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, 2002
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, 2002, 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 8-17
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
SIGNATURES 19
ITEM 1. FINANCIAL STATEMENTS
ATLANTIC LIBERTY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
At At
December 31, March 31,
2002 2002
-------- --------
ASSETS
Cash and cash equivalents
Cash and amounts due from depository Institutions $ 1,921 $ 785
Interest bearing deposits 6,241 9,156
-------- --------
Total cash and cash equivalents 8,162 9,941
-------- --------
Investment securities held to maturity 1,027 1,032
Mortgage-backed securities held to maturity 24,600 15,758
Loans receivable, net 100,890 92,856
Premises and equipment 1,623 1,353
Federal Home Loan Bank of New York Stock 902 902
Interest receivable 776 698
Deferred income tax 351 305
Investment in real estate 78 78
Other assets 2,969 1,121
-------- --------
Total Assets $141,378 $124,044
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $111,061 $110,990
Federal Home Loan Bank of New York advances 1,600 2,000
Advance payments by borrowers for taxes and insurance 1,124 969
Other liabilities 2,879 1,296
-------- --------
Total Liabilities 116,664 115,255
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 -
Paid in Capital 16,086 -
Unearned ESOP Shares (1,232) -
Retained Earnings-substantially restricted 9,689 8,789
-------- --------
Total Stockholders' Equity 24,714 8,789
-------- --------
Total liabilities and Stockholders' Equity $141,378 $124,044
======== ========
See notes to consolidated financial statements.
-1-
ATLANTIC LIBERTY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Nine Months
Ended December 31, Ended December 31,
------------------ ------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income
Loans $ 1,811 $ 1,703 $ 5,327 $ 5,010
Mortgage backed securities 203 217 598 732
Investments held to maturity 16 16 49 61
Other interest-earning assets 86 45 178 191
-- -- --- ---
Total interest income 2,116 1,981 6,152 5,994
----- ----- ----- -----
Interest expense
Deposits 588 903 1,911 3,023
Advances 19 22 63 30
Escrow 3 3 8 8
- - - -
Total interest expense 610 928 1,982 3,061
--- --- ----- -----
Net interest income 1,506 1,053 4,170 2,933
Provision for loan losses 40 (8) 40 (8)
-- -- -- --
Net interest income after provision for loan losses 1,466 1,061 4,130 2,941
----- ----- ----- -----
Non-interest income
Service fees 49 50 154 114
Miscellaneous 28 21 86 81
-- -- -- --
Total non-interest income 77 71 240 195
-- -- --- ---
Non-interest expenses
Salaries and employee benefits 488 383 1,399 1,132
ESOP Expense 184 0 184 0
Directors Compensation 40 58 118 180
Net occupancy expenses 37 8 61 36
Equipment 153 67 457 204
Advertising 10 16 26 40
Federal Insurance Premium 5 5 14 23
Legal fees 15 11 35 66
Miscellaneous 160 139 495 386
--- --- --- ---
Total non-interest expenses 1,092 687 2,789 2,067
----- --- ----- -----
Income before income taxes 451 445 1,581 1,069
Income tax expense 209 189 681 451
--- --- --- ---
Net income $242 $256 $900 $618
==== ==== ==== ====
Earnings per share
Basic and diluted $ 0.15 n/a n/a n/a
Weighted average shares 1,574,301 n/a n/a n/a
See notes to consolidated financial statements.
-2-
ATLANTIC LIBERTY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES 2002 2001
- ------------------------------------ ------------ -----------
Net income $ 900 $ 618
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 100 89
Provision for loan losses 40 --
Net accretion of premiums,
discounts and deferred loan fees (54) (42)
Deferred inocme taxes (47) (109)
ESOP compensation expense 184 --
(Increase) decrease in interest receivable (78) 87
(Increase) decrease in other assets (1,848) 578
Increase in other liabilities 1,583 253
------------ -----------
Net cash provided by operating activities 780 1,474
------------ -----------
Cash flows from investing activities:
Purchases of Mortgage-backed securities held to maturity (14,323) (2,032)
Purchases of Invesment Securities held to maturity -- (1,036)
Proceeds of maturities,calls and principal repayments on:
Investment securities held to maturity 0 4,000
Mortgage-backed securities held to maturity 5,483 6,469
Net change in loans receivable (8,016) (7,953)
Additions to premises and equipment (370) (34)
------------ -----------
Net cash (used in) investing activities (17,226) (586)
------------ -----------
Cash flows from financing activities:
Increase in deposits 71 2,394
Increase in advance payments
by borrowers for taxes and insurance 155 101
(Decrease) increase on Federal Home Loan Bank of New York advances (400) 2,000
Net proceeds from stock conversion 14,841 --
------------ -----------
Net cash provided by investing activities 14,667 4,495
------------ -----------
Net (decrease) increase in cash and cash equivalents (1,779) 5,383
Cash and cash equivalents at beginning of period 9,941 4,689
------------ -----------
Cash and cash equilvalents at end of period $ 8,162 $ 10,072
============ ===========
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 1,976 $ 3,062
------------ -----------
Federal, state and city income taxes $ 855 $ 677
------------ -----------
See notes to consolidated financial statements.
