10-Q 1 g10q-29368.txt 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) -------- X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES -------- EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 ------------------------------------------------- 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 0-24519 ------- LIBERTY BANCORP, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) UNITED STATES OF AMERICA 22-3593532 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1410 St. Georges Avenue, Avenel, New Jersey 07001 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 732-499-7200 ----------------------------- Indicate by check X 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. (1) Yes X No ----- ----- (2) Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of July 20, 2002, 3,267,072 common shares, $1.00 par value, were outstanding. LIBERTY BANCORP, INC. INDEX Page Number ------ PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition as of June 30, 2002 and December 31, 2001 (Unaudited) 1 Consolidated Statements of Income for the Six and Three Months Ended June 30, 2002 and 2001 (Unaudited) 2 Consolidated Statements of Comprehensive Income for the Six and Three Months Ended June 30, 2002 and 2001 (Unaudited) 3 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (Unaudited) 4-5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13-14 PART II OTHER INFORMATION 15-16 SIGNATURES 17 LIBERTY BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ---------------------------------------------- (Unaudited)

See notes to consolidated financial statements. -1- LIBERTY BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME --------------------------------- (Unaudited)

See notes to consolidated financial statements. -2- LIBERTY BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ----------------------------------------------- (Unaudited)

See notes to consolidated financial statements. -3- LIBERTY BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (Unaudited)

See notes to consolidated financial statements. -4- LIBERTY BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (Unaudited)

See notes to consolidated financial statements. -5- LIBERTY BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. BASIS OF PRESENTATION --------------------------- The accompanying unaudited financial statements, representing the consolidation of the financial results of Liberty Bancorp, Inc. (the "Company") and its subsidiary, Liberty Bank (the "Bank"), were prepared in accordance with instructions for Form 10-QSB and regulation S-X and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the three and six months ended June 30, 2002, are not necessarily indicative of the results which may be expected for the entire fiscal year. 2. NET INCOME PER COMMON SHARE --------------------------------- Basic net income per common share is calculated by dividing net income by the weighted average number of shares of common stock outstanding, adjusted for the unallocated portion of shares held by the ESOP in accordance with the American Institute of Certified Public Accountants' Statement of Position 93-6. Diluted net income per share is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of stock options, if dilutive, using the treasury stock method. 3. SUBSEQUENT EVENT ---------------------- On July 2, 2002, the State of New Jersey enacted changes in its corporate business tax law. Among these changes are two which significantly impact the Bank: (a) an increase in the tax rate, from 3% to 9%, applicable to the Bank's pre-tax income and (b) the elimination of the previously permitted exclusion from pre-tax income of certain dividends received. These changes are retroactive to January 1, 2002. The Company has determined that the cumulative effect of the tax law change, through July 2, 2002 was an increase to net income of approximately $20,000.00, which includes, net of the effect of federal income taxes, the recording of additional current state tax for the six months ended June 30, 2002, and the adjustment of state deferred tax assets. This adjustment will be recorded in July 2002. -6- LIBERTY BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------------------- DISCUSSION OF FORWARD-LOOKING STATEMENTS When used or incorporated by reference in disclosure documents, the words "anticipate", "estimate", "expect", "target", "goal" and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. These forward-looking statements speak only as of the date of the document. The Company expressly disclaims any obligation or undertaking to publicly release any update or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectation with regard thereto or any change in events, conditions or circumstances on which such statement is based. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2002 AND DECEMBER 31, 2001 The Company's assets at June 30, 2002 totaled $360.9 million, which represents an increase of $37.9 million, or 11.7% as compared with $323.0 million at December 31, 2001. Such increase was largely due to a $34.1 million increase in securities available for sale and a $5.3 million, or 2.7% increase in loans receivable partially offset by a $2.4 million decrease in cash and cash equivalents. The increase in securities available for sale is the result of $59.0 million in securities purchased, partially offset by $25.8 million in principal repayments and premium amortizations. The Company held no foreclosed real estate at either June 30, 2002 or December 31, 2001. Deposits increased $27.8 million, or 10.8%, to $285.4 million at June 30, 2002 when compared with $257.6 million at December 31, 2001. The increase in