UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
Commission file number 000-49967
Atlantic Liberty Financial Corp.
Delaware 16-1615014
186 Montague Street, Brooklyn, New York 12201
(718) 855-3555
Check whether the issuer: (1); filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
As of September 30, 2004, the Registrant had outstanding 1,681,094 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
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Item 3. Controls and Procedures 17
PART II - Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Small Business Issuer 18
Purchases of Equity Securities
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
ITEM 1. FINANCIAL STATEMENTS
Atlantic Liberty Financial Corp.
Consolidated Statements of Financial Condition
(in thousands of dollars)
(unaudited)
At At
September 30, March 31,
2004 2004
ASSETS
Cash and cash equivalents
Cash and amounts due from depository Institutions $ 1,309 $ 1,276
Interest earning deposits 5,407 2,284
-------- --------
Total cash and cash equivalents 6,716 3,560
-------- --------
Investment securities:
Available for sale 1,284 2,333
Held to maturity 1,012 2,016
Mortgage-backed securities:
Available for sale 810 1,088
Held to maturity 45,978 30,691
Loans receivable 119,565 113,059
Investment in real estate 78 78
Premises and equipment 1,539 1,513
Federal Home Loan Bank of New York Stock 2,268 1,160
Interest receivable 808 722
Deferred income tax 470 370
Other assets 4,136 3,413
-------- --------
Total Assets $184,664 $160,003
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $109,124 $107,861
Federal Home Loan Bank of New York Advances 45,350 23,200
Advance payments by borrowers for taxes and insurance 977 945
Other liabilities 1,987 1,766
-------- --------
Total Liabilities 157,438 133,772
Commitments & Contingencies - -
Stockholders' equity -
Preferred Stock $.10 par value, 500,000 shares authorized; none outstanding - -
Common Stock $.10 par value, 6,000,000 shares authorized
1,710,984 Shares Issued-shares outstanding-1,681,094(9/04);1,691,584(3/04) 171 171
Paid in Capital 16,581 16,366
Retained Earnings-substantially restricted 12,059 11,115
Unearned ESOP Shares (992) (1,061)
Accumulated other comprehensive income (19) 24
Treasury stock, at cost;29,890 shares (9/04);19,400 shares (3/04) (574) (384)
-------- --------
Total Stockholders' Equity 27,226 26,231
-------- --------
Total liabilities and Stockholders' Equity $184,664 $160,003
======== ========
See notes to consolidated financial statements.
1
Atlantic Liberty Financial Corp.
Statements of Income
(in thousands of dollars)
(unaudited)
Three Months Six Months
Ended September 30, Ended September 30,
------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Interest and dividend income
Loans $ 1,897 $ 1,763 $ 3,747 $ 3,550
Mortgage backed securities 479 213 932 373
Investment Securities 58 24 123 40
Other interest-earning assets 18 28 29 50
---------- ---------- ---------- ----------
Total interest income 2,452 2,028 4,831 4,013
---------- ---------- ---------- ----------
Interest expense
Deposits 417 446 830 902
Advances 300 75 549 94
Escrow 3 2 7 7
---------- ---------- ---------- ----------
Total interest expense 720 523 1,386 1,003
---------- ---------- ---------- ----------
Net interest income 1,732 1,505 3,445 3,010
Provision for loan losses 125 0 125 0
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 1,607 1,505 3,320 3,010
---------- ---------- ---------- ----------
Non-interest income
Service fees 90 53 198 103
Miscellaneous 868 49 914 105
---------- ---------- ---------- ----------
Total non-interest income 958 102 1,112 208
---------- ---------- ---------- ----------
Non-interest expenses
Salaries and employee benefits 662 528 1,345 1,117
Directors Compensation 86 44 117 72
Net occupancy expenses 42 38 75 80
Equipment 101 93 201 167
Advertising 8 7 17 15
Federal Insurance Premium 4 4 8 9
Legal fees 136 43 262 73
Miscellaneous 192 208 379 380
---------- ---------- ---------- ----------
Total non-interest expenses 1,231 965 2,404 1,913
---------- ---------- ---------- ----------
Income before income taxes 1,334 642 2,028 1,305
Income tax expense 572 286 861 580
---------- ---------- ---------- ----------
Net income $762 $356 $1,167 $725
========== ========== =========== ==========
Earnings per share
Basic and diluted $0.48 $0.22 $0.74 $0.46
Weighted average shares 1,585,455 1,595,803 1,584,872 1,594,097
Fully diluted average shares 1,585,455 1,595,803 1,584,872 1,594,097
See notes to financial statements.
