10-Q 1 form10q-55624_allied.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 001-16763 Allied First Bancorp, Inc. (Exact name of small business issuer as specified in its charter) Maryland 36-4482786 (State or other jurisdiction of (I.R.S. Employer identification incorporation or organization) or number) 387 Shuman Boulevard, Suite 290 E, Naperville, IL 60563 (Address of principal executive offices) (Zip Code) (630) 778-7700 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Transitional Small Business Disclosure Format (check one): Yes |_| No |X| Indicate the number of Shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of November 13, 2003, there were 558,350 shares of the Registrant's common stock issued and outstanding. Allied First Bancorp, Inc. INDEX PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Consolidated Condensed Financial Statements Consolidated Balance Sheets at September 30, 2003 and June 30, 2003 3 Consolidated Statements of Income and Comprehensive Income for the three months ended September 30, 2003 and 2002 4 Consolidated Statements of Cash Flows for the three months ended September 30, 2003 and 2002 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Controls and Procedures 14 PART II. OTHER INFORMATION Items 1-6 15 Signature Page 16 10-QSB Certifications 17 2 PART I: FINANCIAL INFORMATION, Item 1. Allied First Bancorp, Inc. CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements 3 PART I: FINANCIAL INFORMATION, Item 1 Allied First Bancorp, Inc. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements 4 PART I: Financial Information, Item 1 Allied First Bancorp, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements 5 Allied First Bancorp, Inc. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (1) Basis of Presentation The accompanying consolidated condensed financial statements include the accounts of Allied First Bancorp, Inc. and its wholly owned subsidiary, Allied First Bank, sb. All significant inter-company transactions and balances are eliminated in consolidation. The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation SB. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the consolidated condensed financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to represent fairly the financial condition of the Company as of September 30, 2003 and June 30, 2003 and the results of its operations, for the three months ended September 30, 2003 and 2002. Financial statement reclassifications have been made for the prior period to conform to classifications used as of and for the period ended September 30, 2003. Operating results for the three months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2004. Allied First Bancorp, Inc.'s 2003 annual report on Form 10-KSB should be read in conjunction with these statements. (2) Use of Estimates The preparation of consolidated 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, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from current estimates. Estimates that are more susceptible to change in the near term include the allowance for loan losses and the fair values of financial instruments. (3) Earnings Per Common Share Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding. For the three-month period ended September 30, 2003, the weighted average number of common shares used in the computation of basic earning per share was 558,350. The weighted average number of common shares for the same period in 2002 was 608,350. There are no potential dilutive common shares. 6 (4) Premises and Equipment The company is obligated under a five year operating lease for office space that contains a termination option effective as of April 30, 2007. The lease was effective as of September 16, 2003 with terms to begin occupancy in November 2003. The expiration of the lease is April 30, 2009. It contains a period of free rent in the 2004 fiscal year, and escalation clauses providing for increases in rental expense based primarily on increases in real estate taxes and operating costs. Rent expense was $26,000 for the three month period ending September 30, 2003 under the terms of the expired lease. The future minimum commitments under the full lease term at September 30, 2003 for all operating leases are as follows: Year Ending June 30, Amount 2004 $ 7,564 2005 117,464 2006 120,988 2007 124,618 2008 128,357 Thereafter 109,625 -------- Total $608,616 ======== (5) Federal Home Loan Bank Advances At September 30, 2003, advances from the Federal Home Loan Bank were as follows. Open line advance, variable rate and term $16,000,000 Maturity July 2004, fixed rate of 1.34% 5,000,000 Maturity July 2005, fixed rate of 1.70% 5,000,000 Maturity July 2006, fixed rate of 2.12% 5,000,000 ----------- Total $31,000,000 =========== Each advance is payable at its maturity date, with a prepayment penalty. All advances including open line advances were collateralized by $9,052,000 in mortgaged backed securities and $51,831,000 of first mortgage loans under a blanket lien arrangement at September 30, 2003. 