Item 1. Business
Forward Looking Statements
This Annual Report (including information incorporated by reference) contains, and future oral and written statements of AJS Bancorp, Inc., or the Company as defined below and its management may contain, forward-looking statements as such term is defined in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of AJS Bancorp, Inc. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of AJS Bancorp, Inc.’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and AJS Bancorp, Inc. undertakes no obligation to update any statement in light of new information or future events. By identifying these forward-looking statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include those discussed under “Risk Factors” in Part I, Item 1A
Item 1A. Risk Factors
We remain classified as in “troubled condition” by the Office of the Comptroller of the Currency and remain subject to an Individual Minimum Capital Requirement that may adversely affect our operations and our financial performance.
In March 2012, A.J. Smith Federal was deemed by the Office of the Comptroller of the Currency to be in “troubled condition” under the Office of the Comptroller of the Currency’s prompt corrective action rules. Consequently, A.J. Smith Federal is subject to additional regulatory restrictions that require it to:
· obtain the prior written approval of the Office of the Comptroller of the Currency before appointing any new director or senior executive officer;
· obtain the prior written approval of the Office of the Comptroller of the Currency before making or entering into any “golden parachute” payments or agreements;
· obtain the prior written approval of the Office of the Comptroller of the Currency before declaring or paying any dividends or making any other capital distributions; and
· provide advance notice to and receive a written notice of non-objection from the Office of the Comptroller of the Currency before entering into or amending any contractual arrangements for compensation or benefits with any director or senior executive officer of A.J Smith Federal.
In addition, pursuant to an Individual Minimum Capital Requirement, A.J. Smith Federal has been directed by the Office of the Comptroller of the Currency to maintain a Tier 1 Leverage capital ratio of 8% and a Total Risk-
Based capital ratio of 12%. In order to be considered “well-capitalized” by the Office of the Comptroller of the Currency, a bank must maintain a Tier 1 Leverage capital ratio of 5% and a Total Risk-Based capital ratio of 10%. At December 31, 2013, A.J. Smith Federal’s Tier 1 Leverage capital ratio was 12.96% and its Total Risk-Based capital ratio was 29.69%.
A.J. Smith Federal will be subject to the higher capital requirements noted above until such time as the Office of the Comptroller of the Currency no longer considers A.J. Smith Federal to be in “troubled condition.” A.J. Smith Federal’s current classification and its Individual Minimum Capital Requirement may adversely affect its operations and financial performance.
Changes in interest rates could adversely affect our results of operations and financial condition.
Our results of operations and financial condition are significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings. Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, a sustained increase in interest rates generally would tend to reduce our interest income. At December 31, 2013, a significant portion 43.8% of our loan portfolio was comprised of fixed-rate loans with terms of over 15 years while a significant portion 23.9% of our deposits was comprised of time deposits with terms of one year or less. In the event that interest rates suddenly rise our interest expense may rise more quickly than our interest income. Consequently, we may experience a related decrease in our net interest income.
Changes in interest rates also may affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable-rate loans. Also, increases in interest rates may extend the life of fixed-rate assets, which would restrict our ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive on a new investment.
Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of our securities classified as available for sale changes inversely with changes in interest rates. At December 31, 2013, the fair value of our portfolio of investment securities, mortgage-backed and agency securities classified as available for sale totaled $63.8 million. At that date, net unrealized loss on these securities totaled $677,000.
As a result of our suspending the origination of commercial real estate and multi-family loans, our weighted average yield on interest-earning assets has decreased.
Since 2008, we have ceased originating new commercial and multi-family real estate loans in our market area. In 2014, management intends to resume originating a modest amount of commercial and multi-family real estate loans. Consequently, our one- to four-family residential mortgage loan portfolio and our fixed-rate investment securities portfolio have comprised a greater percentage of our interest-earning assets until the local economy improved. At December 31, 2013, our commercial and multi-family real estate loan portfolios totaled $12.9 million, or 10.7% of total loans, compared to $25.1 million, or 19.3% of total loans at December 31, 2009. During the prolonged low interest rate environment, one- to four-family residential mortgage loans and fixed-rate investment securities have comprised an increasing proportion of our interest-earning assets and our weighted average yield on our interest-earning assets has decreased. Our weighted average yield on our interest-earning assets decreased 17 basis points to 3.01% for the year ended December 31, 2013 from 3.18% for the year ended December 31, 2009.
