those loans had been current, and $29,069 of
interest on such loans was included in income for the year ended September 30, 2007.
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 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, 2007.
At September 30, 2007, all of the classified assets and special mention designated assets were loans.
|
At
September 30, 2007
|
|
(In thousands)
|
|
Special Mention
|
$ 401
|
Substandard
|
1,029
|
Doubtful
|
-
|
Loss
|
-
|
Total
|
$1,430
|
At September 30, 2007, approximately $848,000 of loans classified as "substandard" were
accounted for as non-performing loans. As of that same date, a single loan totaling approximately
$401,000 classified as "special mention" was also accounted for as a non-performing loan.
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, multi-family mortgage loans, non-residential
mortgage loans, construction loans and business 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 the Bank and (2) environmental factors. Although there may be other factors that
also warrant consideration, we consider the following environmental factors:
-
levels and trends of delinquencies and impaired loans;
-
levels and trends of charge-offs and recoveries;
-
trends in volume and terms of loans;
-
changes to lending policies, procedures and practices;
-
experience, ability and depth of lending management and staff;
-
national, regional and local economic trends and conditions;
-
industry conditions; and
-
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 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.
The following table sets forth information with respect to our allowance for loan losses for the
periods indicated:
|
Year Ended September 30,
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
(Dollars in thousands)
|
|
Allowance balance at beginning of period
|
$ 2,123
|
$ 1,658
|
$ 1,578
|
$ 1,371
|
$ 1,117
|
Provision for loan losses
|
445
|
465
|
81
|
207
|
254
|
Charge-offs:
|
One- to four-family real estate
|
-
|
-
|
-
|
-
|
-
|
Consumer
|
-
|
-
|
-
|
-
|
-
|
Total charge-offs
|
-
|
-
|
-
|
-
|
-
|
Recoveries:
|
Consumer
|
-
|
-
|
-
|
-
|
-
|
Total recoveries
|
-
|
-
|
-
|
-
|
-
|
Net (charge-offs) recoveries
|
-
|
-
|
-
|
-
|
-
|
Allowance balance at end of period
|
$ 2,568
|
$ 2,123
|
$ 1,658
|
$ 1,578
|
$ 1,371
|
Total loans outstanding at end of period
|
$ 456,579
|
$ 416,564
|
$ 341,978
|
$ 313,713
|
$ 264,702
|
Average loans outstanding during period
|
$ 418,969
|
$ 369,916
|
$ 327,948
|
$ 278,632
|
$ 238,474
|
Allowance as a % of total loans
|
0.58%
|
0.53%
|
0.48%
|
0.50%
|
0.52%
|
Net loans charge-offs as a % of average loans
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
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
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
Amount
|
Percent
of Loans
to Total
Loans
|
Amount
|
Percent
of Loans
to Total
Loans
|
Amount
|
Percent
of Loans
to Total
Loans
|
Amount
|
Percent
of Loans
to Total
Loans
|
Amount
|
Percent
of Loans
to Total
Loans
|
|
(Dollars in thousands)
|
At end of period allocated to:
|
One- to four-family real
estate
|
$ 748
|
60.92%
|
$ 806
|
68.05%
|
$ 782
|
78.09%
|
$ 777
|
80.17%
|
$ 685
|
81.59%
|
Multi-family and
non-residential real estate
|
1,109
|
21.70
|
878
|
17.64
|
737
|
17.14
|
680
|
13.77
|
566
|
13.68
|
Land
|
46
|
0.73
|
6
|
0.13
|
-
|
-
|
-
|
-
|
-
|
-
|
Construction
|
427
|
10.64
|
174
|
7.96
|
12
|
0.42
|
21
|
2.29
|
3
|
0.47
|
Consumer
|
5
|
0.14
|
5
|
0.17
|
4
|
0.21
|
4
|
0.24
|
3
|
0.29
|
Home equity
|
139
|
4.33
|
95
|
4.59
|
63
|
3.92
|
43
|
3.40
|
37
|
3.36
|
Business
|
94
|
1.54
|
115
|
1.46
|
16
|
0.22
|
9
|
0.13
|
34
|
0.61
|
Unallocated
|
-
|
-
|
44
|
-
|
44
|
-
|
44
|
-
|
43
|
-
|
Total allowance
|
$ 2,568
|
100.00%
|
$2,123
|
100.00%
|
$ 1,658
|
100.00%
|
$ 1,578
|
100.00%
|
$ 1,371
|
100.00%
|
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 enterprises and private corporate issuers (including
securities collateralized by mortgages) and mutual funds comprising such securities. Authorized
investments also include 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, 2007 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.
