10QSB 1 atlantic_q.txt 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2003 Commission file number 000-49967 Atlantic Liberty Financial Corp. Delaware 16-1615014 186 Montague Street, Brooklyn, New York 12201 (718) 855-3555 Check whether the issuer: (1); filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date. As of December 31, 2003, the Registrant had outstanding 1,710,984 shares of common stock. Transitional Small Business Disclosure format Yes [X] No [ ] ATLANTIC LIBERTY FINANCIAL CORP. Form 10-QSB Quarterly Report Index Page ---- PART I - Financial Information Item 1. Financial Statements 1-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-16 Item 3. Controls and Procedures 17 PART II - Other Information Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18-33 SIGNATURES ITEM 1. FINANCIAL STATMENTS Atlantic Liberty Financial Corp. Consolidated Statements of Financial Condition (in thousands of dollars) (unaudited)
At At December 31, March 31, 2003 2003 ------------ ------------ ASSETS Cash and cash equivalents Cash and amounts due from depository Institutions $ 1,855 $ 1,773 Interest bearing deposits 4,098 4,464 ------------ ------------ Total cash and cash equivalents 5,953 6,237 ------------ ------------ Securities available for sale 3,228 1,703 Investment securities held to maturity 2,018 1,024 Mortgage-backed securities held to maturity 32,352 21,002 Loans receivable, net 109,930 100,655 Premises and equipment 1,516 1,616 Federal Home Loan Bank of New York Stock 1,160 902 Interest receivable 792 672 Deferred income tax 484 307 Investment in real estate 78 78 Other assets 3,296 3,000 ------------ ------------ Total Assets $ 160,807 $ 137,196 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits $ 107,635 $ 107,515 Federal Home Loan Bank of New York advances 23,200 1,600 Advance payments by borrowers for taxes and insurance 1,087 886 Other liabilities 2,642 2,104 ------------ ------------ Total Liabilities 134,564 112,105 Commitments & Contingencies -- -- Stockholders' equity -- Preferred Stock $.10 par value, 500,000 shares authorized -- -- Common Stock $.10 par value, 6,000,000 shares authorized 1,710,984 Shares Issued 171 171 Paid in Capital 16,254 16,141 Retained Earnings-substantially restricted 10,888 9,976 Unearned ESOP Shares (1,095) (1,197) Accumulated other comprehensive income 25 0 ------------ ------------ Total Stockholders' Equity 26,243 25,091 ------------ ------------ Total liabilities and Stockholders' Equity $ 160,807 $ 137,196 ============ ============
See notes to consolidated financial statements. 1 Atlantic Liberty Financial Corp. Statements of Income (in thousands of dollars) (unaudited)
Three Months Nine Months Ended December 31 Ended December 31 ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Interest and dividend income Loans $ 1,791 $ 1,811 $ 5,341 $ 5,327 Mortgage backed securities 319 203 692 598 Investment Securities 55 16 95 49 Other interest-earning assets 9 86 59 178 ---------- ---------- ---------- ---------- Total interest income 2,174 2,116 6,187 6,152 ---------- ---------- ---------- ---------- Interest expense Deposits 429 588 1,331 1,911 Advances 150 19 243 63 Escrow 3 3 11 8 ---------- ---------- ---------- ---------- Total interest expense 582 610 1,585 1,982 ---------- ---------- ---------- ---------- Net interest income 1,592 1,506 4,602 4,170 Provision for loan losses 0 40 0 40 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 1,592 1,466 4,602 4,130 ---------- ---------- ---------- ---------- Non-interest income Service fees 51 49 155 154 Miscellaneous 45 28 150 74 ---------- ---------- ---------- ---------- Total non-interest income 96 77 305 228 ---------- ---------- ---------- ---------- Non-interest expenses Salaries and employee benefits 617 672 1,733 1,582 Directors Compensation 47 40 119 106 Net occupancy expenses 39 37 119 61 Equipment 108 153 276 458 Advertising 10 10 26 26 Federal Insurance Premium 4 5 14 14 Legal fees 34 15 107 35 Miscellaneous 181 160 560 495 ---------- ---------- ---------- ---------- Total non-interest expenses 1,040 1,092 2,954 2,777 ---------- ---------- ---------- ---------- Income before income taxes 648 451 1,953 1,581 Income tax expense 302 209 882 681 ---------- ---------- ---------- ---------- Net income $ 346 $ 242 $ 1,071 $ 900 ========== ========== ========== ========== Earnings per share Basic and diluted $ 0.22 $ 0.15 $ 0.67 n/a Weighted average shares 1,599,214 1,574,301 1,595,804 n/a Fully diluted average shares 1,607,020 n/a 1,603,610 n/a
See notes to financial statements 2 Atlantic Liberty Financial Corp. Consolidated Statements of changes in Stockholders' equity (in thousands of dollars) (unaudited)
Accumulated Other Common Paid-in Retained Unearned Comprehensive Stock Capital Earnings ESOP Shares Income/(loss) Total ----------- ----------- ----------- ----------- ----------- ----------- Balance at March 31, 2003 $ 171 $ 16,141 $ 9,976 $ (1,197) $ -- $ 25,091 Comprehensive Income Net income -- -- 1,071 -- -- 1,071 Change in net unrealized gain (loss) -- -- -- -- 25 25 ----------- Total comprehensive income -- -- -- -- -- 1,096 ESOP shares committed to be released -- 113 -- 102 -- 215 Dividends paid ($.10 per share) (159) (159) ----------- ----------- ----------- ----------- ----------- ----------- Balance December 31,2003 $ 171 $ 16,254 $ 10,888 $ (1,095) $ 25 $ 26,243 =========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements 3 Atlantic Liberty Financial Corp. Consolidated Statements of Cash Flows (in thousands of dollars) (unaudited)
