UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission file number 000-49967
Atlantic Liberty Financial Corp.
Delaware 16-1615014
186 Montague Street, Brooklyn, New York 12201
(718) 855-3555
Check whether the issuer: (1); filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
As of September 30, 2003, the Registrant had outstanding 1,710,984 shares of
common stock.
Transitional Small Business Disclosure format Yes [X] No [ ]
ATLANTIC LIBERTY FINANCIAL CORP.
Form 10-QSB Quarterly Report
Index
Page
----
PART I - Financial Information
Item 1. Financial Statements 1- 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-16
Item 3. Controls and Procedures 17
PART II - Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19-24
ITEM 1. FINANCIAL STATMENTS
Atlantic Liberty Financial Corp.
Consolidated Statements of Financial Condition
(in thousands of dollars)
(unaudited)
At At
September 30, March 31,
2003 2003
------------ ------------
ASSETS
Cash and cash equivalents
Cash and amounts due from depository institutions $ 1,778 $ 1,773
Interest bearing deposits 4,877 4,464
------------ ------------
Total cash and cash equivalents 6,655 6,237
------------ ------------
Investment securities held to maturity 2,020 1,024
Investment securities available for sale 1,000 0
Mortgage-backed securities held to maturity 34,610 21,002
Mortgage-backed securities available for sale 1,363 1,703
Loans receivable, net 106,306 100,655
Premises and equipment 1,557 1,616
Federal Home Loan Bank of New York Stock 1,080 902
Interest receivable 764 672
Deferred income tax 483 307
Investment in real estate 78 78
Other assets 3,164 3,000
------------ ------------
Total Assets $ 159,080 $ 137,196
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 109,359 $ 107,515
Federal Home Loan Bank of New York advances 21,200 1,600
Advance payments by borrowers for taxes and insurance 650 886
Other liabilities 2,001 2,104
------------ ------------
Total Liabilities 133,210 112,105
Commitments & Contingencies -- --
Stockholders' equity --
Preferred Stock $.10 par value, 500,000 shares authorized -- --
Common Stock $.10 par value, 6,000,000 shares authorized
1,710,984 Shares Issued 171 171
Paid in Capital 16,196 16,141
Unearned ESOP Shares (1,129) (1,197)
Retained Earnings-substantially restricted 10,615 9,976
Accumulated other comprehensive restricted 17 0
------------ ------------
Total Stockholders' Equity 25,870 25,091
------------ ------------
Total liabilities and Stockholders' Equity $ 159,080 $ 137,196
============ ============
See notes to consolidated financial statements.
-1-
Atlantic Liberty Financial Corp.
Statements of Income
(in thousands of dollars)
(unaudited)
Three Months Six Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Interest and dividend income
Loans $ 1,763 $ 1,774 $ 3,550 $ 3,516
Mortgage backed securities 213 192 373 395
Investments held to maturity 24 16 40 33
Other interest-earning assets 28 50 50 92
------------ ------------ ------------ ------------
Total interest income 2,028 2,032 4,013 4,036
------------ ------------ ------------ ------------
Interest expense
Deposits 446 643 902 1,323
Advances 75 21 94 44
Escrow 2 2 7 5
------------ ------------ ------------ ------------
Total interest expense 523 666 1,003 1,372
------------ ------------ ------------ ------------
Net interest income 1,505 1,366 3,010 2,664
------------ ------------ ------------ ------------
Provision for loan losses 0 0 0 0
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 1,505 1,366 3,010 2,664
------------ ------------ ------------ ------------
Non-interest income
Service fees 53 39 103 105
Miscellaneous 49 23 105 46
------------ ------------ ------------ ------------
Total non-interest income 102 62 208 151
------------ ------------ ------------ ------------
Non-interest expenses
Salaries and employee benefits 463 488 994 911
Esop Expense 65 0 123 0
Directors Compensation 44 37 72 65
Net occupancy expenses 37 19 80 25
Equipment 93 168 167 304
Advertising 7 9 15 16
Federal Insurance Premium 5 5 9 10
Legal fees 43 4 73 20
Miscellaneous 208 162 380 335
------------ ------------ ------------ ------------
Total non-interest expenses 965 892 1,913 1,686
------------ ------------ ------------ ------------
Income before income taxes 642 536 1,305 1,129
Income tax expense 286 225 580 472
------------ ------------ ------------ ------------
Net income $ 356 $ 311 $ 725 $ 657
============ ============ ============ ============
Earnings per share
Basis and diluted $ 0.22 n/a $ 0.46 n/a
Weighted average shares 1,587,793 n/a 1,587,793 n/a
See notes to financial statements
-2-
Atlantic Liberty Financial Corp.
