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 December 31, 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 December 31, 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 1-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-16
Item 3. Controls and Procedures 17
PART II - Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18-33
SIGNATURES
ITEM 1. FINANCIAL STATMENTS
Atlantic Liberty Financial Corp.
Consolidated Statements of Financial Condition
(in thousands of dollars)
(unaudited)
At At
December 31, March 31,
2003 2003
------------ ------------
ASSETS
Cash and cash equivalents
Cash and amounts due from depository Institutions $ 1,855 $ 1,773
Interest bearing deposits 4,098 4,464
------------ ------------
Total cash and cash equivalents 5,953 6,237
------------ ------------
Securities available for sale 3,228 1,703
Investment securities held to maturity 2,018 1,024
Mortgage-backed securities held to maturity 32,352 21,002
Loans receivable, net 109,930 100,655
Premises and equipment 1,516 1,616
Federal Home Loan Bank of New York Stock 1,160 902
Interest receivable 792 672
Deferred income tax 484 307
Investment in real estate 78 78
Other assets 3,296 3,000
------------ ------------
Total Assets $ 160,807 $ 137,196
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 107,635 $ 107,515
Federal Home Loan Bank of New York advances 23,200 1,600
Advance payments by borrowers for taxes and insurance 1,087 886
Other liabilities 2,642 2,104
------------ ------------
Total Liabilities 134,564 112,105
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 16,254 16,141
Retained Earnings-substantially restricted 10,888 9,976
Unearned ESOP Shares (1,095) (1,197)
Accumulated other comprehensive income 25 0
------------ ------------
Total Stockholders' Equity 26,243 25,091
------------ ------------
Total liabilities and Stockholders' Equity $ 160,807 $ 137,196
============ ============
See notes to consolidated financial statements.
1
Atlantic Liberty Financial Corp.
Statements of Income
(in thousands of dollars)
(unaudited)
Three Months Nine Months
Ended December 31 Ended December 31
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Interest and dividend income
Loans $ 1,791 $ 1,811 $ 5,341 $ 5,327
Mortgage backed securities 319 203 692 598
Investment Securities 55 16 95 49
Other interest-earning assets 9 86 59 178
---------- ---------- ---------- ----------
Total interest income 2,174 2,116 6,187 6,152
---------- ---------- ---------- ----------
Interest expense
Deposits 429 588 1,331 1,911
Advances 150 19 243 63
Escrow 3 3 11 8
---------- ---------- ---------- ----------
Total interest expense 582 610 1,585 1,982
---------- ---------- ---------- ----------
Net interest income 1,592 1,506 4,602 4,170
Provision for loan losses 0 40 0 40
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 1,592 1,466 4,602 4,130
---------- ---------- ---------- ----------
Non-interest income
Service fees 51 49 155 154
Miscellaneous 45 28 150 74
---------- ---------- ---------- ----------
Total non-interest income 96 77 305 228
---------- ---------- ---------- ----------
Non-interest expenses
Salaries and employee benefits 617 672 1,733 1,582
Directors Compensation 47 40 119 106
Net occupancy expenses 39 37 119 61
Equipment 108 153 276 458
Advertising 10 10 26 26
Federal Insurance Premium 4 5 14 14
Legal fees 34 15 107 35
Miscellaneous 181 160 560 495
---------- ---------- ---------- ----------
Total non-interest expenses 1,040 1,092 2,954 2,777
---------- ---------- ---------- ----------
Income before income taxes 648 451 1,953 1,581
Income tax expense 302 209 882 681
---------- ---------- ---------- ----------
Net income $ 346 $ 242 $ 1,071 $ 900
========== ========== ========== ==========
Earnings per share
Basic and diluted $ 0.22 $ 0.15 $ 0.67 n/a
Weighted average shares 1,599,214 1,574,301 1,595,804 n/a
Fully diluted average shares 1,607,020 n/a 1,603,610 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
Other
Common Paid-in Retained Unearned Comprehensive
Stock Capital Earnings ESOP Shares Income/(loss) Total
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 2003 $ 171 $ 16,141 $ 9,976 $ (1,197) $ -- $ 25,091
Comprehensive Income
Net income -- -- 1,071 -- -- 1,071
Change in net unrealized gain (loss) -- -- -- -- 25 25
-----------
Total comprehensive income -- -- -- -- -- 1,096
ESOP shares committed to be released -- 113 -- 102 -- 215
Dividends paid ($.10 per share) (159) (159)
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31,2003 $ 171 $ 16,254 $ 10,888 $ (1,095) $ 25 $ 26,243
=========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements
3
Atlantic Liberty Financial Corp.