2
Atlantic Liberty Financial Corp.
Consolidated Statements of Changes in Stockholders Equity
Retained Accumulated
Additional Earnings- Unearned Other
Common Paid In Substantially ESOP Comprehensive Treasury
Stock Capital Restricted Shares Income Stock Total
Balance - March 31, 2004 $ 171 $ 16,366 $ 11,115 $ (1,061) $ 24 $ (384) $ 26,231
--------
Net Income 1,167 1,167
Unrealized loss on securities available
for sale (43) (43)
--------
Comprehensive income 1,124
--------
Cash dividends (223) (223)
ESOP shares committed to be released 57 69 126
Amortization of unearned MRP shares 158 158
Treasury stock, at cost (190) (190)
------------------------------------------------------------------------------------------
Balance - September 30, 2004 $ 171 $ 16,581 $ 12,059 $ (992) $ (19) $ (574) $ 27,226
==========================================================================================
See notes to consolidated financial statements.
3
Atlantic Liberty Financial Corp.
Consolidated Statements of Cash Flow
(in thousands of dollars)
(unaudited)
Six Months Ended
Cash flows from operating activities September 30,
2004 2003
------- -------
Net income $ 1,167 $ 725
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 80 83
Provision for loan losses 125 -
Net accretion of premiums,
discounts and deferred loan fees 79 190
Deferred income taxes (100) (176)
ESOP compensation expense 125 123
Recognition and Retention Plan expense 158 -
(Increase) in interest receivable (86) (92)
(Increase) in other assets (723) (164)
Increase (decrease) in other liabilities 221 (103)
------- -------
Net cash provided by operating activities 1,046 586
------- -------
Cash flows from investing activities:
Purchases of:
Investment securities held to maturity (1,000)
Investment securities available for sale (1,000)
Mortgage-backed securities held to maturity (20,043) (19,816)
Proceeds of maturities, calls and principal repayments on:
Investment securities held to maturity 1,000 0
Investment securities available for sale 1,000 0
Mortgage-backed securities held to maturity 4,722 6,075
Mortgage-backed securities available for sale 277 350
(Increase) in loans receivable (6,665) (5697)
Additions to premises and equipment (106) (24)
Purchase of Federal Home Loan Bank of New York Stock (1,107) (178)
------- -------
Net cash (used in) investing activities (20,922) (21,290)
------- -------
Cash flows from financing activities:
Increase in deposits 1,263 1,844
Increase in advance payments
by borrowers for taxes and insurance 32 (236)
Increase in Federal Home Loan Bank advances 22,150 19,600
Net proceeds from stock conversion - -
Cash dividends paid (223) (86)
Purchase of Treasury Stock (190) 0
------- -------
Net cash provided by financing activities 23,032 21,122
------- -------
Net increase in cash and cash equivalents 3,156 418
Cash and cash equivalents at beginning of period 3,560 6,237
------- -------
Cash and cash equivalents at end of period $ 6,716 $ 6,655
======= =======
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 1,386 $ 1,003
------- -------
Federal, state and city income taxes $ 742 $ 483
------- -------
See notes to consolidated financial statements.
4
Atlantic Liberty Financial Corp.
Notes to Consolidated Financial Statements
September 30, 2004
(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 Company's Annual
Report on Form 10-KSB 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, 2005. 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
5
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- Employee Stock Ownership Plan
- -------------------------------------
As part of its conversion to stock form, 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 common 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.
Note 4- 2003 Incentive Stock Benefit Plan
- -----------------------------------------
In November 2003, the Company's stockholders approved, and the Company
implemented, the 2003 Incentive Stock Benefit Plan. Under the Stock Benefit
Plan, employees and directors of the Company and its subsidiary may be awarded
shares of Company common stock (the "Stock Awards") and issued options to
purchase shares of Company common stock (the "Stock Options") covering up to
256,648 shares in the aggregate.
Stock Awards
Stock Awards under the Stock Benefit Plan are granted in the form of
Company common stock, which are held by a Plan trustee, and vest over a period
of five years (20% annually from the date of grant). The Stock Awards become
fully vested upon the death or disability of the holder. On December 8, 2003,
the Company awarded 85,550 shares of its common stock. At September 30, 2004, no
Stock Awards were vested. During the quarter and six month periods ended
September 30, 2004, approximately $79,000 and $158,000 respectively, in expense
related to the Stock Awards was recorded. There was no similar expense recorded
6
during the three and six months periods ended September 30, 2003. The amount of
expense recorded for the Stock Awards is based upon the number of shares
awarded, the market price of the Company's common stock at the grant date
($18.50 per share) and the period over which the Stock Awards are earned (60
months).