Consolidated Statements of changes in Stockholders' equity
(in thousands of dollars)
(unaudited)
Accumulated
Additional Other
Common Pain-in Retained Benefit Comprehensive
Stock Capital Earnings Plans Income/(loss) Total
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2003 $ 171 $ 116,141 $ 9,976 $ (1,197) $ (1,197) $ 25,091
Comprehensive Income
Net income -- -- 725 -- -- 725
Change in net unrealized
gain (loss) -- -- -- -- 17 17
Total comprehensive income -- -- -- -- -- 742
Employee stock ownership plan-
shares earned -- 55.00 -- 68.00 -- 123
Dividends paid ($.05 per share) (86) (86)
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30,2003 $ 171 $ 16,196 $ 10,615 $ (1,129) $ 17 $ 25,870
============ ============ ============ ============ ============ ============
See notes to consolidated financial statements
-3-
Atlantic Liberty Financial Corp.
Consolidated Statements of Cash Flows
(in thousands of dollars)
(unaudited)
Cash flows from operating activities Six Months Ended
- ------------------------------------- September 30,
------------------------
2003 2002
---------- ----------
Net income $ 725 $ 658
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 83 65
Net accretion of premiums,
discounts and deferred loan fees 190 (36)
Deferred income taxes (176) (46)
ESOP compensation expense 123 0
(Increase) in interest receivable (92) (38)
(Increase) in other assets (164) (335)
(Decrease) increase in other liabilities (103) 221
---------- ----------
Net cash provided by operating activities 586 489
---------- ----------
Cash flows from investing activities:
Purchases of:
Investment securities held to maturity (1,000) --
Investment securities available for sale (1,000) --
Mortgage-backed securities held to maturity (19,816) (9,213)
Proceeds of maturities,calls and principal repayments on:
Mortgage-backed securities held to maturity 6,075 3,381
Mortgage-backed securities available for sale 350 --
(Increase) in loans receivable (5,697) (3663)
Additions to premises and equipment (24) (349)
Purchases of Federal Home Loan Bank of New York (178) --
---------- ----------
Net cash (used in) investing activities (21,290) (9,844)
---------- ----------
Cash flows from financing activities:
Increase in deposits 1,844 42,417
(Decrease) in advance payments
by borrowers for taxes and insurance (236) (138)
Increase (decrease) on Federal Home Loan Bank advance 19,600 (400)
Cash dividends paid (86) --
---------- ----------
Net cash provided by financing activities 21,122 41,879
---------- ----------
Net increase in cash and cash equivalents 418 32,524
Cash and cash equivalents at beginning of period 6,237 9,941
---------- ----------
Cash and cash equilvalents at end of period $ 6,655 $ 42,465
========== ==========
Supplemental disclosures of cash flow information Cash paid for:
Interest $ 1,003 $ 1,364
---------- ----------
Federal, state and city income taxes $ 483 $ 505
---------- ----------
See notes to consolidated financial statements.
-4-
Atlantic Liberty Financial Corp.
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
Note 1- Basis of Presentation
- ------------------------------
Principles of Consolidation:
The accompanying Consolidated Interim Financial Statements include the accounts
of Atlantic Liberty Financial Corp. ("The Company") and its wholly owned
subsidiary Atlantic Liberty Savings, F.A. ("The Association"). All significant
inter-company balances and transactions have been eliminated. The Company began
operations on October 22, 2002 following the completion of Atlantic Liberty
Savings F.A.'s conversion from mutual to stock form.
The accompanying unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-QSB.
Accordingly, certain disclosures required by accounting principles generally
accepted in the United States of America are not included herein. These interim
statements should be read in conjunction with the Association's audited
financial statements and notes thereto included in the Registration Statement
filed with the Securities and Exchange Commission by the Company.
Interim statements are subject to possible adjustment in connection with the
annual audit of the Company for the year ending March 31, 2004. In the opinion
of management of the Company, the accompanying unaudited interim consolidated
financial statements reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the consolidated financial
position and consolidated results of operations for the periods presented.
The results of operations for interim periods are not necessarily indicative of
the results to be expected for the full year.
Note 2- Summary of Significant Accounting Policies
- ---------------------------------------------------
Nature of Operations
- --------------------
The Association is a federally chartered stock savings and loan association,
which maintains insurance on deposit accounts with the Savings Association
Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation. The
Association is engaged in the business of retail banking with operations
conducted through its main office and one branch, both of which are located in
Brooklyn, New York.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and
5
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the amount of
deferred taxes, which are more likely than not to be realized. Management
believes that the allowance for loan losses is adequate and that all deferred
taxes are more likely than not to be realized. While management uses available
information to recognize losses on loans, future additions to the allowance for
loan losses may be necessary based on changes in economic conditions in the
Association's market area. The assessment of the amount of deferred tax assets
more likely than not to be realized is based upon projected future taxable
income, which is subject to continual revisions for updated information.