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
the Bank's Chief Executive Officer, President and Chief Operating Officer, Senior Vice President and
Chief Financial Officer, Senior Vice President and Chief Lending Officer, Senior Vice President,
Commercial Real Estate, Vice President, Branch Administration, and Vice President, Controller, is
responsible for the oversight of the securities portfolio. Management conducts regular, informal
meetings, generally on a weekly basis while the committee 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.
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 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.
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.
At September 30, 2007, the Company's portfolio of collateralized mortgage obligations
primarily included tranches whose terms and structure support the regular receipt of principal cash
flows within a wide range of prepayment speeds of the underlying collateral. This reduces the
likelihood that reductions in market value resulting from movements in market interest rates may be
identified as "other than temporary" which would require an adjustment to the carrying cost of the
security recorded through earnings. Rather, investing in collateralized mortgage obligations allows us
to better manage the prepayment and extension risk associated with conventional mortgage-related
securities thereby reducing the market value sensitivity of that segment of the investment portfolio.
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, 2007, collateralized mortgage obligations comprised $37.2 million of our securities
portfolio.
Other Securities.
In addition, at September 30, 2007 we held an approximate investment of
$2.6 million in Federal Home Loan Bank of New York common stock (this amount is not shown in the
securities portfolio).
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,
|
|
2007
|
2006
|
2005
|
|
(In thousands)
|
Securities Held-to-Maturity
:
|
U.S. government and federal agency obligation
|
$ -
|
$ 2,000
|
$ 2,000
|
Collateralized mortgage non-agency obligations
|
1,855
|
2,137
|
2,503
|
Collateralized mortgage agency obligations
|
47
|
58
|
76
|
Government National Mortgage Association
|
145
|
200
|
244
|
Federal Home Loan Mortgage Corporation
|
138
|
286
|
385
|
Federal National Mortgage Association
|
4,545
|
5,866
|
2,616
|
Total securities held-to-maturity
|
6,730
|
10,547
|
7,824
|
|
Securities Available-for-Sale
:
|
U.S. government and federal agency obligation
|
2,005
|
10,917
|
9,805
|
Collateralized mortgage non-agency obligations
|
-
|
-
|
-
|
Collateralized mortgage agency obligations
|
35,271
|
32,393
|
25,763
|
Government National Mortgage Association
|
81
|
108
|
148
|
Federal Home Loan Mortgage Corporation
|
9,040
|
12,882
|
4,090
|
Federal National Mortgage Association
|
11,696
|
18,223
|
12,782
|
Mutual fund
|
-
|
-
|
9,749
|
Total securities available-for-sale
|
58,093
|
74,523
|
62,337
|
|
Total
|
$ 64,823
|
$ 85,070
|
$ 70,161
|
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, 2007. This table shows contractual maturities and does not reflect repricing or the effect of prepayments. Actual
maturities may differ.