Stock Options
Stock Options granted under the Stock Benefit Plan may be either options
that qualify as incentive stock options as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, or non-statutory options. Options
granted will vest and will be exercisable on a cumulative basis in equal
installments at the rate of 20% per year commencing on December 8, 2003. All
options granted will be exercisable in the event the optionee terminates his
employment due to death or disability. The options expire ten years from the
date of grant.
On December 8, 2003, options to purchase 171,098 shares of Company common
stock were granted, which include non-incentive stock options to directors and
incentive stock options to officers and employees. The options granted, none of
which were exercised or forfeited during the quarter ended September 30, 2004,
are summarized as follows:
Shares
- -----------------------------------------------------
Weighted
Non- Exercise Average Exercise
Incentive Incentive Total Exercisable Price Price
- --------- --------- ----- ----------- -------- ----------------
46,196 124,902 171,098 34,220 $18.50 $18.50
====== ======= ======= ====== ====== ======
At September 30, 2004, 34,220 options were exercisable.
The Company, as permitted by SFAS No. 123, recognizes compensation cost for
stock options granted based on the intrinsic value method instead of the fair
value based method. The weighted-average grant-date fair value of the stock
options granted during fiscal 2004, which have an exercise price equal to the
market price of the Company's common stock at the grant date, is estimated using
the Black-Scholes option-pricing model. Such fair value and the assumptions used
for estimating fair value are as follows:
Weighted average grant-date fair value per share $ 6.40
Expected common stock dividend yield 1.08%
Expected volatility 29.74%
Expected option life 7.0 years
Risk-free interest rate 3.81%
Note 5- 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
7
basic earnings per share, give effect to stock awards and option securities
exercisable into common stock, which would have a dilutive effect.
Note-6 Dividend Declaration
- ----------------------------
On October 20, 2004, the Company's Board of Directors declared a quarterly
cash dividend of $0.07 per share to be paid on November 18, 2004 to shareholders
of record on November 4, 2004 .
Note 7- Share Repurchase Program
- --------------------------------
In January 2004, 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. As of
September 30, 2004, the Company has purchased 29,890 shares of its common stock
at an average cost of $19.21 per share.
Note 8- Settlement of Litigation
- --------------------------------
Earnings for the quarter and six months ended September 30, 2004 include
non-recurring non-interest income of $825,000 received in connection with the
settlement of litigation commenced in 1999. After taxes and legal fees, the
settlement resulted in $395,000 or $0.25 per share in net income for the three
months ended September 30, 2004 and $340,000 or $0.22 per share for the six
months ended September 30, 2004.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The company intends such
forward-looking statements to be covered by the safe harbor provision for
forward-looking statements contained in the Private Securities Reform Act of
1995 as amended and is including these statements for purposes of these safe
harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations of the
Company, are generally identifiable by use of the words "believe", "expect",
"intend", "anticipate", "estimate", "project", or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors that could have a material adverse
affect on the operation and future prospects of the Company and its wholly-owned
subsidiaries include, but are not limited to, changes in: interest rates;
general economic conditions; legislative/regulatory provision; monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Federal Reserve Board; the quality or composition of the loan or
investment portfolios; demand for loan products; deposit flows; competition;
demand for financial services in the Company's market area; and accounting
principles, policies and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements, and undue reliance should
not be placed on such statements. Further information concerning the Company and
its business, including additional factors that could materially affect the
Company's financial results, is included in the company's filings with the
Securities and Exchange Commission.
The following discussion compares the consolidated financial condition of
Atlantic Liberty Financial Corp. at September 30, 2004 to the financial
condition at March 31, 2004 and the consolidated results of operations for the
three-month and six-month periods ended September 30, 2004 and September 30,
2003. This discussion should be read in conjunction with the interim financial
statements and footnotes included herein.
Comparison of Financial Condition at September 30, 2004 and March 31, 2004
The Company's assets increased $24.7 million or 15.4% to $184.7 million at
September 30, 2004 from $160.0 million at March 31, 2004. The increase
principally reflects increases in mortgage-backed securities held to maturity
and loans receivable, funded by increases in advances from the Federal Home Loan
Bank of New York (FHLB) and deposits. During the six-months ended September 30,
2004, mortgage-backed securities held to maturity increased $15.3 million or
49.8% to $46.0 million from $30.7 million at March 31, 2004. The increase
reflects purchases of $20.0 million, partially offset by prepayments and
amortization of $4.7 million. The increase in mortgage-backed securities held to
maturity reflects management's decision to implement a leveraged growth strategy
at a positive interest rate spread. During the six-months ended September 30,
2004, net loans receivable increased $6.5 million or 5.7% to $119.6 million from
$113.1 million at March 31, 2004. The increase resulted principally from new
commercial mortgages of $8.7 million, $4.4 million of which were purchased from
other financial institutions, as well as new originations of one-to-four family
mortgage loans of $3.8 million. Investment securities held to maturity and
available for sale decreased $2.0 million or
9
46.5% to $2.3 million at September 30, 2004 from $4.3 million at March 31, 2004.