We would expect that our weighted average yield on interest-earning assets will decrease in future periods because one- to four-family residential mortgage loans and investment securities generally yield less than
commercial and multi-family real estate loans. If we are unable to leverage the net proceeds of the offering with higher yielding assets our ability to generate or increase our interest income will be compromised, which will reduce our profitability.
Our emphasis on one- to four-family residential mortgage loans exposes us to increased credit risks.
At December 31, 2013, $97.3 million, or 80.8%, of our loan portfolio consisted of one- to four-family residential mortgage loans, and $10.1 million, or 8.4%, of our loan portfolio consisted of home equity lines of credit. Recent economic conditions have resulted in declines in real estate values in our market areas. These declines in real estate values could cause some of our mortgage and home equity lines of credit to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.
In the future we may increase the origination of commercial real estate and multi-family loans, which carry greater credit risk than loans secured by owner occupied one- to four-family real estate.
Due to credit concerns related to commercial lending, since mid-2008 we have ceased new loan originations for commercial and multi-family real estate loans. At December 31, 2013, our commercial and multi-family real estate loan portfolios totaled $12.9 million, or 10.7% of total loans. In 2014, we intend to moderately increase our level of commercial and multi-family real estate loan originations consistent with our conservative loan underwriting policies and procedures. Given their larger balances and the complexity of the underlying collateral, commercial and multi-family real estate loans generally expose a lender to greater credit risk than loans secured by owner occupied one- to four-family real estate. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the impact of local and general economic conditions on the borrower’s ability to repay the loan, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial properties typically depends upon the successful operation of the real property securing the loan. If the cash flow from the property is reduced, the borrower’s ability to repay the loan may be impaired. If these commercial and multi-family real estate loans become non-performing, we may have to increase our provision for loan losses which would negatively affect our results of operations.
Our business may continue to be adversely affected by downturns in our national and local economies.
Our operations are significantly affected by national and local economic conditions. Substantially all of our loans are to businesses and individuals in the metropolitan Chicago area. All of our branches and most of our deposit customers also are located in this area. A continuing decline in the economies in which we operate could have a material adverse effect on our business, financial condition and results of operations. In particular, metropolitan Chicago has experienced home price declines, increased foreclosures and high unemployment rates.
A further deterioration or minimal improvement in economic conditions in the market areas we serve could result in the following consequences, any of which could have a material adverse effect on our business, financial condition and results of operations:
· demand for our loans, deposits and services may decline;
· loan delinquencies, problem assets and foreclosures may increase;
· weak economic conditions may continue to limit the demand for loans by creditworthy borrowers, limiting our capacity to leverage our retail deposits and maintain our net interest income;
· the value of the collateral for our loans may decline further; and
· the amount of our low-cost or non-interest-bearing deposits may decrease.
If the allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
Our customers may not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which may have a material adverse effect on our operating results. We make various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. If our assumptions are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to the allowance. Additions to the allowance would decrease our net income. At December 31, 2013, our allowance for loan losses was $1.4 million, or 42.8% of non-performing loans, compared to $1.6 million, or 41.1% non-performing loans at December 31, 2012.
Bank regulators also periodically review our allowance for loan losses and may require an increase in the provision for loan losses or further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs would decrease our earnings and adversely affect our financial condition.
If our problem assets increase, our earnings may decrease.
At December 31, 2013, our non-performing assets (which consist of non-accrual loans, non-accruing troubled debt restructured loans, loans 90 days or more delinquent, and other real estate owned assets) consisted of $3.3 million of loans and $2.6 million of other real estate owned. In addition, our classified assets (consisting of substandard loans and other real estate owned) totaled $12.4 million at December 31, 2013. Our problem assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or other real estate owned. Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses as a charge to earnings to maintain the allowance for loan losses at an appropriate level. From time to time, we also write down the value of properties in our other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our other real estate owned. Further, the resolution of problem assets requires the active involvement of management, which could detract from the overall supervision of our operations. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance accordingly.
We rely on our management team for the successful implementation of our business strategy.
Our future success will be largely due to the efforts of our senior management team consisting of Thomas R. Butkus, our Chairman, President and Chief Executive Officer, and Emily Lane, our Chief Financial Officer. Because we are a relatively small community savings bank with a relatively small management team, each member of our senior management team has more responsibility than his or her counterpart typically would have at a larger institution with more employees, and we have fewer management-level personnel who are in a position to assume the responsibilities of our senior management team. Accordingly, the loss of services of either of these individuals may have a material adverse effect on our ability to implement our business plan.
Historically low interest rates may adversely affect our net interest income and profitability.