deposits resulted from an increase of $23.7 million in deposits combined with $4.1 million of interest credited. Such increases consisted of $14.9 million in certificates of deposit, $9.6 million in savings accounts and $3.3 million in checking accounts. Stockholders' equity increased $1.6 million, or 5.11%, to $32.9 million at June 30, 2002 as compared with $31.3 million at December 31, 2001. Net income combined with an $844,000 increase in unrealized gain on securities available for sale partially offset by $63,000 in dividends paid accounted for the change in stockholders' equity. -7- LIBERTY BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------------------- COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED JUNE 30, 2002 AND 2001 Net income decreased $57,500, or 20.4%, to $225,000 for the quarter ended June 30, 2002 compared with $282,500 for the same quarter in 2001. Interest expenses decreased by $625,000; however, this was largely offset by increases in non-interest expense of $601,000. The Company incurred non-tax deductible legal and investment banking fees related to the previously announced merger with Northfield Savings Bank, discussed below, of $277,000. There will be further merger related expenses in future periods. Total interest income decreased by $50,000 or 0.9% to $5.30 million during the quarter ended June 30, 2002 from $5.35 million during the same quarter in 2001. Interest income on loans receivable decreased $378,000, or 9.5% to $3.6 million during the quarter ended June 30, 2002 from $4.0 million for the same period in 2001. The decrease during the 2002 quarter resulted from a $9.9 million decline in the average balance of loans receivable to $202.7 million from $212.6 million combined with a 38 basis points decline in the yield on loans receivable to 7.10% from 7.48%. Interest income on securities available for sale, consisting of mortgage-backed securities, increased $538,000, or 48.4% to $1.6 million during the quarter ended June 30, 2002 from $1.1 million for the same quarter in 2001. The increase during the 2002 quarter resulted from a $59.1 million increase in the average balance of such securities to $142.3 million from $83.2 million, offset by a 71 basis point decline in the yield earned to 4.64% from 5.35%. The majority of these securities are adjustable rate mortgage backed securities and the rate decline is a result of declining market rates. Interest income on securities held to maturity, consisting of short-term government agency bonds, decreased $154,100, or 91.3% to $14,600 during the quarter ended June 30, 2002 from $168,700 for the same quarter in 2001. The decrease during the 2002 quarter resulted from a $7.5 million decrease in the average balances to $1.0 million from $8.5 million combined with a 207 basis point decrease in the yield earned on securities held to maturity to 5.84% from 7.91%. These securities are callable by the borrower, and the decline in the average balance of these securities is the result of the securities being called. Interest income on other interest-earning assets, consisting of federal funds and overnight deposits, decreased $56,300, or 61.4% to $35,400 from $91,700 during the quarter ended June 30, 2002 when compared to the same quarter in 2001. The decrease during the 2002 quarter resulted from a $1.0 million decrease in the average balances to $4.8 million from $5.8 million, combined with a 335 basis point decrease in the yield earned on other interest-earning assets to 2.93% from 6.28%. Interest expense on deposits decreased by $589,000 or 20.7% to $2.3 million during the quarter ended June 30, 2002 compared to $2.8 million for the same quarter in 2001. The decrease during the 2002 quarter was attributable to a 145 basis point decrease in the cost of deposits to 3.27% from 4.72% partially offset by a $31.6 million or 13.1% increase in average balances of interest bearing deposits to $272.6 million from $241.0 million. The increase in deposits is the result of increased activity in the branches that the Bank has opened in the last two years. The Company believes that the rates offered in all of the Bank's branches are competitive in its market area. Interest expense on Federal Home Loan Bank of New York ("FHLB") advances decreased $36,000 or 9.2% to $360,000 during the quarter ended June 30, 2002 compared to $396,000 for the same quarter in 2001. Such decrease resulted from a 100 basis point decrease in the cost to 3.39% from 4.39%, partially offset by a $5.9 million increase in the average balance of advances to $42.0 million from $36.1 million. -8- LIBERTY BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------------------- COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED JUNE 30, 2002 AND 2001 (CONT'D.) Interest expense on capitalized leases amounted to $66,000 for the quarter ended June 30, 2002 and 2001. Net interest income increased $575,000 or 28.2% to $2.6 million during the quarter ended June 30, 2002 when compared with $2.0 million for the same quarter in 2001. The increase was due to a decrease in total interest expense of $625,000 partially offset by a decrease in total interest income of $50,000. The Bank's net interest rate spread increased 52 basis points to 2.69% for the quarter ended June 30, 2002. The cost of interest bearing liabilities decreased by 138 basis points, which was partially offset by a decrease in yield on interest earning assets of 86 basis points. During the quarters ended June 30, 2002 and 2001, the Bank made provisions for loan losses of $45,000 and zero, respectively. The allowance for loan losses is based on management's evaluation of the risks inherent in its