-3-
ATLANTIC LIBERTY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
Unearned
Common Paid-in ESOP Retained
Stock Capital Shares Earnings Total
------ -------- -------- -------- --------
Balance at March 31, 2002 -- -- -- $ 8,789 $ 8,789
Issuance of common stock, net of issuance costs 171 16,039 (1,369) -- 14,841
ESOP shares earned -- 47 137 -- 184
Net income -- -- -- 900 900
------ -------- -------- ------- --------
Balance at December 31, 2002 $ 171 $ 16,086 $ (1,232) $ 9,689 $ 24,714
====== ======== ======== ======= ========
See notes to consolidated financial statements.
-4-
ATLANTIC LIBERTY FINANCIAL CORP.
Notes to Consolidated Financial Statements
December 31, 2002
(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, 2003. 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.
5
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
- -------------------------------------------------------------
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.
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 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 of Conversion ("Plan") was
approved by the Office of Thrift Supervision (OTS) and by the Association's
members at a Special Meeting of Members held on October 4, 2002.
On October 22, 2002 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
after the conversion. The Association will maintain the liquidation account in
accordance with applicable federal regulations.
6
NOTE 4- EMPLOYEE STOCK OWNERSHIP PLAN
- ----------------------------------------
As part of the conversion transaction, 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 to eligible employees.
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.
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, 2002 to the Association's
financial condition at March 31, 2002 and the consolidated results of operations
for the three-month and nine-month periods ended December 31, 2002 to the same
periods in 2001. This discussion should be read in conjunction with the interim
financial statements and footnotes included herein.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2002 AND MARCH 31, 2002
Our total assets at December 31, 2002 were $141.4 million an increase of
$17.4 million from the $124.0 million at March 31, 2002. The increase reflects
growth in loans receivable and mortgage-backed securities as well as our
investment in Bank Owned Life Insurance primarily funded by the investment of
the net proceeds provided by our
8
stock offering in October 2002 and a decrease in cash and cash equivalents.
Loans increased by $8.0 million or 8.6% to $100.9 million at December 31, 2002
from $92.9 million at March 31, 2002. Our increase in loans resulted principally
from increased one-to-four family mortgage loan originations reflecting
customers seeking to take advantage of low market interest rates as well as
increased new originations of commercial real estate loans. Mortgage-backed
securities increased $8.8 million or 55.7% to $24.6 million at December 31, 2002
from $15.8 million at March 31, 2002 reflecting new purchases of $14.3 million
partially offset by pre-payments and amortization of $5.5 million. Other assets
includes a $2.0 million investment in Bank Owned Life Insurance at December 31,
2002. There was no similar investment at March 31, 2002. Cash and cash
equivalents decreased $1.7 million or 17.2% to $8.2 million at December 31, 2002
from $9.9 million at March 31, 2002 to provide funding for loan originations,
purchase of mortgage-backed securities and the BOLI investment.
Total deposits of $111.1 million were relatively unchanged at December 31,
2002 from $111.0 million at March 31, 2002.
Federal Home Loan Bank of New York advances decreased $400,000 to $1.6
million at December 31, 2002 from $2.0 million at March 31, 2002, reflecting
repayments of advances due.
Equity increased $15.9 million or 180.7% to $24.7 million at December 31,
2002 from $8.8 million at March 31, 2002. The increase is primarily the result
of the stock conversion in October 2002 in which the company received $17.1
million in stock proceeds reduced by conversion expenses of $900,000 and $1.4
million used to purchase shares to fund our employee stock ownership plan.
Equity at December 31, 2002 also includes net income for the nine months ended
December 31, 2002 of $900,000.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED DECEMBER 31, 2002
AND DECEMBER 31, 2001.