|
At September 30, 2007
|
|
One Year or Less
|
One to Five Years
|
Five to Ten Years
|
More than Ten Years
|
Total Securities
|
|
Carrying
Value
|
Average
Yield
|
Carrying
Value
|
Average
Yield
|
Carrying
Value
|
Average
Yield
|
Carrying
Value
|
Average
Yield
|
Carrying
Value
|
Average
Yield
|
Market
Value
|
|
(Dollars in thousands)
|
|
U.S. Government and Federal
Agency
|
$ 2,005
|
5.18%
|
$ -
|
-%
|
$ -
|
-%
|
$ -
|
-%
|
$ 2,005
|
5.18%
|
$ 2,005
|
|
Mortgage-backed non-agency
Obligations
|
-
|
-
|
1,855
|
3.89
|
-
|
-
|
-
|
-
|
1,855
|
3.89
|
1,837
|
|
Government National Mortgage
Association
|
-
|
-
|
-
|
-
|
-
|
-
|
226
|
6.15
|
226
|
6.15
|
228
|
|
Federal Home Loan Mortgage
Association
|
789
|
3.07
|
368
|
2.70
|
19,106
|
4.82
|
18,602
|
4.52
|
38,865
|
4.62
|
38,864
|
|
Federal National Mortgage
Association
|
-
|
-
|
-
|
-
|
13,468
|
4.09
|
8,404
|
5.01
|
21,872
|
4.44
|
21,830
|
|
Total
|
$ 2,794
|
4.58%
|
$ 2,223
|
3.69%
|
$ 32,574
|
4.52%
|
$ 27,232
|
4.68%
|
$ 64,823
|
4.56%
|
$ 64,764
|
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 are generally determined based upon 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, direct mail and inserts included
with customer statements. We have not in the past utilized the services of deposit brokers and do not
expect to utilize such services at this time. During fiscal 2007, we offered special savings programs at
higher promotional interest rates in connection with the opening of our Verona, Nutley and Clifton
branch offices. The Bank also expects to offer special promotional programs by which premiums or
incentives will be paid for the opening of checking accounts. We also 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, 2007, $193.5 million or 45.2% 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, 2007, we had approximately $5.6 million of public funds on deposit at the
Bank. These deposits include one account relationship whose balances at September 30, 2007 totaled
approximately $5.2 million.
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
|
|
2007
|
2006
|
2005
|
|
Amount
|
Percent
of Total
Deposits
|
Weighted
Average
Nominal
Rate
|
Amount
|
Percent
of Total
Deposits
|
Weighted
Average
Nominal
Rate
|
Amount
|
Percent
of Total
Deposits
|
Weighted
Average
Nominal
Rate
|
Non-interest-bearing
demand deposits
|
$ 30,494
|
7.11%
|
-%
|
$ 23,545
|
7.20%
|
-%
|
$ 25,583
|
7.50%
|
-%
|
|
Interest-bearing
demand deposits
|
111,795
|
26.08
|
4.51
|
31,429
|
9.61
|
2.25
|
39,264
|
11.52
|
1.87
|
|
Savings deposits
|
92,778
|
21.65
|
2.54
|
107,008
|
32.71
|
2.62
|
123,270
|
36.16
|
1.68
|
|
Time deposits
|
193,533
|
45.16
|
4.93
|
165,165
|
50.48
|
4.48
|
152,808
|
44.82
|
3.45
|
|
Total deposits
|
$ 428,600
|
100.00%
|
3.95%
|
$ 327,147
|
100.00%
|
3.34%
|
$ 340,925
|
100.00%
|
2.37%
|
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, 2007.
Remaining Time Until Maturity
|
Certificates
of Deposits
|
|
(In thousands)
|
Within three months
|
|
$ 22,009
|
|
Three through six months
|
|
15,665
|
|
Six through twelve months
|
|
25,064
|
|
Over twelve months
|
|
16,961
|
|
Total
|
|
$ 79,699
|
|
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.
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,
2007, our borrowing limit with the Federal Home Loan Bank was approximately $140.2 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,
|
|
2007
|
2006
|
2005
|
Federal Home Loan Bank Advances:
|
Average balance outstanding
|
$ 44,256
|
$ 52,725
|
$ 62,056
|
Maximum amount outstanding
at any month-end during the period
|
$ 56,269
|
$ 56,075
|
$ 72,853
|
Balance outstanding at end of period
|
$ 37,612
|
$ 56,075
|
$ 53,734
|
Weighted average interest rate during
the period
|
5.14%
|
4.95%
|
4.58%
|
Weighted average interest rate at end
of period
|
5.21%
|
5.16%
|
4.84%
|
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, 2007, we had 78 full-time employees and 11 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, FDIC-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. The
FDIC also has authority to examine the Bank in its role as the administrator of the Deposit Insurance
Fund ("DIF"), which is the fund established upon the merger of the Savings Association Insurance
Fund ("SAIF") and the Bank Insurance Fund ("BIF") in March 2006. 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.