Cash and cash equivalents increased $3.1 million or 86.1% to $6.7 million at
September 30, 2004 from $3.6 million at March 31, 2004.
Advances from the FHLB increased by $22.2 million to $45.4 million at
September 30, 2004 from $23.2 million at March 31, 2004. Total deposits of
$109.1 million at September 30, 2004 increased $1.2 million or 1.1% from $107.9
million at March 31, 2004. Stockholders' equity increased $1 million or 3.8% to
$27.2 million at September 30, 2004 from $26.2 million at March 31, 2004,
primarily the result of including net income of $1.2 million for the six-months
ended September 30,2004, partially offset by treasury stock purchases of
$200,000.
Comparison of Results of Operations for the three-months ended September 30,
2004 and September 30, 2003.
General. Net income for the three months ended September 30, 2004 was
$762,000, an increase of $406,000 or 114.1% from $356,000 for the three months
ended September 30, 2003. The increase in net income was primarily due to
increases of $227,000 in net interest income and $856,000 in non-interest
income, principally from the settlement of litigation, partially offset by
increases of $266,000 in non-interest expense, $125,000 in the provision for
loan losses and $286,000 in income tax expense.
Interest Income. Interest income increased $424,000 during the comparative
three months ended September 30, 2004 and 2003. The increase in interest income
resulted primarily from increases of $266,000 in interest received on mortgage
backed securities, $134,000 in interest received on loans and $34,000 in
interest received on investment securities, partially offset by a $10,000
decrease in interest on other interest earning assets.
Interest income from mortgage-backed securities increased $266,000 or
124.9% to $479,000 for the three months ended September 30, 2004 from $213,000
for the same period in 2003. The increase was due to an increase of $22.7
million or 88.3% in average mortgage-backed securities to $48.4 million for the
three-months ended September 30, 2004 from $25.7 million for the three-months
ended September 30, 2003 as well as an increase in the average yield on
mortgage-backed securities of 64 basis points to 3.96% for the three-months
ended September 30, 2004 from 3.32% for the three-months ended September 30,
2003.
Interest income from loans increased $134,000 or 7.6% to $1.9 million for
the three months ended September 30, 2004 from $1.8 million for the three months
ended September 30, 2003. The average balance of loans outstanding increased by
$14.6 million to $118.6 million for the quarter ended September 30, 2004 from
$104.0 million for the quarter ended September 30, 2003. The average yield on
loans decreased 38 basis points to 6.40% for the three months ended September
30, 2004 from 6.78% for the three months ended September 30, 2003.
Interest income on investment securities increased $34,000 or 141.7% to
$58,000 for the three-months ended September 30, 2004 from $24,000 for the
three-months ended September 30, 2003. The increase was due to an increase of
$2.3 million in the average balance of investment securities to $3.8 million for
the three-months ended September 30, 2004 from $1.5 million in the comparable
period in 2003, partially offset by a decrease in the average yield of 25 basis
points to 6.08% from 6.33% for the respective periods.
10
Interest income on other interest earning assets decreased $10,000 or 35.7%
to $18,000 for the three-months ended September 30, 2004 from $28,000 for the
same period in 2003. The decrease was due to a decrease in the average balance
of other interest earning assets of $1.9 million or 27.1% to $5.1 million from
$7.0 million as well as a decrease of 20 basis points in the average yield to
1.40% from 1.60%.
Interest Expense. Total interest expense increased by $197,000 or 37.7% to
$720,000 for the three-months ended September 30, 2004 from $523,000 for the
three months ended September 30, 2003. The increase in interest expense resulted
primarily from a $37.1 million increase in the average balance of interest
bearing liabilities to $152.6 million from $115.5 million as well as an increase
in the average cost of interest bearing liabilities of 8 basis points to 1.89%
from 1.81%.