Nine Months Ended Cash flows from operating activities December 31, ------------------------------------ -------------------- 2003 2002 -------- -------- Net income $ 1,071 $ 900 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 124 100 Provision for loan losses -- 40 Net accretion of premiums, discounts and deferred loan fees 250 (54) Deferred income taxes (177) (47) ESOP compensation expense 189 184 Recognition and Retention Plan expense 26 -- (Increase) in interest receivable (120) (78) (Increase) in other assets (296) (1,848) Increase in other liabilities 538 1,583 -------- -------- Net cash provided by operating activities 1,605 780 -------- -------- Cash flows from investing activities: Purchases of: Investment securities held to maturity (1,000) -- Investment securities available for sale (2,000) -- Mortgage-backed securities held to maturity (19,816) (14,323) Proceeds of maturities,calls and principal repayments on: Mortgage-backed securities held to maturity 8,291 5,483 Mortgage-backed securities available for sale 490 -- (Increase) in loans receivable (9,334) (8016) Additions to premises and equipment (24) (370) Purchase of Federal Home Loan Bank of New York Stock (258) -- -------- -------- Net cash (used in) investing activities (23,651) (17,226) -------- -------- Cash flows from financing activities: Increase in deposits 120 71 Increase in advance payments by borrowers for taxes and insurance 201 155 Increase (decrease) in Federal Home Loan Bank advances 21,600 (400) Net proceeds from stock conversion -- 14,841 Cash dividends paid (159) -- -------- -------- Net cash provided by financing activities 21,762 14,667 -------- -------- Net (decrease) in cash and cash equivalents (284) (1,779) Cash and cash equivalents at beginning of period 6,237 9,941 -------- -------- Cash and cash equilvalents at end of period $ 5,953 $ 8,162 ======== ======== Supplemental disclosures of cash flow information Cash paid for: Interest $ 1,585 $ 1,976 -------- -------- Federal, state and city income taxes $ 865 $ 855 -------- --------
See notes to consolidated financial statements. 4 Atlantic Liberty Financial Corp. Notes to Consolidated Financial Statements December 31, 2003 (Unaudited) Note 1- Basis of Presentation --------------------------------- Principles of Consolidation: The accompanying Consolidated Interim financial Statements include the accounts of Atlantic Liberty Financial Corp. ("The Company") and its wholly owned subsidiary Atlantic Liberty Savings, F.A. ("The Association"). All significant inter-company balances and transactions have been eliminated. The Company began operations on October 22, 2002 following the completion of Atlantic Liberty Savings F.A.'s conversion from mutual to stock form. The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-QSB. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America are not included herein. These interim statements should be read in conjunction with the Association's audited financial statements and notes thereto included in the Registration Statement filed with the Securities and Exchange Commission by the Company. Interim statements are subject to possible adjustment in connection with the annual audit of the Company for the year ending March 31, 2004. In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Note 2- Summary of Significant Accounting Policies ------------------------------------------------------ Nature of Operations: The Association is a federally chartered stock savings and loan association, which maintains insurance on deposit accounts with the Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation. The Association is engaged in the business of retail banking with operations conducted through its main office and one branch, both of which are located in Brooklyn, New York. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates. 5 Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the amount of deferred taxes, which are more likely than not to be realized. Management believes that the allowance for loan losses is adequate and that all deferred taxes are more likely than not to be realized. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions in the Association's market area. The assessment of the amount of deferred tax assets more likely than not to be realized is based upon projected future taxable income, which is subject to continual revisions for updated information. Note 3- Conversion and Stock Issuance ----------------------------------------- On April 17, 2002, the Board of Directors of the Association adopted a Plan of Conversion ("Plan") under which Atlantic Liberty Savings, F.A. converted from a federal mutual savings and loan association to a federal stock savings and loan association, and formed the Company. The Plan received member and regulatory approval and was completed on October 22, 2002 at which time the Company sold 1,710,984 shares of common stock at $10 per share and received net proceeds of $14.8 million, exclusive of conversion expenses of $900,000 and $1.4 million to fund the purchase of shares for our employee stock ownership plan. Approximately 50% of the net proceeds were used by the Company to acquire all of the capital stock of the Association. At the time of conversion, the Association established a liquidation account in an amount equal to its total retained earnings as of March 31, 2002. The liquidation account is maintained by the association for the benefit of eligible account holders as of March 31, 2001 and supplemental eligible account holders as of June 30, 2002 who continue to maintain deposit accounts at the Association. The Association will maintain the liquidation account in accordance with applicable federal regulations. Note 4- Employee Stock Ownership Plan ----------------------------------------- As part of the conversion, the Association established an employee stock ownership plan (ESOP) for the benefit of eligible employees. The ESOP borrowed $1,368,790 from the Company and used those funds to acquire 136,879 shares of the Company's stock at $10 per share. Shares held by the ESOP are released to ESOP participants based on principal and interest repayments made by the ESOP on the loan from the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Association's discretionary contributions to the ESOP and earnings on the ESOP's assets. Principal and interest payments are scheduled to occur over a ten-year period. However, in the event the Company's contributions exceed the minimum debt service requirements, additional principal payment will be made. Principal and interest payments took place on December 31, 2002 and December 29, 2003 resulting in 13,688 shares being released to eligible employees in each year. 6 Note 5- Incentive Stock Benefit Plan ---------------------------------------- On November 19, 2003, the stockholders approved the Company's 2003 Incentive Stock Benefit Plan. In accordance with the terms of the Plan, 256,648 shares of common stock of the company, in the aggregate, are reserved for issuance, which shares shall be available for issuance pursuant to the exercise of stock options or as restricted stock awards. Note 6- Earnings Per Share ------------------------------ Amounts reported as basic earnings per share of common stock reflect earnings available to stockholders for the period divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share, which did not differ from basic earnings per share, give effect to stock awards and option securities exercisable into common stock, which would have a dilution effect. Earnings per share is calculated beginning with the date of reorganization and, therefore, no earnings per share is reported for periods prior to the reorganization. Note-7 Dividend Declaration -------------------------------- On January 15, 2004, the Company's Board of Directors declared a quarterly cash dividend of $0.05 per share to be paid on February 13, 2004 to shareholders of record on January 30, 2004. Note 8- Recent Development ------------------------------ At its January meeting, the Company's Board of Directors approved a Stock Repurchase Program to acquire up to 85,550 shares of the Company's common stock, which represents approximately 5% of the outstanding common stock. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The company intends such forward-looking statements to be covered by the safe harbor provision for forward-looking statements contained in the Private Securities Reform Act of 1995 as amended and is including these statements for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations of the Company, are generally identifiable by use of the words "believe", "expect", "intend", "anticipate", "estimate", "project", or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse affect on the operation and future prospects of the Company and its wholly-owned subsidiaries include, but are not limited to, changes in: interest rates; general economic conditions; legislative/regulatory provision; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the Company's market area; and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the company's filings with the Securities and Exchange Commission. The following discussion compares the consolidated financial condition of Atlantic Liberty Financial Corp. at December 31, 2003 to the Association's financial condition at March 31, 2003 and the consolidated results of operations for the three-month and nine-month periods ended December 31, 2003 and December 31, 2002. This discussion should be read in conjunction with the interim financial statements and footnotes included herein. Comparison of Financial Condition At December 31, 2003 and March 31, 2003 Our total assets at December 31, 2003 were $160.8 million an increase of $23.6 million or 17.2% from $137.2 million at March 31, 2003. The increase reflects growth in loans receivable, mortgage-backed securities and investment securities primarily funded by increases in advances from the Federal Home Loan Bank of New York (FHLB, NY) and deposits. Loans increased by $9.3 million or 9.2% to $109.9 