Note 3- Adoption of Plan of Conversion and Stock Issuance
- ----------------------------------------------------------
On April 17, 2002, the Board of Directors of the Association adopted a Plan of
Conversion ("Plan") under which Atlantic Liberty Savings, F.A. converted from a
federal mutual savings and loan association to a federal stock savings and loan
association, and formed the Company. The Plan received member and regulatory
approval and was completed on October 22, 2002 at which time the Company sold
1,710,984 shares of common stock at $10 per share and received net proceeds of
$14.8 million, exclusive of conversion expenses of $900,000 and $1.4 million to
fund the purchase of shares for our employee stock ownership plan. Approximately
50% of the net proceeds were used by the Company to acquire all of the capital
stock of the Association.
At the time of conversion, the Association established a liquidation account in
an amount equal to its total retained earnings as of March 31, 2002. The
liquidation account is maintained by the association for the benefit of eligible
account holders as of March 31, 2001 and supplemental eligible account holders
as of June 30, 2002 who continue to maintain deposit accounts at the
Association. The Association will maintain the liquidation account in accordance
with applicable federal regulations.
Note 4- Employee Stock Ownership Plan
- --------------------------------------
As part of the conversion, the Association established an employee stock
ownership plan (ESOP) for the benefit of eligible employees. The ESOP borrowed
$1,368,790 from the Company and used those funds to acquire 136,879 shares of
the Company's stock at $10 per share.
Shares held by the ESOP are released to ESOP participants based on principal and
interest repayments made by the ESOP on the loan from the Company. The loan is
secured by shares purchased with the loan proceeds and will be repaid by the
ESOP with funds from the Association's discretionary contributions to the ESOP
and earnings on the ESOP's assets. Principal and interest payments are scheduled
to occur over a ten-year period. However, in the event the Company's
contributions exceed the minimum debt service requirements, additional principal
payment will be made. The first such principal and interest payment took place
on December 31, 2002 thereby releasing 13,688 shares to eligible employees.
6
Note 5- Earnings Per Share
- ---------------------------
Amounts reported as earnings per share of common stock reflect earnings
available to stockholders for the period divided by the weighted average number
of common shares outstanding during the period. Earnings per share is calculated
beginning with the date of reorganization and, therefore, no earnings per share
is reported for periods prior to the reorganization.
Note 6- Dividend Declaration
- -----------------------------
On October 15, 2003, the Company's Board of Directors declared a quarterly cash
dividend of $0.05 per share to be paid on November 14, 2003 to shareholders of
record on October 31, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The company intends such
forward-looking statements to be covered by the safe harbor provision for
forward-looking statements contained in the Private Securities Reform Act of
1995 as amended and is including these statements for purposes of these safe
harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations of the
Company, are generally identifiable by use of the words "believe", "expect",
"intend", "anticipate", "estimate", "project", or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors that could have a material adverse
affect on the operation and future prospects of the Company and its wholly-owned
subsidiaries include, but are not limited to, changes in: interest rates;
general economic conditions; legislative/regulatory provision; monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board; the quality or composition of the loan or
investment portfolios; demand for loan products; deposit flows; competition;
demand for financial services in the Company's market area; and accounting
principles, policies and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements, and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the company's filings with the
Securities and Exchange Commission.
The following discussion compares the consolidated financial condition of
Atlantic Liberty Financial Corp. at September 30, 2003 to the Association's
financial condition at March 31, 2003 and the consolidated results of operations
for the three-month and six month periods ended September 30, 2003 and September
30, 2002. This discussion
7
should be read in conjunction with the interim financial statements and
footnotes included herein.
Comparison of Financial Condition at September 30, 2003 and March 31, 2003
Our total assets at September 30, 2003 were $159.1 million an increase of $21.9
million or 16.0% from $137.2 million at March 31, 2003. The increase reflects
increases in loans receivable, mortgage-backed securities and investment
securities primarily funded by increases in advances from the Federal Home Loan
Bank of New York (FHLB, NY) and deposits. Loans increased by $5.6 million or
5.6% to $106.3 million at September 30, 2003 from $100.7 million at March 31,
2003. Our increase in loans resulted principally from the increased one-to-four
family mortgage loan originations reflecting customers seeking to take advantage
of low market interest rates as well as an increase of $8.4 million in
commercial loans, $4.3 million of which were purchased from other financial
institutions. Mortgage-backed securities including those held to maturity and
available for sale increased $13.3 million or 58.6% to $36.0 million at
September 30, 2003 from $22.7 million at March 31, 2003 reflecting new purchases
of $19.8 million partially offset by $6.5 million of pre-payments and
amortization. Investment securities held to maturity and available for sale
increased $2.0 million to $3.0 million at September 30, 2003 from $1.0 million
at March 31, 2003. Cash and cash equivalents increased $500,000 or 8.1% to $6.7
million at September 30, 2003 from $6.2 million at March 31, 2003.