GENERAL. Net income for the three months ended December 31, 2002 was
$242,000 which was a decrease of $14,000 or 5.5% from $256,000 for the three
months ended December 31, 2001. The decrease in net income was primarily due to
an increase of $405,000 in non-interest expense, a $48,000 net change in the
provision for loan losses and a $20,000 increase in income tax expense;
partially offset by increases of $453,000 in net interest income and $6,000 in
non-interest income.
INTEREST INCOME. Interest income increased by $135,000 during the
comparative three months ended December 31, 2002 and 2001. The increase in
interest income resulted primarily from an increase of $108,000 in interest
received from loans and an increase in interest received on other interest
earnings assets of $41,000 partially offset by a $14,000 decrease in interest
received on mortgage-backed securities.
Interest income from loans increased $108,000 or 6.3% to $1.8 million for
the three months ended December 31, 2002 from $1.7 million for the three months
ended December 31, 2001. The average balance of loans outstanding for the
periods increased by $8.5 million to $98.8 million from $90.3 million. The
average yield on loans declined 21 basis points to 7.33% for the three months
ended December 31, 2002 from 7.54% for
9
the three months ended December 31, 2001, reflecting a decrease in market
interest rates generally.
Interest income on other interest earning assets increased $41,000 or 91.1%
to $86,000 for the three months ended December 31, 2002 from $45,000 for the
same period in 2001. The increase was due to a increase in the average balance
of other interest earning assets to $21.5 million from $9.1 million partially
offset by an decrease in the rates paid on overnight deposits held at other
financial institutions. The increase in the average balance of other interest
earning assets reflects the temporary use of cash subscriptions received in
connection with our stock offering.
Interest income from mortgage-backed securities decreased $14,000 or 6.5%
to $203,000 for the three months ended December 31, 2002 from $217,000 for the
same period in 2001. The decrease was due to a 181 basis point decrease in the
average yield partially offset by an increase in average mortgage-backed
securities of $6.1 million to $21.7 million for the three months ended December
31, 2002 from $15.6 million for the three months ended December 31, 2001.
INTEREST EXPENSE. Total interest expense decreased by $318,000 or
34.3% to $610,000 for the three months ended December 31, 2002 from $928,000 for
the three months ended December 31, 2001. The decrease in interest expense
resulted primarily from a decrease in the average cost of our interest bearing
liabilities to 1.97% from 3.42%, reflecting the decrease in market interest
rates during the period partially offset by an increase in average total
interest bearing liabilities of $15.3 million to $124.0 million from 108.7
million.
Interest expense on deposits decreased $315,000 or 34.9% to $588,000 for
the three months ended December 31, 2002 from $903,000 for the three months
ended December 31, 2001. The average balance of certificate of deposit accounts
decreased $5.6 million from $66.9 million for the three months ended December
31, 2001 to $61.3 million for the three months ended December 31, 2002, and the
average cost on such accounts decreased from 4.38% to 2.81%. In addition,
although the average balance of transaction and savings deposits increased $21.4
million or 55.2% to $60.2 million for the three months ended December 31, 2002
from $38.8 million for the three months ended December 31, 2001, the average
cost on such accounts declined 70 basis points to 1.05% from 1.75%. The increase
in the average balance of transaction and savings deposits primarily reflects
the temporary deposits resulting from cash subscriptions received in connection
with our stock offering.
Interest expense on Federal Home Loan Bank of New York advances was $19,000
for the three months ended December 31, 2002, a decrease of $3,000 from the
$22,000 recorded in the three months ended December 31, 2001. Average Federal
Home Loan Bank of New York advances decreased to $1.6 million for the three
months ended December 31, 2002, from $2.0 million in the prior period.
NET INTEREST INCOME. Net interest income increased $453,000 or 43.0% to
$1,506,000 for the three months ended December 31, 2002 from $1,053,000 for the
three months ended December 31, 2001. Our net interest spread increased 54bp to
3.95% for the three months ended December 31, 2002, from 3.41% for the
comparable period in 2001, while our net interest margin increased 58 basis
points to 4.21% from 3.63% .
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 made
a provision of $40,000 for the three months ended December 31, 2002 and
recognized an $8,000 recovery for the three months ended December 31, 2001.
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 $484,000 or .48% of loans outstanding at December 31, 2002 as compared with
$358,000 or .39% of loans outstanding at December 31, 2001. The allowance for
loan losses represented 386.5% of non-performing loans at December 31, 2002 and
67.9% of non-performing loans at December 31, 2001. 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, 2002 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 $6,000 to $77,000 for
the three months ended December 31, 2002, as compared to $71,000 for the three
months ended December 31, 2001. The increase was attributable to increases in
income from safe deposit box rentals of $4,000 and miscellaneous operating
income of $2,000.