million at December 31, 2003 from $100.7 million at March 31, 2003. Our increase in loans resulted principally from the increased one-to-four family mortgage loan originations as new customers sought to take advantage of low market interest rates as well as an increase of $12.5 million in commercial loans, $5.0 million of which were purchased from other financial institutions. Mortgage-backed securities including those held to maturity and available for sale increased $10.9 million or 48.0% to $33.6 million at December 31, 2003 from 8 $22.7 million at March 31., 2003 reflecting new purchases of $19.8 million partially offset by $8.9 million of pre-payments and amortization. Investment securities held to maturity and available for sale, increased $3.0 million to $4.0 million at December 31, 2003 from $1.0 million at March 31, 2003. Cash and cash equivalents decreased $200,000 or 3.2% to $6.0 million at December 31, 2003 from $6.2 million at March 31, 2003. Total deposits of $107.6 million at December 31, 2003 increased $100,000 or 0.1% from $107.5 million at March 31, 2003. Federal Home Loan bank of New York advances increased $21.6 million to $23.2 million at December 31, 2003 from $1.6 million at March 31, 2003 to provide funding for the increases in interest earning assets noted above. Stockholders' equity increased $1.2 million or 4.6% to $26.2 million at December 31, 2003 from $25.1 million at March 31, 2003, primarily the result of net income of $1.1 million for the nine-months ended December 31, 2003. Comparison of Results of Operations for the three-months ended December 31, 2003 and December 31, 2002. General. Net income for the three months ended December 31, 2003 was $346,000 an increase of $104,000 or 43.0% form $242,000 for the three months ended December 31, 2002. The increase in net income was primarily due to increases of $86,000 in net interest income and $19,000 in non-interest income, decreases of $52,000 in non-interest expense and $40,000 in the provision for loan losses, partially offset by an increase of $93,000 in income tax expense. Interest Income. Interest income increased $58,000 during the comparative three months ended December 31, 2003 and 2002. The increase in interest income resulted primarily from increases of $116,000 in interest received on mortgage backed securities and $39,000 in interest received on investment securities, partially offset by decreases of $20,000 in interest received from loans and $77,000 on interest received on other interest earning assets. The Federal Home Loan Bank of New York announced in September, 2003 a suspension of their quarterly dividend. The dividend on our Federal Home Loan Bank of New York stock has been approximately $13,000 per quarter and the suspension thereof should not have a material impact on our financial condition or results of operation in the future. In January, 2004 The Federal Home Loan Bank of New York reinstated the dividend at a lower rate. Interest income received on mortgage-backed securities increased $116,000 or 57.1% to $319,000 for the three months ended December 31, 2003 from $203,000 for the three months ended December 31, 2002. The average balance of mortgage-backed securities for the periods increased by $13.2 million to $34.9 million from $21.7 million. The average yield on mortgage-backed securities declined 9 basis points to 3.66% for the three months ended December 31, 2003 from 3.75% for the three months ended December 31, 2002, reflecting the declining interest rate environment in 2003. Interest income on investment securities increased $39,000 or 243.8% to $55,000 for the three months ended December 31, 2003 from $16,000 for the three months ended December 31, 2002. The increase was due to an increase of 9 $2.6 million in the average balance of investment securities to $3.6 million for the three months ended December 31, 2003 from $1.0 million in the comparable period in 2002, partially offset by a decrease in the average yield of 17 basis points to 6.06% from 6.23% for the respective periods. Interest income from loans decreased $20,000 or 1.1% to $1,791,000 for the three months ended December 31, 2003 from $1,811,000 for the same period in 2002. The decrease was due to a 70 basis point decrease in the average yield, partially offset by an increase in average loans outstanding of $9.3 million to $108.1 million for the three months ended December 31, 2003 from $98.8 million for the three months ended December 31, 2002. The decrease in yield reflects a decrease in market interest rates generally. Interest income on other interest earning assets decreased $77,000 or 89.5% to $9,000 for the three months ended December 31, 2003 from $86,000 for the same period in 2002. The decrease was due to a decrease in the average balance of other interest earning assets to $4.4 million from $21.5 million as well as a decrease of 79 basis points in the average yield. Interest Expense. Total interest expense decreased by $28,000 or 4.6% to $582,000 for the three months ended December 31, 2003 from $610,000 for the three months ended December 31, 2002. The decrease in interest expense resulted primarily from a decrease in the average cost of our interest bearing