The Bank must file regular reports with the OTS 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 Bank is a member of the DIF, which is administered by
the FDIC. Deposits are insured up to the applicable limits by the FDIC and such insurance is backed
by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the
FDIC determines by regulation or order to pose a serious risk to the DIF. The FDIC also has the
authority to initiate enforcement actions against savings institutions, after giving the OTS an
opportunity take such action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC merged the BIF and SAIF to form the DIF on March 31, 2006 in accordance with
the Federal Deposit Insurance Reform Act of 2005. FDIC maintains the DIF by assessing depository
institutions an insurance premium. The FDIC Board approved a new risk-based premium system in
November 2006 which was effective January 1, 2007. The FDIC's new regulations for risk-based
deposit insurance assessments establish four Risk Categories. Risk Category I, for well-capitalized
institutions that are financially sound with only a few minor weaknesses, includes approximately 95%
of FDIC-insured institutions. Risk Categories II, III, and IV present progressively greater risks to the
deposit insurance fund. Effective January 1, 2007, Risk Category I institutions pay quarterly
assessments for deposit insurance at annual rates of five to seven basis points. The rates for Risk
Categories, II, III, and IV are seven, 28, and 43 basis points, respective. Rates are subject to change
with advance notice to insured institutions.
Within Risk Category I, the precise rate for an individual institution with less than $10 billion
in assets is generally determined by a formula using CAMELS ratings which are assigned in
examinations, and financial ratios. A different method applies for larger institutions. The rate for an
individual institution is applied to its assessment base, which is generally its deposit liabilities subject to
certain adjustments. An institution (or its successor) insured by the FDIC on December 31, 1996
which had previously paid assessments is eligible for certain credit against deposit insurance
assessments. We anticipate that this credit will reduce our FDIC premium expense for fiscal 2008
before expiring during the latter half of that year.
The Bank, like other former SAIF insured institutions and BIF insured institutions, is required
to pay a Financing Corporation ("FICO") assessment in order to fund the interest on bonds issued to
resolve thrift failures in the 1980s. For the first quarter of fiscal year 2007, the annual rate for this
assessment is 1.14 basis points for each $100 in domestic deposits. These assessments, which may be
revised based upon the level of BIF and former SAIF classified insured institution's deposits, will
continue until the bonds mature in 2017 through 2019.
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, 2007 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 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.
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.
During the fiscal year ended September 30, 2007, the Bank applied for, and received,
regulatory approval to pay two $4.0 million dividends to the holding company which were distributed
during the quarters ended June 30, 2007 and September 30, 2007. The Bank may apply for regulatory
approval to pay additional dividends to the holding company to support the Company's capital
management objectives.
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, 2007 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 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
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 1A. Risk Factors.
Our strategic plan calls for us to diversify our loan portfolio with increased emphasis on
commercial lending which may increase our operating expenses in the future and result in a
higher degree of credit risk within our loan portfolio.
Commercial loans include multi-family and non-residential mortgage loans, construction loans and
business loans. At September 30, 2007, our loan portfolio included commercial loans totaling $141.9
million, or 32.4% of our loans receivable, net. It is our intention to significantly increase our
origination of these types of loans. As part of our plan to grow and diversify the loan mix, we may
expand our commercial lending business unit and may hire additional commercial lenders over the next
several years. We would expect our compensation
and benefit expenses to increase significantly if we
hire these lenders and associated support staff. We also expect that our construction lending program
will also continue to expand in connection with our increasing strategic emphasis on commercial
lending.
Commercial loans are generally considered to involve a higher degree of credit risk than long-term
financing of owner-occupied residential properties. The likelihood that these loans will not be repaid or
will be late in paying is generally greater than with residential loans. Furthermore, it may take some
time for us to attract lending business sufficient to offset the increased compensation and benefit
expenses that result from hiring the additional personnel we will need. There can be no assurance that
the lenders we hire will successfully grow our loan portfolio.