Interest expense on deposits decreased $29,000 or 6.5% to $417,000 for the
three-months ended September 30, 2004 from $446,000 for the three-months ended
September 30, 2003. The average balance of certificate of deposit accounts
decreased $3.4 million from $57.6 million for the three months ended September
30, 2003 to $54.2 million for the three-months ended September 30, 2004, and the
average cost on such accounts decreased from 2.41% to 2.19%. Partially
offsetting the decrease in the average balance of certificate of deposit
accounts was an increase in the average balance of transaction and savings
deposits of $4.5 million or 9.4% to $52.5 million for the three-months ended
September 30, 2004 from $48.0 million for the three-months ended September 30,
2003, together with an increase in the average cost of such accounts of 10 basis
points to 0.92% from 0.82%.
Interest expense on FHLB advances was $300,000 for the three-months ended
September 30, 2004, an increase of $225,000 from the $75,000 recorded in the
three-months ended September 30, 2003. Average FHLB advances increased to $45.1
million for the three-months ended September 30, 2004 from $9.5 million in the
prior comparative period. The average cost of FHLB advances decreased 48 basis
points to 2.67% from 3.15%.
Net Interest Income. Net interest income increased $227,000 or 15.1% to
$1.7 million for the three-months ended September 30, 2004 from $1.5 million for
the three months ended September 30, 2003. The increase in our net interest
income for the three-months ended September 30, 2004 compared to the prior
quarter is primarily attributable to a $37.8 million increase in average
interest earning assets, partially offset by a 38 basis point decrease in our
net interest spread to 3.68% from 4.06%. Our net interest margin for the quarter
ended September 30, 2004 compared to the prior period decreased 42 basis points
to 3.94% from 4.36%.
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 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
for loan losses of $125,000 for the three months ended
11
September 30, 2004. No provision was made during the three-months ended
September 30, 2003.
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 $737,000 or 0.61% of loans outstanding at September 30, 2004, as compared
with $582,000 or 0.54% of loans outstanding at September 30, 2003. The allowance
for loan losses represented 134.5% of non-performing loans at September 30, 2004
and 198.6% of non-performing loans at September 30, 2003. The level of the
allowance is based on estimates and the ultimate losses may vary from the
estimates.
Management assesses the allowance for loan losses on a quarterly basis and
makes provisions for loan losses as necessary in order to maintain the adequacy
of the allowance. While management uses available information to recognize
losses on loans, future loan loss provisions may be necessary based on changes
in economic conditions. In addition, various regulatory agencies, as a part of
their examination process, periodically will review the allowance for loan
losses and may require us to recognize additional provisions based on their
judgment of information available to them at the time of their examination. The
allowance for loan losses as of September 30, 2004 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 $856,000 or 839.2% to
$958,000 for the three months ended September 30, 2004, as compared to $102,000
for the three-months ended September 30, 2003. The increase was attributable to
the recognition of $825,000 in non-recurring income received in connection with
the settlement of litigation commenced in 1999 and an increase of $32,000 in
loan prepayment penalties and other miscellaneous mortgage fees.
Non-Interest Expense. Non-interest expense for the three months ended
September 30, 2004 was $1,231,000 compared to $965,000 for the three months
ended September 30,2003, an increase of $266,000 or 27.6%. The increase was
primarily attributable to increases of $134,000 in salaries and employee
benefits, $79,000 of which related to management recognition plan expenses for
which there was no similar charge in the prior year, $42,000 in directors
compensation, $8,000 in equipment expense $93,000 in legal fees and $4,000 in
net occupancy expense, partially offset by a decrease of $16,000 in
miscellaneous expense. The $93,000 increase in legal fees resulted primarily
from fees incurred in connection with the aforementioned litigation settlement.
Provision for Income taxes. The provision for income taxes increased to
$572,000 for the three- months ended September 30, 2004 from $286,000 for the
three months ended September 30, 2003. The increase in the provision for income
taxes is primarily due to a higher level of income before taxes of $1,334,000
for the three-months ended September 30, 2004, compared with income before taxes
of $642,000 for the comparative 2003 period.
12
Comparison of Results of Operations for the six-months ended September 30, 2004
and September 30, 2003.
General. Net income for the six-months ended September 30, 2004 was
$1,167,000 , an increase of $442,000 or 61.0% from $725,000 for the six-months
ended September 30, 2003. The increase in net income was primarily due to
increases of $435,000 in net interest income and $904,000, in non-interest
income, principally from the settlement of litigation, partially offset by
increases of $491,000 in non-interest expense, $125,000 in the provision for
loan losses and $281,000 in income tax expense.
Interest Income. Interest income increased $818,000 during the comparative
six-months ended September 30, 2004 and 2003. The increase in interest income
resulted primarily from increased of $559,000 in interest received on mortgage
backed securities, $197,000 in interest received on loans and $83,000 in
interest received on investment securities, partially offset by a $21,000
decrease in interest on other interest earning assets.