Consolidated Statements of Cash Flows
(in thousands of dollars)
(unaudited)
Nine Months Ended
Cash flows from operating activities December 31,
- ------------------------------------ --------------------
2003 2002
-------- --------
Net income $ 1,071 $ 900
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 124 100
Provision for loan losses -- 40
Net accretion of premiums,
discounts and deferred loan fees 250 (54)
Deferred income taxes (177) (47)
ESOP compensation expense 189 184
Recognition and Retention Plan expense 26 --
(Increase) in interest receivable (120) (78)
(Increase) in other assets (296) (1,848)
Increase in other liabilities 538 1,583
-------- --------
Net cash provided by operating activities 1,605 780
-------- --------
Cash flows from investing activities:
Purchases of:
Investment securities held to maturity (1,000) --
Investment securities available for sale (2,000) --
Mortgage-backed securities held to maturity (19,816) (14,323)
Proceeds of maturities,calls and principal repayments on:
Mortgage-backed securities held to maturity 8,291 5,483
Mortgage-backed securities available for sale 490 --
(Increase) in loans receivable (9,334) (8016)
Additions to premises and equipment (24) (370)
Purchase of Federal Home Loan Bank of New York Stock (258) --
-------- --------
Net cash (used in) investing activities (23,651) (17,226)
-------- --------
Cash flows from financing activities:
Increase in deposits 120 71
Increase in advance payments
by borrowers for taxes and insurance 201 155
Increase (decrease) in Federal Home Loan Bank advances 21,600 (400)
Net proceeds from stock conversion -- 14,841
Cash dividends paid (159) --
-------- --------
Net cash provided by financing activities 21,762 14,667
-------- --------
Net (decrease) in cash and cash equivalents (284) (1,779)
Cash and cash equivalents at beginning of period 6,237 9,941
-------- --------
Cash and cash equilvalents at end of period $ 5,953 $ 8,162
======== ========
Supplemental disclosures of cash flow information Cash paid for:
Interest $ 1,585 $ 1,976
-------- --------
Federal, state and city income taxes $ 865 $ 855
-------- --------
See notes to consolidated financial statements.
4
Atlantic Liberty Financial Corp.
Notes to Consolidated Financial Statements
December 31, 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 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.
5
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- 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. Principal and interest payments took place on December 31,
2002 and December 29, 2003 resulting in 13,688 shares being released to eligible
employees in each year.
6
Note 5- Incentive Stock Benefit Plan
- ----------------------------------------
On November 19, 2003, the stockholders approved the Company's 2003
Incentive Stock Benefit Plan. In accordance with the terms of the Plan, 256,648
shares of common stock of the company, in the aggregate, are reserved for
issuance, which shares shall be available for issuance pursuant to the exercise
of stock options or as restricted stock awards.
Note 6- Earnings Per Share
- ------------------------------
Amounts reported as basic 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. Diluted earnings per share,
which did not differ from basic earnings per share, give effect to stock awards
and option securities exercisable into common stock, which would have a dilution
effect. 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-7 Dividend Declaration
- --------------------------------
On January 15, 2004, the Company's Board of Directors declared a quarterly cash
dividend of $0.05 per share to be paid on February 13, 2004 to shareholders of
record on January 30, 2004.
Note 8- Recent Development
- ------------------------------
At its January meeting, the Company's Board of Directors approved a Stock
Repurchase Program to acquire up to 85,550 shares of the Company's common stock,
which represents approximately 5% of the outstanding common stock.
7
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 December 31, 2003 to the Association's
financial condition at March 31, 2003 and the consolidated results of operations
for the three-month and nine-month periods ended December 31, 2003 and December
31, 2002. This discussion should be read in conjunction with the interim
financial statements and footnotes included herein.