Total deposits of $109.4 million at September 30, 2003 increased $1.9
million or 1.8% from $107.5 million at March 31, 2003. Federal Home Loan Bank of
New York advances increased $19.6 million to $21.2 million at September 30, 2003
from $1.6 million at March 31, 2003 to provide funding for the increases in
interest earning assets noted above.
Equity increased $800,000 or 3.2% to $25.9 million at September 30,
2003 from $25.1 million at March 31, 2003, primarily the result of including net
income for the six months ended September 30, 2003 of $725,000.
Comparison of Results of Operations for the three-months ended September 30,
2003 and September 30, 2002 .
General. Net income for the three months ended September 30, 2003 was
$356,000, an increase of $45,000 or 14.5% from $311,000 for the three months
ended September 30, 2002. The increase in net income was primarily due to
increases of $139,000 in net interest income and $40,000 in non-interest income,
partially offset by increases of $73,000 in non-interest expense and $61,000 in
income tax expense.
Interest Income. Interest income decreased $4,000 during the
comparative three months ended September 30, 2003 and 2002. The decrease in
interest income resulted primarily from decreases of $11,000 in interest
received from loans and $22,000 on other interest-earning assets, partially
offset by increases of $21,000 in interest received on mortgage-backed
securities and $8,000 on interest received on investment securities. The Federal
Home Loan Bank of New York recently announced a suspension of their quarterly
dividend. The dividend on our Federal Home Loan Bank of New York stock has been
approximately $13,000 per quarter and the suspension thereof should not have a
material impact on our financial condition or results of operation in the
future.
8
Interest income from loans decreased $11,000 or 0.6% to $1,763,000 for
the three months ended September 30, 2003 from $1,774,000 for the same period in
2002. The decrease was due to a 63 basis point decrease in the average yield
partially offset by an increase in average loans outstanding of $8.2 million to
$104.0 million for the three months ended September 30, 2003 from $95.8 million
for the three months ended September 30, 2002. The decrease in yield reflects a
decrease in market interest rates generally.
Interest income on other interest earning assets decreased $22,000 or
44.0% to $28,000 the three months ended September 30, 2003 from $50,000 for the
same period in 2002. The decrease was due to a decrease in the average balance
of other interest earning assets to $7.0 million from $13.2 million partially
offset by an increase of 9 basis points in the average yield.
Interest income received on mortgage-backed securities increased
$21,000 or 10.9% to $213,000 for the three months ended September 30, 2003 from
$192,000 for the three months ended September 30, 2002. The average balance of
mortgage-backed securities for the periods increased by $9.1 million to $25.7
million from $16.6 million. The average yield on mortgage-backed securities
declined 131 basis points to 3.32% for the three months ended September 30, 2003
from 4.63% for the three months ended September 30, 2002, reflecting the
declining interest rate environment in 2003.
Interest income on investment securities increased $8,000 or 50.0% to
$24,000 for the three months ended September 30, 2003 from $16,000 for the three
months ended September 30, 2002. The increase was due to an increase in the
average investment securities of $500,000 to $1.5 million for the three months
ended September 30, 2003 from $1.0 million in the comparable period in 2002,
partially offset by a decrease in the average yield of 8 basis points to 6.33%
from 6.41% for the respective periods.
Interest Expense. Total interest expense decreased by $143,000 or 21.5%
to $523,000 for the three months ended September 30, 2003 from $666,000 for the
three months ended September 30, 2002. The decrease in interest expense resulted
primarily from a decrease in the average cost of our interest bearing
liabilities to 1.81% from 2.23%, reflecting the decrease in market interest
rates during the period as well as a decrease in the average balance of interest
bearing liabilities of $3.7 million to $115.5 million from $119.2 million.
Interest expense on deposits decreased $197,000 or 30.6% to $446,000
for the three months ended September 30, 2003 from $643,000 for the three months
ended September 30, 2002. The average balance of certificate of deposit accounts
decreased $8.1 million to $57.6 million for the three months ended September 30,
2003 from $65.7 million for the three months ended September 30, 2002 , and the
average cost on such accounts decreased to 2.41% from 3.07%. In addition, the
average balance of transaction and savings deposits decreased $3.7 million or
7.2% to $48.0 million for the three months ended September 30, 2003 from $51.7
million for the three months ended September 30, 2002, and the average cost on
such accounts declined 24 basis points to .82% from 1.06%, reflecting the
decline in market interest rates paid on deposits during 2002 and 2003.
9
Interest expense on Federal Home Loan Bank of New York advances was
$75,000 for the three months ended September 30, 2003 an increase of $54,000
from the $21,000 recorded in the three months ended September 30, 2002. Average
Federal Home Loan Bank of New York advances increased to $9.9 million for the
three months ended September 30, 2003, from $1.9 million in the prior period,
however, the average cost of such advances decreased 195 basis points to 3.11%
from 5.06%.