portfolio giving due consideration to changes in general market conditions and the nature and volume of the Bank's loan activity. The Bank intends to continue to provide for loan losses as needed based on its periodic review of the loan portfolio and general market conditions. At June 30, 2002 and 2001, the Bank's non-performing loans that were delinquent ninety days or more totaled $512,000 or 0.14% of total assets and $214,000 or 0.06% of total assets, respectively. Non-interest income increased by $86,000 or 40.0% to $301,000 during the quarter ended June 30, 2002 when compared to $215,000 during the same quarter in 2001. The increase during the quarter ended June 30, 2002 resulted primarily from increases in gain on sale of assets of $31,000 and miscellaneous fees of $59,000. Approximately $44,000 of the total miscellaneous fees is the result of the sale of investment products in Bank branches that began in February of 2001. Non-interest expenses increased by $601,000 or 33.0% to $2.4 million during the quarter ended June 30, 2002 when compared to the same quarter in 2001. Salaries and employee benefits expense increased $159,000 or 18.8% to $1.0 million during the quarter ended June 30, 2002 from $844,000 during the same quarter in 2001. Such increase was primarily related to staffing increases and related benefits for personnel in new branches and the commercial loan department. Legal expenses increased $162,000, or 423.5% to $200,000 during the quarter ended June 30, 2002 from $38,000 during the same quarter in 2001. Equipment depreciation and maintenance expense increased $57,600, or 27.9% during the quarter ended June 30, 2002 to $263,900 from $206,300 for the same quarter last year. Such expenses were one-time costs of approximately $75,000 related to the Bank's conversion of its core data processor during the quarter ender June 30, 2002. Miscellaneous expenses increased by $115,000 or 36.5% to $430,000 during the quarter ended June 30, 2002 from $315,000 during the same quarter in 2001. The other non-interest expenses remained mostly unchanged during the quarter. Legal expenses related to the pending merger with Northfield Savings Bank were $177,000 during the quarter ended June 30, 2002. Investment banking fees paid during the quarter ended June 30, 2002 were $100,000 and are directly related to the merger. There were no such expenses during the same period in 2001. There will be further merger related expenses in future periods. Income taxes totaled $225,900 and $153,300 for the quarter ended June 30, 2002 and 2001, respectively. On May 16, 2002 the Company announced that it had entered into a definitive agreement to be acquired by Northfield Holdings Corp., the to be formed parent of Northfield Savings Bank, Staten Island, New York. Completion of the merger is subject to regulatory approval as well as the approval by stockholders of the Company and members of Liberty Bancorp, MHC, the Company's parent mutual holding company. -9- LIBERTY BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------------------- COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 Net income increased $184,800 or 40.1% to $645,400 for the six months ended June 30, 2002 compared with $460,600 for the same period in 2001. Interest expenses decreased by $1.2 million; however, this was largely offset by an increase in non-interest expense of $757,500. The Company incurred legal and investment banking fees related to the announced merger with Northfield Savings Bank, of $277,000. There will be further merger related expenses in future periods. Total interest income decreased by $202,000 or 1.9%, to $10.3 million during the six months ended June 30, 2002 from $10.5 million during the same period in 2001. Interest income on loans receivable decreased $850,000, or 10.6%, to $7.2 million during the six months ended June 30, 2002 from $8.0 million for the same period in 2001. The decrease during the 2002 period resulted from a $13.8 million decline in the average balance of loans receivable to $200.9 million from $214.7 million combined with a 33 basis points decline in the yield on loans receivable to 7.15% from 7.48%. Interest income on securities available for sale, consisting of mortgage-backed securities, increased $1.1 million, or 61.3% to $3.0 million during the six months ended June 30, 2002 from $1.9 million for the same period in 2001. The increase during the 2002 period resulted from a $65.1 million increase in the average balance of such securities to $131.2 million from $66.1 million, offset by a 106 basis point decline in the yield earned to 4.56% from 5.62%. The majority of these securities are adjustable rate mortgage backed securities and the rate decline is a result of declining market rates. Interest income on securities held to maturity, consisting of short-term government agency bonds, decreased $432,000 or 93.6% to $29,200 during the six months ended June 30, 2002 from $462,000 for the same period in 2001. The decrease during the 2002 period resulted from an $11.9 million decrease in the average balances to $1.0 million from $12.9 million combined with a 129 basis point decrease in the yield earned on securities held to maturity to 5.84% from 7.13%. These securities are callable by the borrower and the decline in the average balance of these securities is the result of the securities being called. Interest income on other interest-earning assets, consisting of federal funds and overnight deposits, decreased $57,000, or 41.0% to $82,000 from $139,000 during the six months ended June 30, 2002 when compared to the same period in 2001. The decrease during the 2002 period resulted from a $1.0 million