Our strategic plan calls for us to expand our franchise through de novo branching. New
branches are expected to increase our operating expenses and reduce our net income until they
achieve profitability which can not be assured.
Our current business plan calls for us to open up to three de novo branches over approximately the next
five years. Having opened three full service branches located in Verona, Nutley and Clifton, New
Jersey during fiscal 2007, the Company currently has no plans or commitments to open additional de
novo branches during fiscal 2008. Rather, the Company expects to direct significant strategic
effort toward achieving profitability within each of these three branches while revisiting additional
branching opportunities after fiscal 2008. Notwithstanding this current focus, the Company would
consider additional branching projects during fiscal 2008 if appropriate opportunities were to arise.
Until new branches attract sufficient business to offset the increased expenses incurred by de novo
branching, the new branches are likely to reduce our earnings. There is no assurance, however, that we
will be successful in opening de novo branches. Costs for land purchase and branch construction will
adversely impact earnings going forward. We currently estimate that total land, construction and
equipment costs could average as much as $3.1 million per branch and could be higher. 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. Because these expenses are
in fixed assets, they will not result in any additional earnings but will result in a substantial increase in
depreciation and occupancy expense. There can be no assurance when, or if, these new offices will
open or that we will be successful in executing this part of the business plan. If we are able to locate
and obtain suitable sites for these branches, there is no guarantee that these de novo branches will be
profitable.
While not a de novo branch, we also expect to incur additional costs associated with relocating and
expanding the Bloomfield deposit branch. The new facility will be located on a property adjacent to
our Bloomfield headquarters building where the branch is currently located. Such relocation will
significantly upgrade and modernize the Bloomfield branch facility supporting the Company's deposit
growth and customer service enhancement objectives. The relocation will also support potential
expansion of the administrative and lending office space within the Company's existing headquarters
facility where the branch is currently located should such expansion be required to support the
Company's business plan. Like the de novo branches mentioned above, the relocation of the Bloomfield
branch is expected to increase our operating costs through various forms of additional
occupancy and depreciation costs,
We expect that changes in interest rates may have a significant, adverse impact on our net
interest income.
The income from our assets and the cost of our liabilities are sensitive to changes in interest rates. 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: (a) the interest income we
earn on our interest-
earning assets such as loans and securities; and (b) 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 or other
repricing characteristics 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 than the
interest paid on our liabilities.
Our business is geographically concentrated in New Jersey and the New York metropolitan area.
A downturn in economic conditions in the state and/or the surrounding region could have an
adverse impact on our profitability.
A substantial majority of our loans are to individuals and businesses in New Jersey and the New York
metropolitan area. Any decline in the regional economy could have an adverse impact on our earnings.
Because we have a significant amount of real estate loans, decreases in local real estate values could
adversely affect the value of property used as collateral. Adverse changes in the economy and real
estate values may also have a negative effect on the ability of our borrowers to make timely repayments
of their loans, which would have an adverse impact on our earnings.
Strong competition within our market area may limit our growth and profitability.
Competition in the banking and financial services industry in New Jersey is intense. In our market area,
we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions,
finance companies, mutual funds, insurance companies and brokerage and investment banking firms
operating locally and elsewhere. Many of these competitors have substantially greater resources and
lending limits than we do and offer services that we do not or cannot provide. This competition has
made it more difficult for us to make new loans and more difficult to retain deposits. Price competition
for loans might result in us originating fewer loans, or earning less on our loans, and price competition
for deposits might result in slower growth or reduction of our total deposits or having to pay more for
our deposits.
We operate in a highly regulated environment and may be adversely affected by changes in laws
and regulations.
We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision
and by the Federal Deposit Insurance Corporation. This regulation and supervision govern the activities
in which a bank and its holding company may engage and are intended primarily for the protection of
the insurance fund and depositors. Regulatory authorities have extensive discretion in connection with
their supervisory and enforcement activities, including the imposition of restrictions on the operation of
a bank, the classification of assets by a bank and the adequacy of a bank's allowance for loan losses.
Any change in this regulation and oversight, whether in the form of regulatory policy, regulations, or
legislation could have a material impact on us and our operations.
Item 1B. Unresolved Staff Comments.