Net Interest Income. Net interest income increased $139,000 or 10.2% to
$1.5 million for the three months ended September 30, 2003 from $1.4 million for
the three months ended September 30, 2002. The increase in our net interest
income for the quarter ended September 30, 2003 compared to the prior quarter is
attributable to an $11.5 million increase in interest earning assets partially
offset by a 13 basis point decrease in our net interest spread to 4.06% from
4.19%. Our net interest margin for the quarter ended September 30, 2003 compared
to the prior period increased 4 basis points to 4.36% from 4.32%.
Provision for Loan Losses. We establish provisions for loan losses,
which are charged to operations, at a level management believes is appropriate
to absorb probable incurred credit losses in the loan portfolio. In evaluating
the level of the allowance for loan losses, management considers historical loss
experience, the nature and volume of the loan portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, peer group information, and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available or as
future events change. Based on our evaluation of these factors, management did
not make a provision for the three months ended September 30, 2003 and September
30, 2002.
We used the same methodology and generally similar assumptions in
assessing the adequacy of the allowance for both periods. During the three
months ended September 30, 2003, the Company recorded a $98,000 recovery on a
previously charged off loan. The allowance for loan losses was $582,000 or 0.54%
of loans outstanding at September 30, 2003, as compared with $444,000 or 0.44%
of loans outstanding at September 30, 2002. The allowance for loan losses
represented 198.6% of non-performing loans at September 30, 2003 and 61.3% of
non-performing loans at September 30, 2002. The level of the allowance is based
on estimates and the ultimate losses may vary from the estimates.
Management assesses the allowance for loan losses on a quarterly basis and makes
provisions for loan losses as necessary in order to maintain the adequacy of the
allowance. While management uses available information to recognize losses on
loans, future loan loss provisions may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as a part of their
examination process, periodically will review the allowance for loan losses and
may require us to recognize additional provisions based on their judgment of
information available to them at the time of their examination. The allowance
for loan losses as of September 30, 2003 is maintained at a level that
represents management's best estimate of inherent losses in the loan portfolio,
and such losses were both probable and reasonably estimable.
10
Non-Interest Income. Non-interest income increased $40,000 to $102,000
for the three months ended September 30, 2003, as compared to $62,000 for the
three months ended September 30, 2002. The increase was attributable to
increases of $10,000 in savings and checking account fees, $9,000 in loan
prepayment penalty fees and $19,000 of income on Atlantic Liberty Savings F.A.'s
investment in Bank owned Life Insurance (BOLI), which was purchased subsequent
to September 30, 2002 and as to which there is no comparable income in the prior
period.
Non-Interest Expense. Non-interest expense for the three months ended
September 30, 2003 was $965,000 compared to $892,000 for the three months ended
September 30, 2002, an increase of $73,000 or 8.2%. The increase was primarily
attributable to increases of $65,000 of ESOP expense for which there was no
similar expense in the prior year, $39,000 in legal expense, $46,000 in
miscellaneous expense, $19,000 in occupancy expense and $7,000 in director's
compensation expense partially offset by decreases of $75,000 in equipment
expense and $25,000 in salaries and benefits.
Provision for Income taxes. The provision for income taxes increased to
$286,000 for the three months ended September 30, 2003 from $225,000 for the
three months ended September 30, 2002. The increase in the provision for income
taxes is primarily due to a higher level of income before taxes of $642,000 for
the three-months ending September 30, 2003, compared with income before taxes of
$536,000 for the comparative 2002 period as well as an increase in the effective
tax rate to 44.5% for the three months ended September 30, 2003 from 41.9% in
the prior period caused principally by the non-deductibility for income tax
purposes of the excess of market value on the release date over purchase price
of the ESOP shares.
Comparison of results of operation for the six months ended September 30, 2003
and September 30, 2002.
General. Net income for the six months ended September 30, 2003 was
$725,000 an increase of $68,000 or 10.4% from $657,000 for the six months ended
September 30, 2002. The increase in net income was primarily due to increases of
$346,000 in net interest income and $57,000 in non-interest income partially
offset by increases of $227,000 in non-interest expense and $108,000 in income
tax expense.
Interest Income. Interest income decreased $23,000 during the
comparative six months ended September 30, 2003 and 2002. The decrease in
interest income resulted primarily from decreases of $22,000 in interest
received on mortgage backed securities and $42,000 on other interest-earning
assets partially offset by increases of $34,000 in interest received from loans
and $7,000 in interest on investment securities.