7 Part I, Item 2 Allied First Bancorp, Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Allied First Bancorp, Inc.'s results of operations are primarily dependent on Allied First Bank's net interest margin, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Allied First Bank's net income is also affected by the level of its non-interest income and non-interest expenses, such as employee compensation and benefits, occupancy expenses and other expenses. FORWARD-LOOKING STATEMENTS When used in this filing and in future filings by Allied First Bancorp, Inc. and Allied First Bank, sb with the U.S. Securities and Exchange Commission, in Allied First Bancorp, Inc. and Allied First Bank press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties, including but not limited to changes in economic conditions in our market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in our market area and competition, all or some of which could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Allied First Bancorp, Inc. wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advises readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors, could affect our financial performance and could cause Allied First Bancorp, Inc.'s actual results for future periods to differ materially from those anticipated or projected. These risks and uncertainties should be considered in evaluating forward-looking statements and you should not rely on these statements. CRITICAL ACCOUNTING POLICIES Certain of the Company's accounting policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Some of the facts and circumstances which could affect these judgments include changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include 8 determining the allowance for loan losses and determining the fair value of securities and other financial instruments. COMPARISON OF THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002 FINANCIAL CONDITION The Company's total assets increased $28.0 million during the three months ended September 30, 2003, to $129.6 million from $101.6 million at June 30, 2003. The increase was due to increases in net loans of $24.0 million and an increase of $5.8 million in available for sale securities. The Company's total liabilities increased $28.0 million from $91.7 million at June 30, 2003, to $119.7 million at September 30, 2003. The increase was due primarily to $31.0 million in borrowed funds and was offset by a decrease in deposits of $2.9 million from $91.2 million at June 30, 2003 to $88.3 million at September 30, 2003. Stockholders' equity increased by $85,000 from $9.8 million at June 30, 2003 to $9.9 million at September 30, 2003. The increase is primarily from year to date net income of $77,000, and increased unrealized appreciation of available for sale securities of $8,000 RESULTS OF OPERATION Net income for the three-month period ended September 30, 2003 was $77,000 compared to net income of $65,000 for the equivalent period in 2002. The increase in net income for the three-month period ended September 30, 2003 compared to the same three month period in 2002 was due primarily to a higher net interest income. NET INTEREST INCOME The net interest income for the three-month period ended September 30, 2003, was $895,000 compared to $810,000 for the same period in 2002. This is a 10.49% increase over the same period in 2002. The net interest margins were 3.25% and 3.77% for the three-month periods ended September 30, 2003 and 2002. The reason net interest income rose in the three-month period ended September 30, 2003 compared to the same period in 2002 was due to a lower percentage cost on interest bearing liabilities. The three-month period ended September 30, 2003 had a declining interest rate margin due to a 142 basis point drop in the average rate for interest earning assets; this is partially offset by the 125 basis points drop in average rate for interest bearing liabilities. Total average loans increased $28.5 million for the three-month period over one-year ago. The increase in average loans in 2003 over 2002 average loans is due to the purchase of $35.3 million in first mortgage loans. Total average interest earning balances decreased $3.3 million for the three-month over one-year ago. The yields on total average earning assets were 4.93%and 6.35% for the three-month period ended September 30, 2003, and 2002. 9 Total average interest bearing liabilities increased $25.7 million for the three-month periods ended September 30, 2003 over the comparative period in 2002. Interest bearing liabilities increased primarily due to the increase in average debt outstanding of $13.8 million. During the first quarter of the 2004 fiscal year, Allied First Bancorp began utilizing Federal Home Loan Bank of Chicago loan advances to purchase first mortgage products in an effort to utilize more of its capital. The terms of the advances were one, two, and three years with $5.0 million due in each year and having fixed interest rates of 1.34%, 1.70%, and 2.12% respectively. The company also has $16.0 million outstanding on an open line of credit with a variable rate of interest with the Federal Home Loan Bank of Chicago. INTEREST INCOME Interest income for the three months ended September 30, 2003 was $1,357,000 compared to $1,362,000 for the same period in 2002. The decrease for the three-month period was primarily due to a decline in yields on earning assets. Allied First Bancorp was able to partially offset the loss in income from the decline in yields by purchasing first mortgage loans. INTEREST EXPENSE Interest expense for the three months ended September 30, 2003 was $462,000 compared to $552,000 for the same period in 2002. The decrease was primarily due to lower rates paid on interest-bearing liabilities of 1.95% for the three-month period ending September 30, 2003, and 3.20% for the same three-month period in 2002. This represents a 125 basis point decrease in the rates paid over the same period in the prior year. 10 The following tables set forth consolidated information regarding average balances and annualized average rates.