liabilities to 1.81% from 1.97%, reflecting the decrease in market interest rates during the period, partially offset by an increase of $4.8 million in average total interest bearing liabilities to $128.8 million from $124.0 million. Interest expense on deposits decreased $159,000 or 27.0% to $429,000 for the three months ended December 31, 2003 from $588,000 for the three months ended December 31, 2002. The average balance of certificate of deposit accounts decreased $4.4 million to $56.9 million for the three months ended December 31, 2003 from $61.3 million for the three months ended December 31, 2002, and the average cost on such accounts decreased to 2.30% from 2.81%. In addition, the average balance of transaction and savings deposits decreased $11.2 million or 18.6% to $49.0 million for the three months ended December 31, 2003 from $60.2 million for the three months ended December 31, 2002, and the average cost on such accounts declined 23 basis points to 0.82% from 1.05%, reflecting the decline in market interest rates paid on deposits during 2002 and 2003. Interest expense on Federal Home Loan Bank of New York advances was $150,000 for the three months ended December 31, 2003, an increase of $131,000 from the $19,000 recorded in the three months ended December 31, 2002. Average Federal Home Loan Bank of New York advances increased to $22.1 million for the three months ended December 31, 2003, from $1.6 million in the prior period, however, the average cost of such advances decreased 203 basis points to 2.72% from 4.75%. Net Interest Income. Net interest income increased $86,000 or 5.7% to $1.6 million for the three months ended December 31, 2003 from $1.5 million for the three months ended December 31, 2002. The increase in our net interest income for the quarter ended December 31, 2003 compared to the prior quarter is attributable to an $8.1 million increase in interest earning assets. Our net interest spread was 3.95% for both periods. Our net interest margin for the quarter ended December 31, 2003 compared to the prior period increased 1 basis point to 4.22% from 4.21%. 10 Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, peer group information, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. Based on our evaluation of these factors, management did not make a provision for the three months ended December 31, 2003, while we established a provision of $40,000 for the three months ended December 31, 2002. We used the same methodology and generally similar assumptions in assessing the adequacy of the allowance for both periods. The allowance for loan losses was $582,000 or .53% of loans outstanding at December 31, 2003 as compared with $484,000 or .48% of loans outstanding at December 31, 2002. The allowance for loan losses represented 481.7% of non-performing loans at December 31, 2003 and 386.4% of non-performing loans at December 31, 2002. The level of the allowance is based on estimates and the ultimate losses may vary from the estimates. Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as a part of their examination process, periodically will review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of December 31, 2003 is maintained at a level that represents management's best estimate of inherent losses in the loan portfolio, and such losses were both probable and reasonably estimable. Non-Interest Income. Non-interest income increased $19,000 to $96,000 for the three months ended December 31, 2003, as compared to $77,000 for the three months ended December 31, 2002. The increase was attributable to $24,000 of income on Atlantic Liberty Savings, F.A.'s investment in Bank owned Life Insurance (BOLI) as to which there is no comparable income in the prior period, partially offset by a decrease of $5,000 in saving account fees. Non-Interest Expense. Non-interest expense for the three months ended December 31, 2003 was $1,040,000 compared to $1,092,000 for the three months ended December 31, 2002, a decrease of $52,000 or 4.8%. The decrease was primarily attributable to decreases of $55,000 in salaries and employee benefits and $45,000 in equipment expense, partially offset by increases of $19,000 in legal expense, $21,000 in miscellaneous expense and $7,000 in director's compensation. Provision for Income Taxes. The provision for income taxes increased to $302,000 for the three months ended December 31, 2003 from $209,000 for the three months ended December 31, 2002. The increase in the provision for income taxes is primarily due to a higher level of income before taxes of $648,000 for the three months ended December 31, 2003, compared with income before taxes of $451,000 for the comparative 2002 period. 