NON-INTEREST EXPENSE. Non-interest expense for the three months ended
December 31, 2002 was $1,092,000 compared to $687,000 for the three months ended
December 31, 2001, an increase of $405,000 or 59.0%. The increase was primarily
attributable to a $105,000 increase in salaries and employee benefits, $72,000
in expenses related to the conversion to a new data service provider which
occurred in October 2002, an increase of $29,000 in occupancy expenses, $184,000
in ESOP expenses related to the release of 13,688 shares to eligible employees
and an increase of $21,000 in miscellaneous expenses partially offset by a
$18,000 decrease in directors' compensation.
PROVISION FOR INCOME TAXES. The provision for income taxes increased to
$209,000 for the three months ended December 31, 2002 from $189,000 for the
three months ended December 31, 2001. The increase in the provision for income
taxes is primarily due to an increase in the effective tax rate to 46.4% for the
three months
11
ending December 31, 2002 from 42.5% 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 OPERATING RESULTS FOR THE NINE-MONTHS ENDED DECEMBER 31, 2002 AND
DECEMBER 2001.
GENERAL. Net income for the nine months ended December 31, 2002 was
$900,000 which was an increase of $282,000 or 45.6% from $618,000 for the nine
months ended December 31, 2001. The increase in net income was primarily due to
increases of $1.2 million in net interest income and $45,000 in non-interest
income, which were partially offset by an increase of $722,000 in non-interest
expense and a $48,000 net change in the provision for loan losses.
INTEREST INCOME. Interest income increased by $158,000 during the
comparative nine months ended December 31, 2002 and 2001. The increase in
interest income resulted primarily from an increase of $317,000 in interest
received from loans offset by a $134,000 decrease in interest received on
mortgage-backed securities, a $12,000 decrease in interest on investments held
to maturity, and a $13,000 decrease in interest received on other
interest-earning assets.
Interest income from loans increased $317,000 or 6.3% to $5.3 million for
the nine months ended December 31, 2002 from $5.0 million for the nine months
ended December 31, 2001. The average yield on loans declined 23 basis points to
7.40% for the nine months ended December 31, 2002 from 7.63% for the nine months
ended December 31, 2001, reflecting a decrease in market interest rates
generally. The effect of the decline was more than offset by a $8.5 million
increase in the average balance of loans outstanding for the same period.
Interest income from mortgage-backed securities decreased $134,000 or 18.3%
to $598,000 for the nine months ended December 31, 2002 from $732,000 for the
same period in 2001. The decrease was due to a 148 basis point decrease in the
average yield partially offset by an increase in mortgage-backed securities of
$1.5 million to $18.1 million for the nine months ended December 31, 2002 from
$16.6 million for the nine months ended December 31, 2001.
Interest income on investment securities decreased $12,000 or 19.7% to
$49,000 for the nine months ended December 31, 2002, from $61,000 for the nine
months ended December 31, 2001.The decrease in interest income on investment
securities was due to a decrease in the average balance of investment securities
to $1.0 million from $1.3 million partially offset by an increase of 6 basis
points in the average yield.
Interest income on other interest earning assets decreased $13,000 or 6.8%
to $178,000 for the nine months ended December 31, 2002 from $191,000 for the
same period in 2001. The decrease was due to a decrease in the rates paid on
overnight
12
deposits held at other financial institutions, which was partially offset by an
increase in the average balance of other interest earning assets to $14.8
million from $8.0 million.
INTEREST EXPENSE. Total interest expense decreased by $1.1 or 35.5% to $2.0
million for the nine months ended December 31, 2002 from $3.1 million for the
nine months ended December 31, 2001. The decrease in interest expense resulted
primarily from a decrease in the average cost of our interest bearing
liabilities to 2.24% from 3.85%, reflecting the decrease in market interest
rates during the period partially offset by an increase in interest paid on
Federal Home Loan Bank of New York advances.
Interest expense on deposits decreased $1.1million or 36.7% to $1.9 million
for the nine months ended December 31, 2002 from $3.0 million for the nine
months ended December 31, 2001. The average balance of certificate of deposit
accounts decreased $2.2 million from $66.1 million for the nine months ended
December 31, 2001 to $63.9 million for the nine months ended December 31, 2002,
and the average cost on such accounts decreased to 3.07% from 4.88%. In
addition, although the average balance of transaction and savings deposits
increased $13.1 million or 34.3% to $51.3 million for the nine months ended
December 31, 2002 from $38.2 at December 31, 2001, the average cost on such
accounts declined 98 basis points to 1.14% from 2.12%.