Interest income from mortgage-backed securities increased $559,000 or
149.9% to $932,000 for the six-months ended September 30, 2004 from $373,000 for
the same period in 2003. The increase was due to an increase of $23.6 million or
100.4% in average mortgage-backed securities to $47.1 million for the six-months
ended September 30, 2004 from $23.5 million for the six-months ended September
30, 2004 as well as an increase in the average yield on mortgage-backed
securities of 79 basis points to 3.96% for the six-months ended September 30,
2004 from 3.17% for the six-months ended September 30, 2003.
Interest income from loans increased $197,000 or 5.6% to $3.75 million for
the six-months ended September 30, 2004 from $3.55 million for the six-months
ended September 30, 2003. the average balance of loans outstanding increased by
$13.1 million to $116.2 million for the quarter ended September 30, 2004 from
$103.1 million for the six-months ended September 30, 2003. The average yield on
loans declined 44 basis points to 6.45% for the six-months ended September 30,
2004 from 6.89% for the six-months ended September 30, 2003 reflecting a
decrease in market interest rates generally.
Interest income on investment securities increased $83,000 or 207.5% to
$123,000 for the six-months ended September 30, 2004 from $40,000 for the
six-months ended September 30, 2003. The increase was due to an increase of $2.8
million in the average balance of investment securities to $4.1 million for the
six-months ended September 30, 2004 from $1.3 million in the comparable period
in 2003, partially offset by a decrease in the average yield of 20 basis points
to 6.05% from 6.25% for the respective periods.
Interest income on other interest earning assets decreased $21,000 or 42.0%
to $29,000 for the six-months ended September 30, 2004 from $50,000 for the same
period in 2003. The decrease was due to a decrease in the average balance of
other interest earning assets of $1.0 million or 16.4% to $5.1 million from $6.1
million as well as a decrease of 54 basis points in the average yield to 1.12%
from 1.66%.
Interest Expense. Total interest expense increased by $383,000 or 38.2% to
$1.38 million for the six-months ended September 30, 2004 from $1.0 million for
the six-months ended September 30, 2003. The increase in interest expense
resulted primarily from a $37.6 million increase in the average balance of
interest bearing liabilities to $149.3 million from $111.7
13
million as well as an increase in the average cost of interest bearing
liabilities of 6 basis points to 1.86% from 1.80%.
Interest expense on deposits decreased $72,000 or 8.0% to $830,000 for the
six-months ended September 30, 2004 from $902,000 for the six-months ended
September 30, 2003. The average balance of certificate of deposit accounts
decreased $3.2 million from $57.9 million for the six-months ended September 30,
2003 to $54.7 million for the six-months ended September 30, 2004, and the
average cost on such accounts decreased from 2.45% to 2.18%. Partially
offsetting this decrease was an increase in the average balance of transaction
and savings deposits of $4.5 million or 8.6% to $52.1 million for the six-months
ended September 30, 2004, from $47.6 million for the six-months ended September
30, 2003, together with an increase in the average cost of such accounts of 8
basis points to 0.90% from 0.82%.
Interest expense on Federal Home Loan Bank of New York advances was
$549,000 for the six-months ended September 30, 2004, an increase of $455,000
from the $94,000 recorded in the six-months ended September 30, 2003. Average
FHLB advances increased to $41.6 million for the six-months ended September 30,
2004 from $5.6 million in the prior comparative period. The average cost of FHLB
advances decreased 72 basis points to 2.64% from 3.36%.
Net Interest Income. Net interest income increased $435,000 or 14.5% to
$3.45 million for the six-months ended September 30, 2004 from $3.0 million for
the six-months ended September 30, 2003. The increase in our net interest income
for the six-months ended September 30, 2004 compared to the prior six-month
period is primarily attributable to a $38.5 million increase in average interest
earning assets, partially offset by a 46 basis point decrease in our net
interest spread to 3.74% from 4.20%. Our net interest margin for the six-months
ended September 30, 2004 compared to the prior period decreased 50 basis points
to 3.99% from 4.49%.
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 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
for loan losses of $125,000 for the six-months ended September 30, 2004. No
provision was made during the six-months ended September 30, 2003. During the
six months ended September 30, 2004 , we also recorded a $29,000 recovery of a
previously charged off loan.