(1) Total Loans less deferred net loan fees 11 PROVISION FOR LOAN LOSSES The provision for loan losses was $121,000 for the three-month period ended September 30, 2003 and $60,000 for the same period in 2002. The reason for the increase is due to the increase in the loan portfolio balances and in net charge-offs for the three-month period ended September 30, 2003 over the same period in 2002, as well as current probable losses in the loan portfolio. Changes in the provision for loan losses are attributed to management's analysis of the adequacy of the allowance for loan losses to address probable losses. Net charge-offs of $72,000 have been recorded for the three-month period ended September 30, 2003, compared to $59,000 of net charge-offs for the same period in 2002. The allowance for loan losses was $641,000 or 0.58% of net loans as of September 30, 2003, compared to $592,000 or 0.68% of net loans at June 30, 2003. The reason for the decline in percentage of allowance for loan loss to net loans was primarily due to loan portfolio shifting to a greater percentage of real estate secured loans and a smaller percentage of unsecured loans. The portfolio continued to shift to more real estate loans with the purchase of $35.3 million in first mortgage loans during the first quarter of the fiscal 2004 year. Allied First Bancorp, Inc. holds a small percentage in secured commercial loans, which was $2.9 million or 2.61% of net loans at September 30, 2003. At September 30, 2003 first mortgage and home equity loans comprise nearly 70% of the loan portfolio compared to 62% at June 30, 2003. 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 revisions as more information becomes available or as future events change. Approximately 93% of our customer base consists of American Airlines pilots and their family members. Although this customer base had historically relatively stable employment and sources of income, the terrorist attacks on the United States in September 2001, the war in Iraq, and the current economic environment have adversely affected the airline industry. As a result of these factors, the stability of the employment and income of the American Airline pilots has been adversely affected and could negatively affect the ability of our customers to repay their loans, although the effect on our loan delinquencies and loan losses cannot be identified with reasonable certainty at this time. As a result of these factors, we may have higher loan delinquencies and defaults in future periods. At September 30, 2003, our delinquent loans past due 60 days or more remained at 0.02% of our loan portfolio. NON-INTEREST INCOME Non-interest income remained relatively stable over all periods presented. Non-interest income for the three-months period ended September 30, 2003 was $204,000 and $201,000 for the same period in 2002. Account fees for the three-month period ended September 30, 2003 were $40,000 compared to $31,000 for the same three-month period in 2002 for a 29.03% increase. This increase was primarily due to the overdraft privilege program. 12 NON-INTEREST EXPENSE Non-interest expense for the three-month period ended September 30, 2003 was $851,000, an increase of $8,000, or 0.95%, compared to $843,000 for the same period in 2002. Salary and employee benefits was $333,000 for the three-month period ended September 30, 2003 an increase of $46,000 or 16.03%, from $287,000 for the same period in 2002. The increase in salaries and employee benefits is due to normal merit raises, additional staff, increased pension and benefit costs. Occupancy expense was $26,000 for the quarter ended September 30, 2003 up $5,000 or 23.81% from $21,000 for same three-month period in 2002. The reason for the increase was a change in rent effective January 1, 2003. Credit and debit card processing expense was $119,000 for the quarter ended September 30, 2003 a decrease of $18,000 or 13.14% from $137,000 for the same period in 2002. The decrease was due to lower processing expenses on credit cards. The travel and conference expense was $17,000, an increase of $5,000 from $12,000 for the same three-month period in 2002. The reason for the increase is additional conference attendance. Professional services were $109,000 for the three-month period ended September 30, 2003 up $15,000 or 15.96% from $94,000 for the same three-month period in 2002. The reason for the increase is additional legal and audit service expenses. Marketing and promotion was $39,000 for the three-month period ended September 30, 2003, a decrease of $67,000 or 63.21%, from $106,000 for the same period in 2002. The decrease in marketing and promotion expense is a result of decreased promotional activities in the first quarter of the 2004 fiscal year. Other expenses for the quarter ended September 30, 2003 were $37,000 an increase of $17,000, from the $20,000 for the three months ended September 30, 2002. This increase is primarily related to an increase in regulatory fees. INCOME TAXES The provision for income taxes was $50,000 for the three-month period ended September 30, 2003 compared to $42,000 for the same period in 2002. The effective tax rate for the three months ended September 30, 2003 and September 30, 2002 was 39.18% and 39.15%. REGULATORY CAPITAL REQUIREMENTS Pursuant to federal law, Allied First Bank must meet three separate minimum capital ratio requirements. As of September 30, 2003, Allied First Bank had core capital, Tier I risk-based and total risk-based ratios of 8.6%, 11.0% and 11.8% compared to well-capitalized requirements of 5.00%, 6.00% and 10.00%. At June 30, 2003, Allied First Bank had core capital, Tier I risk-based and total risk-based ratios of 9.5%, 12.1% and 12.9%, respectively. LIQUIDITY Liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, and pay operating expenses. Allied First Bancorp, Inc. relies on various funding sources in order to meet these demands. Primary sources of funds include interest-earning balances with other financial institutions, money market mutual funds, proceeds from principal and interest payments on loans as well as the ability to borrow against first mortgages, and marketable securities. At September 30, 2003, Allied First Bank had $3.4 million in cash and cash equivalents that could be used for its funding needs. Cash and cash equivalents increased by $339,000 compared to the period ending June 30, 2003 and securities available for sale increased by $5.8 million, time deposits with other institutions decreased $800,000. As of September 30, 2003, management is not aware of any current recommendations by regulatory authorities, which, if they were to be implemented, would have or are reasonably likely to have a material adverse effect on the Allied First Bancorp, Inc.'s liquidity, capital resources or operations. 13 Item 3 Allied First Bancorp, Inc. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this report an evaluation was carried out under the supervision and with the participation of Allied First Bancorp Inc.'s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures (as defined in Rule 13a-14(c)/15d-14(c)) under the Securities Exchange Act of 1934). Based on their evaluation, Allied First Bancorp Inc.'s Chief Executive Officer and Chief Financial Officer have concluded that Allied First Bancorp, Inc's disclosure controls and procedures are to the best of their knowledge, effective to ensure that the information required to be disclosed by Allied First Bancorp Inc. in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, there were no significant changes in Allied First Bancorp Inc.'s internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 14 Part II - Other Information Item 1 - Legal Proceedings - Not Applicable. Item 2 - Changes in Securities and Use of Proceeds - Not Applicable. Item 3 - Defaults upon Senior Securities - Not Applicable. Item 4 - Submission of Matters to a vote of Security Holders On October 23, 2003, the shareholders held their annual meeting to consider and act upon the election of Mr. Frank K. Voris and Mr. Brien J. Nagle to serve as directors for terms of three years and the ratification of the appointment of Crowe Chizek and Company LLC as auditors for the Company for the fiscal year ending June 30, 2004. Both of the foregoing items were approved by the shareholders at the meeting by the following vote totals based upon 558,350 shares outstanding and entitled to vote at the meeting. I. Election of Directors- 451,738 shares voted, as follows: Frank K. Voris: 449,738 votes for; 1700 votes WITHHELD. Brien J. Nagle: 450,738 votes for; 700 votes WITHHELD. II. Ratification of the appointment of Crowe Chizek and Company LLC as auditors for the company for the fiscal year ending June 30, 2004 - 451,438 shares voted, as follows: 451,438 votes for; 0 votes withheld Item 5 - Other Information - Not Applicable Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit 31.1 Rule 13a-14(a)/15d/14(a) Certification of Chief Executive Officer Exhibit 31.2 Rule 13a-14(a)/15d/14(a) Certification of Chief Financial Officer Exhibit 32.1 Chief Executive Officer's Section 906 Certification under the Sarbanes-Oxley Act of 2002 Exhibit 32.2 Chief Financial Officer's Section 906 Certification Under the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K None 15 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. Allied First Bancorp, Inc. Registrant Date: November,13 2003 /s/ Kenneth L. Bertrand ---------------------------------- Kenneth L. Bertrand President and Chief Executive Officer Date: November 13, 2003 /s/ Brian K. Weiss ---------------------------------- Brian K. Weiss Chief Financial Officer 16

ALLIED FIRST BANCORP INC 10-Q