Interest expense on Federal Home Loan Bank of New York advances was $63,000
for the nine months ended December 31, 2002, an increase of $33,000 from the
$30,000 recorded in the nine months ended December 31, 2001. Average Federal
Home Loan Bank of New York advances increased to $1.8 million for the nine
months ended December 31, 2002, from $894,000 during the prior period.
NET INTEREST INCOME. Net interest income increased $1.2 million or 41.4% to
$4.2 million for the nine months ended December 31, 2002 from $2.9 million for
the nine months ended December 31, 2001. Our net interest spread increased 87
basis points to 4.07% for the nine months ended December 31, 2002, from 3.20%
for the comparable period in 2001, while our net interest margin increased 83
basis points to 4.28% from 3.45% .
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 made
a provision of $40,000 for the nine months ended December 31, 2002 and
recognized an $8,000 recovery for the nine months ended December 31, 2001.
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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 $484,000 or .48% of loans outstanding at December 31, 2002 as compared with
$358,000 or .39% of loans outstanding at December 31, 2001. The allowance for
loan losses represented 386.5% of non-performing loans at December 31, 2002 and
67.9% of non-performing loans at December 31, 2001. 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 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, 2002 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 $45,000 or 23.1% to
$240,000 for the nine months ended December 31, 2002, as compared to $195,000
for the nine months ended December 31, 2001. The increase was primarily
attributed to an increase in loan prepayment penalty fees of $20,000; a $10,000
increase in late charges on mortgages; and a $12,000 increase in checking
account fees.
NON-INTEREST EXPENSE. Non-interest expense for the nine months ended
December 31, 2002 was $2.8 million compared to $2.1 million for the nine months
ended December 31, 2001, an increase of $722,000 or 34.9%. The increase was
primarily attributable to a $267,000 increase in salaries and employee benefits,
$245,000 in expenses related to the conversion to a new data service provider,
which occurred in October, an increase of $25,000 in net occupancy expenses,
$184,000 in ESOP expenses related to the release of 13,688 shares of stock to
eligible employees, and an increase in other miscellaneous expenses of $109,000
partially offset by decreases of $62,000 in Directors Compensation and $31,000
in legal fees.
PROVISION FOR INCOME TAXES. The provision for income taxes for the nine
months ended December 31, 2002 increased to $681,000 from $451,000 for the nine
months ended December 31, 2001. The increase in the provision for income taxes
is primarily due to our higher level of income before taxes of $1.6 million for
the nine months ended December 31, 2002 compared with $1.1 million in the prior
period.
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
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and other short-term interest-bearing assets to provide liquidity to meet these
needs. At December 31, 2002, cash and cash equivalents totaled $8.2 million. At
December 31, 2002, the Association had commitments to funds loans of $11.5
million. At December 31, 2002, certificates of deposit represented 54.7% of
total deposits. The Association expects to retain these deposit accounts. In
addition, the Association could borrow up to $16.4 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 December 31, 2002:
ACTUAL REQUIRED EXCESS
----------------- ---------------- ----------------
(Dollars in thousands) AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- ------- -----
Core capital
(to adjusted total assets) $ 16.6 11.8% $ 5.7 4.0% $ 10.9 7.8%
Risk-based capital
To (risk-weighted assets) $ 17.0 22.7% $ 6.0 8.0% $ 13.0 14.7%
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.
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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 September 30, 2002, 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 $13,447 $(3,561) (21)% 7.88% (179) basis points
+200 15,102 (1,906) (11) 8.74 (93) basis points
+100 16,390 (618) (4) 9.39 (28) basis points
0 17,008 - - 9.67 - basis points
- -100 17,268 260 +2 9.77 +9 basis points
The table above indicates that at September 30, 2002, 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 a 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
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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
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of a date
(the "Evaluation Date") within 90 days prior to the filing date of this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to us (or our consolidated subsidiaries) required to be included in our
periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during
the period covered by this report or, to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
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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, 2002, 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.
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 99.1 Sarbanes-Oxley Certifications pursuant to Section 906.
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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 11, 2002 /s/ Barry M. Donohue
--------------------------------------
Barry M. Donohue
President and Chief Executive Officer
Date: February 11, 2002 /s/ William M. Gilfillan
--------------------------------------
William M. Gilfillan
Chief Financial Officer and Corporate
Secretary
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