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 $737,000 or 0.61% of loans outstanding at September 30, 2004, as compared
with $582,000 or 0.54% of loans outstanding at September 30, 2003. The allowance
for loan losses represented 134.5% of non-performing loans at September 30, 2004
and 198.6% of non-performing loans at September 30, 2003. The level of the
allowance is based on estimates and the ultimate losses may vary from the
estimates.
14
Management assesses the allowance for loan losses on a quarterly basis and
makes provisions for loan losses as necessary in order to maintain the adequacy
of the allowance. While management uses available information to recognize
losses on loans, future loan loss provisions may be necessary based on changes
in economic conditions. In addition, various regulatory agencies, as a part of
their examination process, periodically will review the allowance for loan
losses and may require us to recognize additional provisions based on their
judgment of information available to them at the time of their examination. The
allowance for loan losses as of September 30, 2004 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 $904,000 or 434.6% to
$1.1 million for the six-months ended September 30, 2004, as compared to
$208,000 for the six-months ended September 30, 2003. The increase was
attributable to the recognition of $825,000 in non-recurring income received in
connection with the settlement of litigation commenced in 1999 as well as
increases of $65,000 in loan prepayment penalties and other miscellaneous
mortgage fees and $14,000 in net appraisal fees.
Non-Interest Expense. Non-interest expense for the six-months ended
September 30, 2004 was $2.4 million compared to $1.9 million for the six-months
ended September 30, 2003, an increase of $491,000 or 25.7%. The increase was
primarily attributable to increases of $228,000 in salaries and employee
benefits, $158,000 of which related to management recognition plan expenses for
which there was no similar charge in the prior year, $45,000 in directors
compensation, $34,000 in equipment expense and $189,000 in legal fees, partially
offset by a decrease of $5,000 in net occupancy expense. The $189,000 increase
in legal fees resulted primarily from fees incurred in connection with the
aforementioned litigation settlement.
Provision for Income taxes. The provision for income taxes increased to
$861,000 for the six-months ended September 30, 2004 from $580,000 for the
six-months ended September 30, 2003. The increase in the provision for income
taxes in primarily due to a higher level of income before taxes of $2,028,000
for the six-months ended September 30, 2004, compared with income before taxes
of $1,305,000 for the comparative 2003 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 and other short-term interest-earning assets to provide
liquidity to meet these needs. At September 30, 2004, cash and cash equivalents
totaled $6.7 million. At September 30, 2004, the Association had commitments to
funds loans of $3.4 million. At September 30, 2004, certificates of deposit
represented 48.6% of total deposits. The Association expects to retain these
deposit accounts. In addition, the Association could borrow up to $10.1 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.
15
Capital Resources. The Association is subject to various regulatory capital
requirements administered by federal regulatory agencies. The following table
summarizes the Association's regulatory capital requirements versus actual
capital as of September 30, 2004:
ACTUAL REQUIRED EXCESS
------------------ ---------------- ----------------
(Dollars in thousands) AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
Core capital
(to adjusted total assets) $ 20.2 11.1% $ 7.3 4.0% $ 12.9 7.1%
Risk-based capital
To (risk-weighted assets) $ 20.9 20.4% $ 8.2 8.0% $ 12.7 12.4%
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 the majority of which reprice within
one and three years. We do not solicit high-rate jumbo certificates of deposit
or brokered funds.
Net Portfolio Value. In past years, many savings associations have measured
interest rate sensitivity by computing the "gap" between the assets and
liabilities which are expected to mature or reprice within certain time periods,
based on assumptions regarding loan prepayment and deposit decay rates formerly
provided by the Office of Thrift Supervision. However, the Office of Thrift
Supervision now requires the computation of amounts by which the net present
value of an institution's cash flow from assets, liabilities and off balance
sheet items (the institution's net portfolio value or "NPV") would change in the
event of a range of assumed changes in market interest rates. The Office of
Thrift Supervision provides all institutions that file a Consolidated
Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with
an interest rate sensitivity report of net portfolio value. The Office of Thrift
Supervision simulation model uses a discounted cash flow analysis and an
option-based pricing approach to measure the interest rate sensitivity of net
portfolio value. Historically, the Office of Thrift Supervision model estimated
the economic value of each type of asset, liability
16
and off-balance sheet contract under the assumption that the United States
Treasury yield curve increases or decreases instantaneously by 100 to 300 basis
points in 100 basis point increments. However, given the current low level of
market interest rates, we did not receive a NPV calculation for an interest rate
decrease of greater than 100 basis points. A basis point equals one-hundredth of
one percent, and 100 basis points equals one percent. An increase in interest
rates from 3% to 4% would mean, for example, a 100 basis point increase in the
"Change in Interest Rates" column below. The Office of Thrift Supervision
provides us the results of the interest rate sensitivity model, which is based
on information we provide to the Office of Thrift Supervision to estimate the
sensitivity of our net portfolio value.