Interest income from mortgage-backed securities decreased $22,000 or
5.6% to $373,000 for the six months ended September 30, 2003 from $395,000 for
the same period in 2002. The decrease was due to a 168 basis point decrease in
the average yield partially offset by an increase in average mortgage-backed
securities of $7.2 million to $23.5 million for the six months ended September
30, 2003 from $16.3 for the six months ended September 30, 2002. The decrease in
yield reflects the declining interest rate environment in 2002 and 2003.
11
Interest income on other interest earning assets decreased $42,000 or
45.7% to $50,000 for the six months ended September 30, 2003 from $92,000 for
the same period in 2002. The decrease was due to a decrease in the average
balance of other interest earning assets to $6.1 million from $11.6 million
partially offset by an increase of 7 basis points in the average yield.
Interest income from loans increased $34,000 or 1.0% to $3.55 million
for the six months ended September 30, 2003 from $3.5 million for the six months
ended September 30, 2002. The average balance of loans outstanding for the
periods increased by $8.6 million to $103.1 million from $94.5 million. The
average yield on loans declined 55 basis points to 6.89% for the six months
ended September 30, 2003 from 7.44% for the six months ended September 30, 2002,
reflecting a decrease in market interest rates generally.
Interest Expense. Total interest expense decreased by $369,000 or 26.9%
to $1.0 million for the six months ended September 30, 2003 from $1.4 million
for the six months ended September 30, 2002. The decrease in interest expense
resulted primarily from a decrease in the average cost of our interest bearing
liabilities to 1.80% from 2.39%, reflecting the decrease in market interest
rates during the period as well as a decrease in the average balance of interest
bearing liabilities of $2.6 million to $111.7 million from $114.3 million.
Interest expense on deposits decreased $421,000 or 31.8% to $900,000
for the six months ended September 30, 2003 from $1.3 million for the six months
ended September 30, 2002. The average balance of certificate of deposit accounts
decreased $7.4 million to $57.9 million for the six months ended September 30,
2003 from $65.3 million for the six months ended September 30, 2002, and the
average cost on such accounts decreased to 2.45% from 3.20%. In addition,
although the average balance of transaction and savings deposits increased $1.0
million or 2.19% to $47.6 million for the six months ended September 30, 2003
from $46.6 million for the six months ended September 30, 2002, the average cost
on such accounts declined 35 basis points to .82% from 1.17%, reflecting the
decline in market interest rates paid on deposits during 2002 and 2003.
Interest expense on Federal Home Loan Bank of New York advances was
$94,000 for the six months ended September 30, 2003, an increase of $50,000 from
the $44,000 recorded in the six months ended September 30, 2002. Average Federal
Home Loan Bank of New York advances increased to $6.2 million for the six months
ended June 30, 2003 from $2.4 million in the prior period however, the average
cost on such advances decreased 75 basis points to 3.26% from 4.01%.
Net Interest Income. Net interest income increased $346,000 or 13.0% to
$3.0 million for the six months ended September 30, 2003 from $2.7 million for
the six months ended September 30, 2002. Our net interest spread increased 5
basis points to 4.20% for the six months ended September 30, 2003, from 4.15%
for the comparable period in 2002, while our net interest margin increased 16
basis points to 4.49% from 4.33%. In addition, average interest earning assets
increased $10.6 million to $134.0 million for the six months ended September 30,
2003 from $123.4 fro the six months ended September 30, 2002.
12
Provision for Loan Losses. We establish provisions for loan losses,
which are charged to operations, at a level management believes is appropriate
to absorb probable incurred credit losses in the loan portfolio. In evaluating
the level of the allowance for loan losses, management considers historical loss
experience, the nature and volume of the loan portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, peer group information, and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available or as
future events change. Based on our evaluation of these factors, management did
not make a provision for the six months ended September 30, 2003 and September
30, 2002.
We used the same methodology and generally similar assumptions in
assessing the adequacy of the allowance for both periods. During the six months
ended September 30, 2003 the Company recorded a $98,000 recovery on a previously
charged off loan. The allowance for loan losses was $582,000 or 0.54% of loans
outstanding at September 30, 2003 as compared with $444,000 or 0.44% of loans
outstanding at September 30, 2002. The allowance for loan losses represented
198.6% of non- performing loans at September 30, 2003 and 61.3% of
non-performing loans at September 30, 2002. The level of the allowance is based
on estimates and the ultimate losses may vary from the estimates.
Management assesses the allowance for loan losses on a quarterly basis
and makes provision for loan losses as necessary in order to maintain the
adequacy of the allowance. While management uses available information to
recognize losses on loans, future loan loss provisions may be necessary based on
charges in economic conditions. In addition, various regulatory agencies, as a
part of their examination process, periodically will review the allowance for
loan losses and may require us to recognize additional provision based on their
judgment of information available to them at the time of their examination. The
allowance for loan losses as of September 30, 2003 is maintained at a level that
represents management's best estimate of inherent losses in the loan portfolio,
and such losses were both probable and reasonably estimable.