Comparison of Financial Condition At December 31, 2003 and March 31, 2003
Our total assets at December 31, 2003 were $160.8 million an increase
of $23.6 million or 17.2% from $137.2 million at March 31, 2003. The increase
reflects growth 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 $9.3 million or
9.2% to $109.9 million at December 31, 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 as new customers sought to take advantage of
low market interest rates as well as an increase of $12.5 million in commercial
loans, $5.0 million of which were purchased from other financial institutions.
Mortgage-backed securities including those held to maturity and available for
sale increased $10.9 million or 48.0% to $33.6 million at December 31, 2003 from
8
$22.7 million at March 31., 2003 reflecting new purchases of $19.8 million
partially offset by $8.9 million of pre-payments and amortization. Investment
securities held to maturity and available for sale, increased $3.0 million to
$4.0 million at December 31, 2003 from $1.0 million at March 31, 2003. Cash and
cash equivalents decreased $200,000 or 3.2% to $6.0 million at December 31, 2003
from $6.2 million at March 31, 2003.
Total deposits of $107.6 million at December 31, 2003 increased $100,000 or 0.1%
from $107.5 million at March 31, 2003. Federal Home Loan bank of New York
advances increased $21.6 million to $23.2 million at December 31, 2003 from $1.6
million at March 31, 2003 to provide funding for the increases in interest
earning assets noted above.
Stockholders' equity increased $1.2 million or 4.6% to $26.2 million at December
31, 2003 from $25.1 million at March 31, 2003, primarily the result of net
income of $1.1 million for the nine-months ended December 31, 2003.
Comparison of Results of Operations for the three-months ended December 31, 2003
and December 31, 2002.
General. Net income for the three months ended December 31, 2003 was
$346,000 an increase of $104,000 or 43.0% form $242,000 for the three months
ended December 31, 2002. The increase in net income was primarily due to
increases of $86,000 in net interest income and $19,000 in non-interest income,
decreases of $52,000 in non-interest expense and $40,000 in the provision for
loan losses, partially offset by an increase of $93,000 in income tax expense.
Interest Income. Interest income increased $58,000 during the
comparative three months ended December 31, 2003 and 2002. The increase in
interest income resulted primarily from increases of $116,000 in interest
received on mortgage backed securities and $39,000 in interest received on
investment securities, partially offset by decreases of $20,000 in interest
received from loans and $77,000 on interest received on other interest earning
assets. The Federal Home Loan Bank of New York announced in September, 2003 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. In January, 2004 The Federal Home Loan
Bank of New York reinstated the dividend at a lower rate.
Interest income received on mortgage-backed securities increased
$116,000 or 57.1% to $319,000 for the three months ended December 31, 2003 from
$203,000 for the three months ended December 31, 2002. The average balance of
mortgage-backed securities for the periods increased by $13.2 million to $34.9
million from $21.7 million. The average yield on mortgage-backed securities
declined 9 basis points to 3.66% for the three months ended December 31, 2003
from 3.75% for the three months ended December 31, 2002, reflecting the
declining interest rate environment in 2003.
Interest income on investment securities increased $39,000 or 243.8%
to $55,000 for the three months ended December 31, 2003 from $16,000 for the
three months ended December 31, 2002. The increase was due to an increase of
9
$2.6 million in the average balance of investment securities to $3.6 million for
the three months ended December 31, 2003 from $1.0 million in the comparable
period in 2002, partially offset by a decrease in the average yield of 17 basis
points to 6.06% from 6.23% for the respective periods.
Interest income from loans decreased $20,000 or 1.1% to $1,791,000
for the three months ended December 31, 2003 from $1,811,000 for the same period
in 2002. The decrease was due to a 70 basis point decrease in the average yield,
partially offset by an increase in average loans outstanding of $9.3 million to
$108.1 million for the three months ended December 31, 2003 from $98.8 million
for the three months ended December 31, 2002. The decrease in yield reflects a
decrease in market interest rates generally.
Interest income on other interest earning assets decreased $77,000
or 89.5% to $9,000 for the three months ended December 31, 2003 from $86,000 for
the same period in 2002. The decrease was due to a decrease in the average
balance of other interest earning assets to $4.4 million from $21.5 million as
well as a decrease of 79 basis points in the average yield.
Interest Expense. Total interest expense decreased by $28,000 or
4.6% to $582,000 for the three months ended December 31, 2003 from $610,000 for
the three months ended December 31, 2002. The decrease in interest expense
resulted primarily from a decrease in the average cost of our interest bearing
liabilities to 1.81% from 1.97%, reflecting the decrease in market interest
rates during the period, partially offset by an increase of $4.8 million in
average total interest bearing liabilities to $128.8 million from $124.0
million.