The table below sets forth, as of June 30, 2004, the latest date for which
the Office of Thrift Supervision has provided to Atlantic Liberty Savings, F.A.
an interest rate sensitivity report of net portfolio value, the estimated
changes in our net portfolio value that would result from the designated
instantaneous changes in the United States Treasury yield curve.
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 $19,934 $(8,130) (29)% 11.43% (363) basis points
+200 22,675 (5,390) (19) 12.71 (235) basis points
+100 25,432 (2,632) (9) 13.94 (112) basis points
0 28,064 - - 15.06 - basis points
-100 30,070 2,006 +7 15.84 +78 basis points
The table above indicates that at June 30, 2004, in the event of a 100
basis point decrease in interest rates, we would experience a 7% increase in net
portfolio value. In the event of a 200 basis point increase in interest rates,
we would experience a 19% decrease in net portfolio value.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in net portfolio value require
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest rates. In this
regard, the net portfolio value table presented assumes that the composition of
our interest-sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration or repricing of specific assets and
liabilities. Accordingly, although the net portfolio value table provides an
indication of our interest rate risk exposure at a particular point in time,
such measurements are not intended to and do not provide a precise forecast of
the effect of changes in market interest rates on its net interest income and
will differ from actual results.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
the Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as
17
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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings as a defendant
other than routine legal proceedings occurring in the ordinary course
of business. At September 30, 2004, 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 AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
In accordance with the Share Repurchase Program approved by the Board
of Directors in January, 2004, the Company has made share repurchases
as summarized below:
Total Number of Maximum Number of
Shares Purchased as Shares That May Be
Total Number of Average Price Paid Part of a Publicly Purchased Under Plan
Shares Purchased Per Share Announced Plan (1)
---------------- ------------------ ------------------- --------------------
Total - March 31 ............ 19,400 $ 19.80 19,400 66,150
April 1 - April 30 .......... - - - -
May 1 - May 31................ 490 18.25 19,890 65,660
June 1- June 30 .............. 10,000 18.11 29,890 55,660
July 1 - September 30 ....... - - - 55,660
------ ------- ------ ------
Total September 30, 2004...... 29,890 $ 19.21 29,890 -
====== ======= ====== =======
- ------------------
(1) On January 26, 2004, the Company announced that the Board of Directors, at
its January meeting, approved a share repurchase plan to acquire up to 85,550
shares of the Company's common stock, which represents approximately 5% of the
outstanding shares of common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the annual meeting of stockholders held on August 18, 2004, the
following proposals were voted upon and approved by the stockholders:
18
Proposal No. 1: Resolved, that Honorable Guy J. Mangano and George M.
Spanakos be elected to serve as directors of the company for a term of
three years, or until his successor has been elected and qualified.
The voting as to Proposal No. 1 was as follows:
For Withheld
--------- --------
Hon. Guy J. Mangano: 1,377,350 92,510
George M. Spanakos: 1,374,532 95,328
Proposal No. 2: Resolved, that the appointment of Radics & Co., LLC to
act as the Company's auditors for the fiscal year ending March 31, 2005
is hereby ratified.
The voting to Proposal No. 2 was as follows:
For Against Withheld
--------- ------- --------
Radics & Co., LLC 1,444,249 22,034 3,577
ITEM 5. OTHER INFORMATION
At its October meeting, the Board of Directors of Atlantic Liberty
Financial Corp. declared a quarterly cash dividend of $0.07 per share
to be paid on November 18, 2004 to shareholders of record on November
4, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 31.1
Exhibit 31.2
Exhibit 32 Sarbanes-Oxley Certifications pursuant to Section
906.
On July 26, 2004 we filed Form 8-K, which contained our press release
of earnings for the quarter ended June 30, 2004.
On October 5, 2004 we filed Form 8-K, which contained our press release
announcing the settlement of litigation commenced in 1999.
On October 21, 2004 we filed Form 8-K, which contained our press
release of earnings for the quarter and six months ended September 30,
2004.
19
SIGNATURES
Pursuant to the requirement of the securities Exchange Act of 1934. The
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Atlantic Liberty Financial Corp.
Date: November 12, 2004 /s/Barry M. Donohue
-------------------------------------
Barry M. Donohue
President and Chief Executive Officer
Date: November 12, 2004 /s/William M. Gilfillan
-------------------------------------
William M. Gilfillan
Chief Financial Officer and Corporate
Secretary
20