11 Comparison of Operating Results for the nine-months ended December 31, 2003 and December 2002. General. Net income for the nine months ended December 31, 2003 was $1,071,000 an increase of $171,000 or 19.0% from $900,000 for the nine months ended December 31, 2002. The increase in net income was primarily due to increases of $432,000 in net interest income and $77,000 in non-interest income, as well as a decrease of $40,000 in the provision for loan losses, partially offset by increases of $177,000 in non-interest expense and $201,000 in income tax expense. Interest Income. Interest income increased $35,000 during the comparative nine months ended December 31, 2003 and 2002. The increase in interest income resulted primarily from increases of $14,000 in interest received from loans, $94,000 in interest received on mortgage-backed securities and $46,000 in interest on investment securities, partially offset by a decrease of $119,000 of interest received on other interest earning assets. Interest income from loans increased $14,000 or 0.3% to $5.34 million for the nine months ended December 31, 2003 from $5.32 million for the nine months ended December 31, 2002. The average balance of loans outstanding for the periods increased by $8.8 million to $104.8 million from $96.0 million. The average yield on loans declined 60 basis points to 6.80% for the nine months ended December 31, 2003 from 7.40% for the nine months ended December 31, 2002, reflecting a decrease in market interest rates generally. Interest income from mortgage-backed securities increased $94,000 or 15.7% to $692,000 for the nine months ended December 31, 2003 from $598,000 for the same period in 2002. The increase was due to an increase in average mortgage-backed securities of $9.2 million to $27.3 million for the nine months ended December 31, 2003 from $18.1 million for the nine months ended December 31, 2002, partially offset by a 103 basis point decrease in the average yield. The decrease in yield reflects the declining interest rate environment in 2002 and 2003. Interest income on investment securities increased $46,000 or 93.4% to $95,000 for the nine months ended December 31, 2003 from $49,000 for the nine months ended December 31, 2002. The increase was due to an increase in average investment securities of $1.1 million to $2.1 million for the nine months ended December 31, 2003 from $1.0 million in the comparable period in 2002, partially offset by a decrease in the average yield of 13 basis points to 6.18% from 6.31% for the respective periods. Interest income on other interest earning assets decreased $119,000 or 66.9% to $59,000 for the nine months ended December 31, 2003, from $178,000 for the same period in 2002. The decrease was due to a decrease in the average balance of other interest earning assets to $4.9 million from $14.9 million, partially offset by an increase of 4 basis points in the average yield. Interest Expense. Total interest expense decreased by $397,000 or 20.0% to $1.6 million for the nine months ended December 31, 2003 from $2.0 million for the nine months ended December 31, 2002. The decrease in interest expense resulted primarily from a decrease in the average cost of our interest bearing liabilities to 1.79% from 2.24%, reflecting the decrease in market interest rates during the period as well as a decrease in the average balance of interest bearing liabilities of $100,000 to $117.8 million from $117.9 million. 12 Interest expense on deposits decreased $580,000 or 30.4% to $1.3 million for the nine months ended December 31, 2003 from $1.9 million for the nine months ended December 31, 2002. The average balance of certificate of deposit accounts decreased $6.3 million to $57.6 million for the nine months ended December 31, 2003 from $63.9 million for the nine months ended December 31, 2002, and the average cost on such accounts decreased to 2.40% from 3.07%. In addition, the average balance of transaction and savings deposits decreased $2.9 million or 5.7% to $48.4 million for the nine months ended December 31, 2003 from $51.3 million for the nine months ended December 31, 2002, and the average cost on such accounts declined 33 basis points to 0.81% from 1.14% reflecting the decline in market interest rates paid on deposits during 2002 and 2003. Interest expense on Federal Home Loan Bank of New York advances was $243,000 for the nine months ended December 31, 2003, an increase of $180,000 from the $63,000 recorded in the nine months ended December 31, 2002. Average Federal Home Loan Bank of New York advances increased to $11.1 million for the nine months ended December 31, 2003, from $1.8 million in the prior period however, the average cost on such advances decreased 171 basis points to 2.91% from 4.62%. Net Interest Income. Net interest income increased $432,000 or 10.4% to $4.6 million for the nine months ended December 31, 2003 from $4.2 million for the nine months ended December 31, 2002. Our net interest spread increased 7 basis points to 4.14% for the nine months ended December 31, 2003, from 4.07% for the comparable period in 2002, while our net interest margin increased 13 basis points to 4.41% from 4.28% . In addition, average interest earning assets increased $9.1 million to $139.0 million for the nine months ended December 31, 2003 from $129.9 for the nine months ended December 31, 2002. Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, peer group information, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. Based on our evaluation of these factors, management did not make a provision for the nine months ended December 31, 2003 while we established a provision of $40,000 for the nine months ended December 31, 2002. We used the same methodology and generally similar assumptions in assessing the adequacy of the allowance for both periods. The allowance for loan losses was $582,000 or .0.53% of loans outstanding at December 31, 2003 as compared with $484,000 or .0.48% of loans outstanding at December 31, 2002. The allowance for loan losses represented 481.7% of non-performing loans at December 31, 2003 and 386.4% of non-performing loans at December 31, 2002. The level of the allowance is based on estimates and the ultimate losses may vary from the estimates. 13 Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of December 31, 2003 is maintained at a level that represents management's best estimate of inherent losses in the loan portfolio, and such losses were both probable and reasonably estimable. Non-Interest Income. Non-interest income increased $77,000 to $305,000 for the nine months ended December 31, 2003, as compared to $228,000 for the nine months ended December 31, 2002. The increase was attributed to increases of $22,000 in savings and checking account fees and $69,000 of income on Atlantic Liberty Savings, F.A. investment in Bank Owned Life Insurance (BOLI), as to which there is no comparable income in the prior period, partially offset by a decrease of $13,000 in loan prepayment penalty fees. Non-Interest Expense. Non-interest expense for the nine months ended December 31, 2003 increased $177,000 or 6.4% to $3.0 million from $2.8 million of the nine months ended December 31, 2002. The increase was primarily attributable to increases of $151,000 in salaries and employee benefits, $13,000 in directors' compensation, $58,000 in occupancy expense, $72,000 in legal expense and $65,000 in miscellaneous expense, partially offset by a decrease of $182,000 in equipment expense. Provision for Income Taxes. The provision for income taxes increased to $882,000 for the nine months ended December 31, 2003 from $681,000 for the nine months ended December 31, 2002. The increase in the provision for income taxes is primarily due to our higher level of income before taxes of $2.0 million for the nine months ended December 31, 2003, compared with $1.6 million for the comparative 2002 period as well as an increase in the effective tax rate to 45.2% for the nine months ended December 31, 2003 from 43.1% in the prior period caused principally by the non-deductibility for income tax purposes of the excess of market value on the release date over purchase price of the ESOP shares. Liquidity and Capital Resources Liquidity. The Association must maintain an adequate level of liquidity to ensure the availability of sufficient funds to fund loan originations and deposit withdrawals, to satisfy other financial commitments, and to take advantage of investment opportunities. The Association invests excess funds in overnight deposits and other short-term interest-bearing assets to provide liquidity to meet these needs. At December 31, 2003, cash and cash equivalents totaled $6.0 million. At December 31, 2003, the Association had commitments to funds loans of $2.0 million. At December 31, 2003, certificates of deposit represented 52.4% of total deposits. The Association expects to retain these deposit accounts. In addition, the Association could borrow up to $16.2 million from the Federal Home Loan Bank of New York without providing additional collateral. The Association considers its liquidity and capital resources sufficient to meet its outstanding short-term and long-term needs. 14 Capital Resources. The Association is subject to various regulatory capital requirements administered by federal regulatory agencies. The following table summarizes the Association's regulatory capital requirements versus actual capital as of December 31, 2003:
ACTUAL REQUIRED EXCESS ------------------- ------------------ ------------------ (Dollars in thousands) AMOUNT % AMOUNT % AMOUNT % ------ ----- ------ ----- ------ ----- Core capital (to adjusted total assets) $ 18.3 11.6% $ 6.3 4.0% $ 12.0 7.6% Risk-based capital To (risk-weighted assets) $ 18.8 21.2% $ 7.1 8.0% $ 11.7 13.2%
Management of Market Risk General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our board of directors has established an Asset/Liability Management Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing the risk consistent with the guidelines approved by the board of directors. Senior management monitors the level of interest rate risk on a regular basis and the Asset/Liability Management Committee, which consists of senior management operating under a policy adopted by the board of directors, meets as needed to review our asset/liability policies and interest rate risk position. We have sought to manage our interest rate risk by more closely matching the maturities of our interest rate sensitive assets and liabilities. In particular, we offer one, three, and five year adjustable rate mortgage loans, a loan product that has a fixed rate of interest for seven years and which adjusts annually thereafter, and three and five year balloon loans. We also invest in mortgage-backed securities which reprice within one and three years. We do not solicit high-rate jumbo certificates of deposit or brokered funds. Net Portfolio Value. In past years, many