Interest expense on deposits decreased $159,000 or 27.0% to $429,000
for the three months ended December 31, 2003 from $588,000 for the three months
ended December 31, 2002. The average balance of certificate of deposit accounts
decreased $4.4 million to $56.9 million for the three months ended December 31,
2003 from $61.3 million for the three months ended December 31, 2002, and the
average cost on such accounts decreased to 2.30% from 2.81%. In addition, the
average balance of transaction and savings deposits decreased $11.2 million or
18.6% to $49.0 million for the three months ended December 31, 2003 from $60.2
million for the three months ended December 31, 2002, and the average cost on
such accounts declined 23 basis points to 0.82% from 1.05%, 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
$150,000 for the three months ended December 31, 2003, an increase of $131,000
from the $19,000 recorded in the three months ended December 31, 2002. Average
Federal Home Loan Bank of New York advances increased to $22.1 million for the
three months ended December 31, 2003, from $1.6 million in the prior period,
however, the average cost of such advances decreased 203 basis points to 2.72%
from 4.75%.
Net Interest Income. Net interest income increased $86,000 or 5.7%
to $1.6 million for the three months ended December 31, 2003 from $1.5 million
for the three months ended December 31, 2002. The increase in our net interest
income for the quarter ended December 31, 2003 compared to the prior quarter is
attributable to an $8.1 million increase in interest earning assets. Our net
interest spread was 3.95% for both periods. Our net interest margin for the
quarter ended December 31, 2003 compared to the prior period increased 1 basis
point to 4.22% from 4.21%.
10
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 December 31, 2003, while we
established a provision of $40,000 for the three months ended December 31, 2002.
We used the same methodology and generally similar assumptions in
assessing the adequacy of the allowance for both periods. The allowance for loan
losses was $582,000 or .53% of loans outstanding at December 31, 2003 as
compared with $484,000 or .48% of loans outstanding at December 31, 2002. The
allowance for loan losses represented 481.7% of non-performing loans at December
31, 2003 and 386.4% of non-performing loans at December 31, 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 December 31, 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 $19,000 to
$96,000 for the three months ended December 31, 2003, as compared to $77,000 for
the three months ended December 31, 2002. The increase was attributable to
$24,000 of income on Atlantic Liberty Savings, F.A.'s investment in Bank owned
Life Insurance (BOLI) as to which there is no comparable income in the prior
period, partially offset by a decrease of $5,000 in saving account fees.
Non-Interest Expense. Non-interest expense for the three months
ended December 31, 2003 was $1,040,000 compared to $1,092,000 for the three
months ended December 31, 2002, a decrease of $52,000 or 4.8%. The decrease was
primarily attributable to decreases of $55,000 in salaries and employee benefits
and $45,000 in equipment expense, partially offset by increases of $19,000 in
legal expense, $21,000 in miscellaneous expense and $7,000 in director's
compensation.
Provision for Income Taxes. The provision for income taxes increased
to $302,000 for the three months ended December 31, 2003 from $209,000 for the
three months ended December 31, 2002. The increase in the provision for income
taxes is primarily due to a higher level of income before taxes of $648,000 for
the three months ended December 31, 2003, compared with income before taxes of
$451,000 for the comparative 2002 period.
11
Comparison of Operating Results for the nine-months ended December 31, 2003 and
December 2002.
General. Net income for the nine months ended December 31, 2003 was
$1,071,000 an increase of $171,000 or 19.0% from $900,000 for the nine months
ended December 31, 2002. The increase in net income was primarily due to
increases of $432,000 in net interest income and $77,000 in non-interest income,
as well as a decrease of $40,000 in the provision for loan losses, partially
offset by increases of $177,000 in non-interest expense and $201,000 in income
tax expense.
Interest Income. Interest income increased $35,000 during the
comparative nine months ended December 31, 2003 and 2002. The increase in
interest income resulted primarily from increases of $14,000 in interest
received from loans, $94,000 in interest received on mortgage-backed securities
and $46,000 in interest on investment securities, partially offset by a decrease
of $119,000 of interest received on other interest earning assets.