During the past five years it has been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal funds rate and purchases of mortgage-backed securities. Historically, our interest-bearing liabilities have repriced or matured more quickly than our interest-earning assets. As a result, rates paid on our interest-bearing liabilities have decreased more quickly than the rates we pay on the loans we have originated and the securities we have purchased. Consequently, our interest rate spreads increased in the short term. However, our ability to reduce our interest expense is now highly limited while the average yields on our interest-earning assets may continue to decrease. The Federal Reserve Board has indicated its intention to maintain low interest rates in the near future. Accordingly, our interest rate spreads and our net interest income (the difference between interest income earned on assets and interest expense paid on liabilities) may decrease, which would adversely affect our profitability.
Strong competition and the changing banking environment may limit our growth and profitability.
Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking firms operating locally and elsewhere, and non-traditional financial institutions, including non-depository financial services providers. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Additionally, non-traditional financial institutions may not have the same regulatory requirements or burdens as we do even while playing a rapidly increasing role in the financial services industry, which could ultimately limit our growth, profitability and stockholder value. Our profitability depends upon our ability to successfully compete in our market areas and adapt to the changing financial services environment.
We may not be able to realize our deferred tax asset.
We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. At December 31, 2013, we had a $1.0 million net deferred tax asset. In 2009, we established a valuation allowance for our net deferred tax asset after evaluating the positive and negative evidence regarding our ability to generate future taxable income in order to utilize the deferred tax asset in accordance with U.S. GAAP. At December 31, 2013, our valuation allowance was $1.8 million. U.S. GAAP requires more weight be given to objective evidence, and since realization is dependent on future operating results, our three year cumulative operating loss carried more weight than forecasted earnings.
Management regularly reviews the net deferred tax asset for recoverability based on our history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of the net deferred tax asset ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income. The net deferred tax asset at December 31, 2013 will not become fully realizable until our expected future earnings will support realization of the asset. In addition, future events such as the expiration of net operating loss carryfowards, capital raises or transactions that result in a change in control, could trigger the application of certain tax laws which materially limit the utilization of the net deferred tax asset. This is a complex analysis and requires us to make certain judgments in determining the annual limitation. It is possible that we could ultimately not be able to use or lose a significant portion of the net deferred tax asset. Realization of our net deferred tax asset would significantly improve our earnings and capital.
Financial reform legislation has, among other things, eliminated the Office of Thrift Supervision, tightened capital standards and created a new Consumer Financial Protection Bureau, and will result in new laws and regulations that are expected to increase our costs of operations.
The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.
Among other things, as a result of the Dodd-Frank Act:
· the Office of the Comptroller of the Currency became the primary federal regulator for federal savings associations such as A.J. Smith Federal (replacing the Office of Thrift Supervision), and the Federal Reserve Board now supervises and regulates all savings and loan holding companies that were formerly regulated by the Office of Thrift Supervision, including AJS Bancorp;
· the federal prohibition on paying interest on demand deposits has been eliminated, thus allowing businesses to have interest-bearing checking accounts. This change has increased our interest expense;
· the Federal Reserve Board is required to set minimum capital levels for depository institution holding companies that are as stringent as those required for their insured depository subsidiaries, and the components of Tier 1 capital are required to be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. The new rule for savings and loan holding companies has set January 1, 2015 as the date the new capital requirements will begin to apply;
· the federal banking regulators are required to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives;
· a new Consumer Financial Protection Bureau has been established, which has broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, like A.J. Smith Federal, will be examined by their applicable bank regulators; and
· federal preemption rules that have been applicable for national banks and federal savings banks have been weakened, and state attorneys general have the ability to enforce federal consumer protection laws.
In addition to the risks noted above, we expect that our operating and compliance costs, and possibly our interest expense, could increase as a result of the Dodd-Frank Act and the implementing rules and regulations. The need to comply with additional rules and regulations, as well as state laws and regulations to which we were not previously subject, will also divert management’s time from managing our operations. Higher capital levels would reduce our ability to grow and increase our interest-earning assets which would adversely affect our return on stockholders’ equity.
We will become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.
In July 2013, the Office of the Comptroller of the Currency and the Federal Reserve Board approved a new rule that will substantially amend the regulatory risk-based capital rules applicable to A.J. Smith Federal and AJS Bancorp. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.
The final rule includes new minimum risk-based capital and leverage ratios, which will be effective for A.J. Smith Federal and AJS Bancorp on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements will be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
The application of more stringent capital requirements for A.J. Smith Federal and AJS Bancorp could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions such as the inability to pay dividends or repurchase shares if we were to be unable to comply with such requirements.