Non-Interest Income. Non interest income increased $57,000 to $208,000
for the six months ended September 30, 2003, as compared to $151,000 for the six
months ended September 30, 2002. The increase was attributable to increases of
$19,000 in savings and checking account fees, $4,000 in late fees on mortgages
and $45,000 of income on Atlantic Liberty Savings F.A.'s investment in Bank
Owned Life Insurance (BOLI), which was purchased subsequent to September 30,
2002 and as to which there is no comparable income in the prior period;
partially offset by a decrease of $13,000 in loan prepayment penalty fees.
Non-Interest Expense. Non-interest expense for the six months ended
September 30, 2003 increased $227,000 or 13.5% to $1.9 million from $1.7 million
for the six months ended September 30, 2002. The increase was primarily
attributable to increases of $83,000 in salaries and employee benefits, $123,000
of ESOP expense for which there was no similar charge in the prior year, $55,000
in occupancy expense, $53,000 in legal expense and $45,000 in miscellaneous
expense, partially offset by a decrease of $137,000 in equipment expense.
13
Provision for Income taxes. The provision for income taxes increased to
$580,000 for the six months ended September 30, 2003 from $472,000 for the six
months ended September 30, 2002. The increase in the provision for income taxes
in primarily due to a higher level of income before taxes of $1.3 million for
the six months ending September 30, 2003, compared with income before taxes of
$1.1 million for the comparative 2002 period as well as an increase in the
effective tax rate to 44.4% for the six months ended September 30, 2003 from
41.8% in the prior period caused principally by the non-deductibility for income
tax purposes of the excess of market value on the release date over purchase
price of the ESOP shares.
Liquidity and Capital Resources
Liquidity. The Association must maintain an adequate level of liquidity
to ensure the availability of sufficient funds to fund loan originations and
deposit withdrawals, to satisfy other financial commitments, and to take
advantage of investment opportunities. The Association invests excess funds in
overnight deposits and other short-term interest-bearing assets to provide
liquidity to meet these needs. At September 30, 2003, cash and cash equivalents
totaled $6.7 million. At September 30, 2003, the Association had commitments to
funds loans of $6.4 million. At September 30, 2003, certificates of deposit
represented 52.5% of total deposits. The Association expects to retain these
deposit accounts. In addition, the Association could borrow up to $18.6 million
from the Federal Home Loan Bank of New York without providing additional
collateral. The Association considers its liquidity and capital resources
sufficient to meet its outstanding short-term and long-term needs.
Capital Resources. The Association is subject to various regulatory
capital requirements administered by federal regulatory agencies. The following
table summarizes the Association's regulatory capital requirements versus actual
capital as of September 30, 2003:
ACTUAL REQUIRED EXCESS
-------------------- ------------------- -------------------
(Dollars in thousands) AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- --------
Core capital
(to adjusted total assets) $ 17.9 11.4% $ 6.3 4.0% $ 11.6 7.4%
Risk-based capital
To (risk-weighted assets) $ 18.4 21.3% $ 6.9 8.0% $ 11.5 13.3%
Management of Market Risk
General. The majority of our assets and liabilities are monetary in
nature. Consequently, our most significant form of market risk is interest rate
risk. Our assets, consisting primarily of mortgage loans, have longer maturities
than our liabilities, consisting primarily of deposits. As a result, a principal
part of our business strategy is
14
to manage interest rate risk and reduce the exposure of our net interest income
to changes in market interest rates. Accordingly, our board of directors has
established an Asset/Liability Management Committee which is responsible for
evaluating the interest rate risk inherent in our assets and liabilities, for
determining the level of risk that is appropriate given our business strategy,
operating environment, capital, liquidity and performance objectives, and for
managing the risk consistent with the guidelines approved by the board of
directors. Senior management monitors the level of interest rate risk on a
regular basis and the Asset/Liability Management Committee, which consists of
senior management operating under a policy adopted by the board of directors,
meets as needed to review our asset/liability policies and interest rate risk
position. We have sought to manage our interest rate risk by more closely
matching the maturities of our interest rate sensitive assets and liabilities.
In particular, we offer one, three, and five year adjustable rate mortgage
loans, a loan product that has a fixed rate of interest for seven years and
which adjusts annually thereafter, and three and five year balloon loans. We
also invest in mortgage-backed securities which reprice within one and three
years. We do not solicit high-rate jumbo certificates of deposit or brokered
funds.