Interest income from loans increased $14,000 or 0.3% to $5.34
million for the nine months ended December 31, 2003 from $5.32 million for the
nine months ended December 31, 2002. The average balance of loans outstanding
for the periods increased by $8.8 million to $104.8 million from $96.0 million.
The average yield on loans declined 60 basis points to 6.80% for the nine months
ended December 31, 2003 from 7.40% for the nine months ended December 31, 2002,
reflecting a decrease in market interest rates generally.
Interest income from mortgage-backed securities increased $94,000 or
15.7% to $692,000 for the nine months ended December 31, 2003 from $598,000 for
the same period in 2002. The increase was due to an increase in average
mortgage-backed securities of $9.2 million to $27.3 million for the nine months
ended December 31, 2003 from $18.1 million for the nine months ended December
31, 2002, partially offset by a 103 basis point decrease in the average yield.
The decrease in yield reflects the declining interest rate environment in 2002
and 2003.
Interest income on investment securities increased $46,000 or 93.4%
to $95,000 for the nine months ended December 31, 2003 from $49,000 for the nine
months ended December 31, 2002. The increase was due to an increase in average
investment securities of $1.1 million to $2.1 million for the nine months ended
December 31, 2003 from $1.0 million in the comparable period in 2002, partially
offset by a decrease in the average yield of 13 basis points to 6.18% from 6.31%
for the respective periods.
Interest income on other interest earning assets decreased $119,000
or 66.9% to $59,000 for the nine months ended December 31, 2003, from $178,000
for the same period in 2002. The decrease was due to a decrease in the average
balance of other interest earning assets to $4.9 million from $14.9 million,
partially offset by an increase of 4 basis points in the average yield.
Interest Expense. Total interest expense decreased by $397,000 or
20.0% to $1.6 million for the nine months ended December 31, 2003 from $2.0
million for the nine months ended December 31, 2002. The decrease in interest
expense resulted primarily from a decrease in the average cost of our interest
bearing liabilities to 1.79% from 2.24%, reflecting the decrease in market
interest rates during the period as well as a decrease in the average balance of
interest bearing liabilities of $100,000 to $117.8 million from $117.9 million.
12
Interest expense on deposits decreased $580,000 or 30.4% to $1.3
million for the nine months ended December 31, 2003 from $1.9 million for the
nine months ended December 31, 2002. The average balance of certificate of
deposit accounts decreased $6.3 million to $57.6 million for the nine months
ended December 31, 2003 from $63.9 million for the nine months ended December
31, 2002, and the average cost on such accounts decreased to 2.40% from 3.07%.
In addition, the average balance of transaction and savings deposits decreased
$2.9 million or 5.7% to $48.4 million for the nine months ended December 31,
2003 from $51.3 million for the nine months ended December 31, 2002, and the
average cost on such accounts declined 33 basis points to 0.81% from 1.14%
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
$243,000 for the nine months ended December 31, 2003, an increase of $180,000
from the $63,000 recorded in the nine months ended December 31, 2002. Average
Federal Home Loan Bank of New York advances increased to $11.1 million for the
nine months ended December 31, 2003, from $1.8 million in the prior period
however, the average cost on such advances decreased 171 basis points to 2.91%
from 4.62%.
Net Interest Income. Net interest income increased $432,000 or 10.4% to $4.6
million for the nine months ended December 31, 2003 from $4.2 million for the
nine months ended December 31, 2002. Our net interest spread increased 7 basis
points to 4.14% for the nine months ended December 31, 2003, from 4.07% for the
comparable period in 2002, while our net interest margin increased 13 basis
points to 4.41% from 4.28% . In addition, average interest earning assets
increased $9.1 million to $139.0 million for the nine months ended December 31,
2003 from $129.9 for the nine months ended December 31, 2002.
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 nine months ended December 31, 2003 while we
established a provision of $40,000 for the nine months ended December 31, 2002.
We used the same methodology and generally similar assumptions in
assessing the adequacy of the allowance for both periods. The allowance for loan
losses was $582,000 or .0.53% of loans outstanding at December 31, 2003 as
compared with $484,000 or .0.48% of loans outstanding at December 31, 2002. The
allowance for loan losses represented 481.7% of non-performing loans at December
31, 2003 and 386.4% of non-performing loans at December 31, 2002. The level of
the allowance is based on estimates and the ultimate losses may vary from the
estimates.