New regulations could restrict our ability to originate and sell mortgage loans.
The Consumer Financial Protection Bureau has issued a rule designed to clarify for lenders how they can avoid monetary damages under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that meet this “qualified mortgage” definition will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including:
· excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);
· interest-only payments;
· negative-amortization; and
· terms longer than 30 years.
Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more expensive/and or time consuming to make these loans, which could limit our growth or profitability.
Government responses to economic conditions may adversely affect our operations, financial condition and earnings.
The Dodd-Frank Act has changed the bank regulatory framework, created an independent consumer protection bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, and established more stringent capital standards for banks and bank holding companies. Bank regulatory agencies also have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of the Dodd-Frank Act and regulatory actions, may adversely affect our operations by increasing ongoing compliance costs and restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These risks could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.
If the Federal Reserve Board increases the federal funds rate, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery. In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.
Changes in laws and regulations may increase our costs of compliance which may adversely affect our operations and our income.
In response to the financial crisis of 2008 and early 2009, Congress has taken actions that are intended to increase confidence and encourage liquidity in financial institutions, and the Federal Deposit Insurance Corporation has taken actions to increase insurance coverage on deposit accounts. In addition, there have been proposals made by members of Congress and others that would reduce the amount delinquent borrowers are otherwise contractually obligated to pay on their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral.
Moreover, bank regulatory agencies have responded aggressively to concerns and trends identified in examinations, and have issued many formal enforcement orders requiring capital ratios in excess of regulatory requirements. Bank regulatory agencies, such as the Office of the Comptroller of the Currency and the Federal
Deposit Insurance Corporation, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of potential investors. In addition, new laws and regulations are likely to increase our costs of regulatory compliance and costs of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge, and our ongoing operations, costs and profitability. Further, legislative proposals limiting our rights as a creditor could result in credit losses or increased expense in pursuing our remedies as a creditor. Regulations limit interchange fees for banks with assets of more than $10.0 billion. It is unclear whether in the future these limits will apply to smaller banks such as A.J. Smith Federal.
The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.
As a result of the completion of our second-step conversion and offering, we became a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we will file with the Securities and Exchange Commission. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. These obligations will increase our operating expenses and could divert our management’s attention from our operations.
Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks.
We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of: fraud by employees or persons outside our company; the execution of unauthorized transactions by employees: errors relating to transaction processing and technology; breaches of the internal control systems and compliance requirements; and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to negative publicity. In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and suffer damage to our reputation.
We may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. Any such losses could have a material adverse effect on our financial condition and results of operations.
We are a community bank and our ability to maintain our reputation is critical to the success of our business.
Our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior
service to our customers and caring about our customers and associates. If our reputation is negatively affected by the actions of our employees or otherwise, our business and operating results may be materially adversely affected.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in violations of consumer privacy laws including the Gramm-Leach-Bliley Act, cause significant liability to us and give reason for existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage and potential liability, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.
There may be a limited trading market in our common stock, which would hinder your ability to sell our common stock and may lower the market price of the stock.
We expect transactions in the shares of AJS Bancorp common stock will be quoted on the OTC Bulletin Board under the symbol “AJSB.” The development of an active trading market for our common stock depends on the existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock as a short-term investment. In addition, our public “float,” which is the total number of our outstanding shares less the shares held by our employee stock ownership plan and our directors and executive officers, is likely to be quite limited. As a result, it is unlikely that an active trading market for the common stock will develop or that, if it develops, it will continue. Purchasers of our common stock should have long-term investment intent and should recognize that there will be a limited trading market in the common stock which may have an adverse impact on the price at which the common stock can be sold.
We may not receive regulatory approval to pay dividends on our shares of common stock in future periods.
We have adopted resolutions requested by the Federal Reserve Bank of Chicago that restrict our ability to pay dividends without prior approval of the Federal Reserve Bank of Chicago and A.J. Smith Federal is prohibited from making any capital distributions unless it receives the prior written non-objection of the Office of the Comptroller of the Currency. Although AJS Bancorp has received regulatory approval to pay a quarterly cash dividend to its stockholders, subject to market considerations, during 2014, stockholders are not entitled to receive dividends. We may not receive regulatory approval following 2014 to pay a regular quarterly cash dividend, or we may only receive regulatory approval to pay a smaller regular quarterly cash dividend than we currently intend.