Net Portfolio Value. In past years, many savings associations have
measured interest rate sensitivity by computing the "gap" between the assets and
liabilities which are expected to mature or reprice within certain time periods,
based on assumptions regarding loan prepayment and deposit decay rates formerly
provided by the Office of Thrift Supervision. However, the Office of Thrift
Supervision now requires the computation of amounts by which the net present
value of an institution's cash flow from assets, liabilities and off balance
sheet items (the institution's net portfolio value or "NPV") would change in the
event of a range of assumed changes in market interest rates. The Office of
Thrift Supervision provides all institutions that file a Consolidated
Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with
an interest rate sensitivity report of net portfolio value. The Office of Thrift
Supervision simulation model uses a discounted cash flow analysis and an
option-based pricing approach to measure the interest rate sensitivity of net
portfolio value. Historically, the Office of Thrift Supervision model estimated
the economic value of each type of asset, liability and off-balance sheet
contract under the assumption that the United States Treasury yield curve
increases or decreases instantaneously by 100 to 300 basis points in 100 basis
point increments. However, given the current low level of market interest rates,
we did not receive a NPV calculation for an interest rate decrease of greater
than 100 basis points. A basis point equals one-hundredth of one percent, and
100 basis points equals one percent. An increase in interest rates from 3% to 4%
would mean, for example, a 100 basis point increase in the "Change in Interest
Rates" column below. The Office of Thrift Supervision provides us the results of
the interest rate sensitivity model, which is based on information we provide to
the Office of Thrift Supervision to estimate the sensitivity of our net
portfolio value.
The table below sets forth, as of June 30, 2003, the latest date for
which the Office of Thrift Supervision has provided Atlantic Liberty Savings,
F.A. an interest rate sensitivity report of net portfolio value, the estimated
changes in our net portfolio value that would result from the designated
instantaneous changes in the United States Treasury yield curve.
15
Net Portfolio Value as a %of Present
Value of
Net Portfolio Value Assets/Liabilities
- -------------------------------------------------------- --------------------------------
Change in
Interest Rates Estimated Amount of
(basis points) NPV Change Percent NPV Ratio Change
- -------------- --------- --------- ------- --------- ------------------
(Dollars in Thousands)
+300 $ 21,807 $(4,796) (18)% 15.45% (257) basis points
+200 23,744 (2,859) (11) 16.54 (148) basis points
+100 25,500 (1,103) (4) 17.48 ( 54) basis points
0 26,603 -- -- 18.02 -- basis points
- -100 27,164 561 +2 18.25 +22 basis points
The table above indicates that at June 30, 2003, in the event of a 100
basis point decrease in interest rates, we would experience a 2% increase in net
portfolio value. In the event of a 200 basis point increase in interest rates,
we would experience an 11% decrease in net portfolio value.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in net portfolio value require
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest rates. In this
regard, the net portfolio value table presented assumes that the composition of
our interest-sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration or repricing of specific assets and
liabilities. Accordingly, although the net portfolio value table provides an
indication of our interest rate risk exposure at a particular point in time,
such measurements are not intended to and do not provide a precise forecast of
the effect of changes in market interest rates on its net interest income and
will differ from actual results.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
the Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this quarterly
report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
quarterly report, the Company's disclosure controls and procedures are effective
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. There has been no change
in the Company's internal control over financial reporting during the most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings as a defendant
other than routine legal proceedings occurring in the ordinary course of
business. At September 30, 2003, we were not involved in any legal proceedings,
the outcome of which would be material to our financial condition or results of
operations.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the annual meeting of stockholders held on August 20, 2003, the
following proposals were voted upon and approved by the stockholders:
Proposal No. 1: Resolved, that Thomas M. DeMartino be elected to serve
as a director of the company for a term of three years, or until his
successor has been elected and qualified.
The voting as to Proposal No. 1 was as follows:
For Withheld
--------- --------
Thomas M. DeMartino 1,440,916 8,546
Proposal No. 2: Resolved, that the appointment of Radics & Co., LLC to
act as the Company's auditors for the fiscal year ending March 31, 2004
is hereby ratified.
The voting as to Proposal No.2 was as follows:
For Against Withheld
--------- ------- --------
Radics & Co., LLC 1,436,306 7,293 5,863
17
ITEM 5. OTHER INFORMATION
At its October meeting, the Board of Directors of Atlantic Liberty
Financial Corp. declared a quarterly cash dividend of $0.05 per share
to be paid on November 14, 2003 to shareholders of record on October
31, 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 31.1
Exhibit 31.2
Exhibit 32 Sarbanes-Oxley Certifications pursuant to Section 906
On October 23, 2003 we filed a Form 8K which contained our Press
Release of earnings for the quarter ended September 30, 2003.
18
SIGNATURES
Pursuant to the requirement 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.
Atlantic Liberty Financial Corp.
Date: November 12, 2003 /s/ BARRY M. DONOHUE
-------------------------------------
Barry M. Donohue
President and Chief Executive Officer
Date: November 12, 2003 /s/ WILLIAM M. GILFILLAN
-------------------------------------
William M. Gilfillan
Chief Financial Officer and Corporate
Secretary
19