savings associations have measured interest rate sensitivity by computing the "gap" between the assets and liabilities which are expected to mature or reprice within certain time periods, based on assumptions regarding loan prepayment and deposit decay rates formerly provided by the Office of Thrift Supervision. However, the Office of Thrift Supervision now requires the computation of amounts by which the net present value of an institution's cash flow from assets, liabilities and off balance sheet items (the institution's net portfolio value or "NPV") would change in the event of a range of assumed changes in market interest rates. The Office of Thrift Supervision provides all institutions that file a Consolidated Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with an interest rate sensitivity report of net portfolio value. The Office of Thrift Supervision simulation model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net 15 portfolio value. Historically, the Office of Thrift Supervision model estimated the economic value of each type of asset, liability and off-balance sheet contract under the assumption that the United States Treasury yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point increments. However, given the current low level of market interest rates, we did not receive a NPV calculation for an interest rate decrease of greater than 100 basis points. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the "Change in Interest Rates" column below. The Office of Thrift Supervision provides us the results of the interest rate sensitivity model, which is based on information we provide to the Office of Thrift Supervision to estimate the sensitivity of our net portfolio value. The table below sets forth, as of September 31, 2003, the latest date for which the Office of Thrift Supervision has provided Atlantic Liberty Savings, F.A. an interest rate sensitivity report of net portfolio value, the estimated changes in our net portfolio value that would result form the designated instantaneous changes in the United States Treasury yield curve.
Net Portfolio Value as a %of Present Value of Net Portfolio Value Assets/liabilities ----------------------------------------------------------- -------------------------------- Change in Interest Rates Estimated Amount of (Basis Points) NPV Change Percent NPV Ratio Change -------------- --- ------ ------- --------- ------------------- (Dollars in Thousands) +300 $ 18,833 $(7,046) (27)% 12.07% (357) basis points +200 21,449 (4,430) (17) 13.47 (218) basis points +100 23,881 (1,999) (8) 14.69 ( 95) basis points 0 25,879 -- -- 15.64 -- basis points -100 26,995 1,116 +4 16.10 +46 basis points
The table above indicates that at September 30, 2003, in the event of a 100 basis point decrease in interest rates, we would experience a 4% increase in net portfolio value. In the event of a 200 basis point increase in interest rates, we would experience a 17% decrease in net portfolio value. Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net portfolio value table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on its net interest income and will differ from actual results. 16 ITEM 3. CONTROLS AND PROCEDURES Under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report, the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There has been no change in the Company's internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are not involved in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business. At December 31, 2003, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the special meeting of stockholders held on November 19, 2003, the following proposal was voted upon and approved by the stockholders: Resolved, that the adoption of the Atlantic Liberty Financial Corp., 2003 Incentive Stock Benefit Plan is hereby approved. The voting as to the proposal was as follows: For Against Withheld --------- -------- --------- 860,056 149,058 8,202 ITEM 5. OTHER INFORMATION At its January meeting, the Board of Directors of Atlantic Liberty Financial Corp. declared a quarterly cash dividend of $0.05 per share to be paid on February 13, 2004 to shareholders of record on January 30, 2004. At its January meeting, the Company's Board of Directors approved a Stock Repurchase Program to acquire up to 85,550 shares of Company's common stock, which represent approximately 5% of the outstanding common stock. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibit 10.1 Atlantic Liberty Financial Corp. 2003 Incentive Stock Benefit Plan Exhibit 31.1 Exhibit 31.2 Exhibit 32 Sarbanes-Oxley Certifications pursuant to Section 906 On January 26, 2004 we filed a Form 8-K which contained our Press Release of earnings for the quarter ended December 31, 2003. 18 SIGNATURES Pursuant to the requirement of the securities Exchange Act of 1934. The Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Atlantic Liberty Financial Corp. Date: February 6, 2004 /s/ BARRY M. DONOHUE --------------------------------------- Barry M. Donohue President and Chief Executive Officer Date: February 6, 2004 /s/ WILLIAM M. GILFILLAN --------------------------------------- William M. Gilfillan Chief Financial Officer and Corporate Secretary 19