Item 1B.
Item 1B. Unresolved Staff Comments
None
Item 2.
Item 2. Properties
We operate from three locations in Midlothian and Orland Park, Illinois. Set forth below is information related to our headquarters and branch locations. The net book value of our facilities was $3.4 million at December 31, 2013. The net book value of our real property described below in the table is as of December 31, 2013.
Item 3.
Item 3. Legal Proceedings
AJS Bancorp and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, as of December 31, 2013, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our shares of common stock are traded on the OTC Bulletin Board under the symbol “AJSB”. The approximate number of holders of record of AJS Bancorp’s common stock as of March 17, 2014 was 327. Certain shares of AJS Bancorp, Inc. are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number. Market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The following table presents quarterly market and dividend information for AJS Bancorp’s common stock for each quarter during 2013 and 2012, as reported on the OTC Bulletin Board. We completed our second-step conversion on October 9, 2013 whereby each share of AJS Bancorp, a federal corporation was exchanged for 1.1460 shares of AJS Bancorp, a Maryland corporation. Accordingly, we have adjusted the share prices prior to October 9, 2013 to reflect the 1.1460 exchange rate.
The Board of Directors has the authority to declare cash dividends on shares of common stock, subject to statutory and regulatory requirements and currently Federal Reserve Bank of Chicago non-objection. In determining whether and in what amount to pay a cash dividend, the Board takes into account a number of factors, including capital requirements, our consolidated financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that cash dividends will be paid or that, if paid, will not be reduced.
The available sources of funds for the payment of a cash dividend in the future are interest and principal payments with respect to AJS Bancorp’s loan to the Employee Stock Ownership Plan, and dividends from A.J. Smith Federal.
Under the rules of the Office of the Comptroller of the Currency and the Federal Reserve Board, A.J. Smith Federal is not permitted to make a capital distribution if, after making such distribution, it would be undercapitalized. For information concerning additional federal laws and regulations regarding the ability of A.J. Smith Federal to make capital distributions, including the payment of dividends to AJS Bancorp, see Item 1 Business- “Taxation-Federal Taxation” and “Supervision and Regulation-Capital Distributions.”
Unlike A.J. Smith Federal, AJS Bancorp is not restricted by Office of the Comptroller of the Currency regulations on the payment of dividends to its stockholders. However, the Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies that it has also made applicable to savings and loan holding companies as well. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Federal Reserve Board guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of AJS Bancorp, Inc. to pay dividends or otherwise engage in capital distributions.
AJS Bancorp did not repurchase any of its common stock during the quarter ended December 31, 2013.
Item 6.
Item 6. Selected Financial Data
The Selected Financial Data is incorporated by reference to the Annual Report to Stockholders included in Exhibit 13 to this Form 10-K.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Incorporated by reference to the Annual Report to Stockholders included in Exhibit 13 to this Form 10-K.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
Item 8.
Item 8. Financial Statements and Supplementary Data
Incorporated by reference to the Annual Report to Stockholders included in Exhibit 13 to this Form 10-K.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable
Item 9A.
Item 9A. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2013. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
(b) Management’s Report on Internal Control over Financial Reporting
This annual report does not include a management’s report regarding internal control over financial reporting. A Management’s report was not required pursuant to rules of the Securities and Exchange Commission that permit new public companies to not have such discourses in their first annual report as a public company.
(c) Changes in internal controls
There were no significant changes made in our internal control over financial reporting during the Company’s fourth quarter of the year ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
Not Applicable
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The “Proposal I-Election of Directors” section of the Company’s definitive proxy statement for the Company’s 2014 Annual Meeting of Stockholders (the “2014 Proxy Statement”) is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The “Proposal I-Election of Directors” section of the Company’s 2014 Proxy Statement is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The “Proposal I-Election of Directors” section of the Company’s 2014 Proxy Statement is incorporated herein by reference.
The following table sets forth information as of December 31, 2013 about Company common stock that may be issued under the Company’s equity compensation plans.