13
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 an
integral part of their examination process, periodically 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 December 31, 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 $77,000 to
$305,000 for the nine months ended December 31, 2003, as compared to $228,000
for the nine months ended December 31, 2002. The increase was attributed to
increases of $22,000 in savings and checking account fees and $69,000 of income
on Atlantic Liberty Savings, F.A. investment in Bank Owned Life Insurance
(BOLI), 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 nine months ended
December 31, 2003 increased $177,000 or 6.4% to $3.0 million from $2.8 million
of the nine months ended December 31, 2002. The increase was primarily
attributable to increases of $151,000 in salaries and employee benefits, $13,000
in directors' compensation, $58,000 in occupancy expense, $72,000 in legal
expense and $65,000 in miscellaneous expense, partially offset by a decrease of
$182,000 in equipment expense.
Provision for Income Taxes. The provision for income taxes increased
to $882,000 for the nine months ended December 31, 2003 from $681,000 for the
nine months ended December 31, 2002. The increase in the provision for income
taxes is primarily due to our higher level of income before taxes of $2.0
million for the nine months ended December 31, 2003, compared with $1.6 million
for the comparative 2002 period as well as an increase in the effective tax rate
to 45.2% for the nine months ended December 31, 2003 from 43.1% 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 December 31, 2003, cash and cash
equivalents totaled $6.0 million. At December 31, 2003, the Association had
commitments to funds loans of $2.0 million. At December 31, 2003, certificates
of deposit represented 52.4% of total deposits. The Association expects to
retain these deposit accounts. In addition, the Association could borrow up to
$16.2 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.
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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 December 31, 2003:
ACTUAL REQUIRED EXCESS
------------------- ------------------ ------------------
(Dollars in thousands) AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ -----
Core capital
(to adjusted total assets) $ 18.3 11.6% $ 6.3 4.0% $ 12.0 7.6%
Risk-based capital
To (risk-weighted assets) $ 18.8 21.2% $ 7.1 8.0% $ 11.7 13.2%
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 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
15
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 September 31, 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 form the
designated instantaneous changes in the United States Treasury yield curve.
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 $ 18,833 $(7,046) (27)% 12.07% (357) basis points
+200 21,449 (4,430) (17) 13.47 (218) basis points
+100 23,881 (1,999) (8) 14.69 ( 95) basis points
0 25,879 -- -- 15.64 -- basis points
- -100 26,995 1,116 +4 16.10 +46 basis points
The table above indicates that at September 30, 2003, in the event
of a 100 basis point decrease in interest rates, we would experience a 4%
increase in net portfolio value. In the event of a 200 basis point increase in
interest rates, we would experience a 17% 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.
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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.
17
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 December 31, 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 special meeting of stockholders held on November
19, 2003, the following proposal was voted upon and
approved by the stockholders:
Resolved, that the adoption of the Atlantic Liberty
Financial Corp., 2003 Incentive Stock Benefit Plan is
hereby approved.
The voting as to the proposal was as follows:
For Against Withheld
--------- -------- ---------
860,056 149,058 8,202
ITEM 5. OTHER INFORMATION
At its January meeting, the Board of Directors of
Atlantic Liberty Financial Corp. declared a quarterly
cash dividend of $0.05 per share to be paid on February
13, 2004 to shareholders of record on January 30, 2004.
At its January meeting, the Company's Board of Directors
approved a Stock Repurchase Program to acquire up to
85,550 shares of Company's common stock, which represent
approximately 5% of the outstanding common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 10.1 Atlantic Liberty Financial Corp. 2003
Incentive Stock Benefit Plan
Exhibit 31.1
Exhibit 31.2
Exhibit 32 Sarbanes-Oxley Certifications pursuant to
Section 906
On January 26, 2004 we filed a Form 8-K which contained
our Press Release of earnings for the quarter ended
December 31, 2003.
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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: February 6, 2004 /s/ BARRY M. DONOHUE
---------------------------------------
Barry M. Donohue
President and Chief Executive Officer
Date: February 6, 2004 /s/ WILLIAM M. GILFILLAN
---------------------------------------
William M. Gilfillan
Chief Financial Officer and Corporate
Secretary
19