There are no options available for future grant under the May 2003 stock option plan as the plan has expired. As of December 31, 2013, there were 1,200 outstanding options available to be exercised at a weighted average price of $23.75.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The “Transactions with Certain Related Persons” section of the Company’s 2014 Proxy Statement is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services
The “Proposal III - Ratification of Appointment of Independent Registered Public Accounting Firm” Section of the Company’s 2014 Proxy Statement is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
The following are filed as a part of this report by means of incorporation by reference to AJS Bancorp, Inc.’s 2013 Annual Report to Stockholders:
(A) Report of Independent Registered Public Accounting Firm
(B) Consolidated Balance Sheets - at December 31, 2013 and 2012
(C) Consolidated Statements of Income - Years ended December 31, 2013 and 2012
(D) Consolidated Statements of Comprehensive Income - Years ended December 31, 2013 and 2012
(E) Consolidated Statements of Changes In Stockholders’ Equity - Years ended December 31, 2013 and 2012
(F) Consolidated Statements of Cash Flows - Years ended December 31, 2013 and 2012
(G) Notes to Consolidated Financial Statements.
(a)(2)
Financial Statement Schedules
None.
(a)(3)
Exhibits
3.1 Articles of Incorporation of AJS Bancorp, Inc. (1)
3.2 Bylaws of AJS Bancorp, Inc. (2)
4 Form of Common Stock Certificate of AJS Bancorp, Inc. (3)
10.1 Employment Agreement between A.J. Smith Federal Savings Bank and Thomas R. Butkus (4)
10.2 Amended and Restated Supplemental Executive Agreement between AJS Bancorp, Inc. and Thomas R. Butkus (5)
10.3 AJS Bancorp, Inc. 2003 Stock Option Plan, including one amendment (6)
10.4 A.J. Smith Federal Savings Bank Amended and Restated 2005 Executives and Directors Deferred Compensation Plan (7)
10.5 A.J. Smith Federal Savings Bank Executives and Directors Deferred Compensation Plan (8)
10.6 A.J. Smith Federal Savings Bank Amended and Restated 2005 Retirement Plan for Outside Directors (9)
10.7 A.J. Smith Federal Savings Bank Retirement Plan for Outside Directors (10)
13 Annual Report to Stockholders
21 Subsidiaries of Registrant(11)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of December 31, 2013 and 2012, (ii) the Consolidated Statements of Income for the years ended December 31, 2013 and 2012, (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2013 and 2012, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013 and 2012, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012, and (vi) the notes to the Consolidated Financial Statements
(1) Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 of AJS Bancorp, Inc. (file no. 333-189171), originally filed with the Securities and Exchange Commission on June 7, 2013, as amended.
(2) Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 of AJS Bancorp, Inc. (file no. 333-189171), originally filed with the Securities and Exchange Commission on June 7, 2013, as amended.
(3) Incorporated by reference to Exhibit 4 to the Registration Statement on Form S-1 of AJS Bancorp, Inc. (file no. 333-189171), originally filed with the Securities and Exchange Commission on June 7, 2013, as amended.
(4) Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-1 of AJS Bancorp, Inc. (file no. 333-189171), originally filed with the Securities and Exchange Commission on June 7, 2013, as amended.
(5) Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-1 of AJS Bancorp, Inc. (file no. 333-189171), originally filed with the Securities and Exchange Commission on June 7, 2013, as amended.
(6) Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1 of AJS Bancorp, Inc. (file no. 333-189171), originally filed with the Securities and Exchange Commission on June 7, 2013, as amended.
(7) Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1 of AJS Bancorp, Inc. (file no. 333-189171), originally filed with the Securities and Exchange Commission on June 7, 2013, as amended.
(8) Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1 of AJS Bancorp, Inc. (file no. 333-189171), originally filed with the Securities and Exchange Commission on June 7, 2013, as amended.
(9) Incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 of AJS Bancorp, Inc. (file no. 333-189171), originally filed with the Securities and Exchange Commission on June 7, 2013, as amended.
(10) Incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1 of AJS Bancorp, Inc. (file no. 333-189171), originally filed with the Securities and Exchange Commission on June 7, 2013, as amended.
(11) Incorporated by reference to Exhibit 21 to the Registration Statement on Form S-1 of AJS Bancorp, Inc. (file no. 333-189171), originally filed with the Securities and Exchange Commission on June 7, 2013, as amended.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Thomas R. Butkus
Chairman, President and Chief Executive Officer (Principal Executive Officer)
March 26, 2014
Thomas R. Butkus
/s/ Emily Lane
Chief Financial Officer (Principal Accounting and Financial Officer)
March 26, 2014
Emily Lane
/s/ Roger L. Aurelio
Director
March 26, 2014
Roger L. Aurelio
/s/ Raymond J. Blake
Director
March 26, 2014
Raymond J. Blake
/s/ Richard J. Nogal
Director
March 26, 2014
Richard J. Nogal
/s/ Michael H. Rose
Director
March 26, 2014
Michael H. Rose