decrease in the average balances to $4.9 million from $5.9 million, combined with a 137 basis point decrease in the yield earned on other interest-earning assets to 3.31% from 4.68%. Interest expense on deposits decreased by $1.2 million or 20.6% to $4.4 million during the six months ended June 30, 2002 compared to $5.6 million for the same period in 2001. The decrease during the 2002 period was attributable to a 132 basis point decrease in the cost of deposits to 3.35% from 4.67%, partially offset by a $23.8 million or 9.9% increase in average balances of interest bearing deposits to $264.0 million from $240.2 million. The increase in deposits is the result of increased activity in the branches that the Bank has opened in the last two years. The Company believes that the rates offered in all of the Bank's branches are competitive in its market area. Interest expense on FHLB advances decreased $72,000 or 9.3% to $701,000 during the six months ended June 30, 2002 compared to $773,000 for the same period in 2001. Such decrease resulted from a 119 basis point decrease in the cost to 3.61% from 4.80%, partially offset by a $6.4 million increase in the average balance of advances to $38.6 million from $32.2 million. -10- LIBERTY BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------------------- COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (CONT'D.) Interest expense on capitalized leases amounted to $133,000 for the six months ended June 30, 2002 and 2001. Net interest income increased $1.0 million or 25.9% to $5.0 million during the six months ended June 30, 2002 when compared with $4.0 million for the same period in 2001. The increase was due to a decrease in total interest expense of $1.2 million partially offset by a decrease in total interest income of $202,000. The Bank's net interest rate spread increased 39 basis points to 2.64% for the six months ended June 30, 2002. The cost of interest bearing liabilities decreased by 130 basis points which was partially offset by a decrease in yield on interest earning assets of 91 basis points. During the six months ended June 30, 2002 and 2001, the Bank made provisions for loan losses of $90,000 and $40,000, respectively. The allowance for loan losses is based on management's evaluation of the risks inherent in its portfolio giving due consideration to changes in general market conditions and the nature and volume of the Bank's loan activity. The Bank intends to continue to provide for loan losses as needed based on its periodic review of the loan portfolio and general market conditions. At June 30, 2002 and 2001, the Bank's non-performing loans that were delinquent ninety days or more totaled $512,000 or 0.14% of total assets and $214,000 or 0.06% of total assets, respectively. Non-interest income increased by $206,000 or 54.7% to $582,000 during the six months ended June 30, 2002 when compared to $376,000 during the same period in 2001. The increase during the six months ended June 30, 2002 resulted primarily from increases in gain on sale of assets of $56,000, miscellaneous fees of $103,000 and fees and service charges on deposits of $56,000. Approximately $65,000 of the total miscellaneous fees is the result of the sale of investment products in Bank branches. Non-interest expenses increased by $757,500 or 20.9% to $4.4 million during the six months ended June 30, 2002 when compared to the same period in 2001. Salaries and employee benefits expense increased $276,000 or 16.5% to $1.9 million during the six months ended June 30, 2002 from $1.6 million during the same period in 2001. Such increase was primarily related to staffing increases and related benefits for personnel in new branches and the commercial loan department. Legal expenses increased $164,000, or 282.8% to $222,000 during the six months ended June 30, 2002 from $58,000 during the same period in 2001. Equipment depreciation and maintenance expense increased $57,700, or 13.3% during the six months ended June 30, 2002 to $490,400 from $432,700 for the same period last year. Such expenses were related to one-time costs of approximately $75,000 related to the Bank's conversion of its core data processor during the six months ended June 30, 2002. Miscellaneous expenses increased by $150,400 or 24.4% to $767,700 during the six months ended June 30, 2002 from $617,300 during the same period in 2001. The other non-interest expenses remained mostly unchanged during the period. Legal expenses related to the pending merger with Northfield Savings Bank were $177,000 during the six months ended June 30, 2002. Investment banking fees paid during the six months ended June 30, 2002 were $100,000 and are directly related to the merger. There were no such expenses during the same period in 2001. Income taxes totaled $465,800 and $224,300 for the six months ended June 30, 2002 and 2001, respectively. -11- LIBERTY BANCORP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES The Bank is required to maintain liquid assets, as defined by Office of Thrift Supervision ("OTS") regulations, to promote safe and sound operations of the Bank. The Bank's liquidity, which includes securities available for sale, averaged 51.15% of deposits during the month of June 2002. The Bank adjusts its liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings, when applicable, and loan funding commitments. The Bank also adjusts its liquidity level as appropriate to meet its asset/liability objectives. The Bank's primary sources of funds are deposits, amortization and prepayments of loans and mortgage-backed securities principal, maturities of investment securities and funds provided by operations. While scheduled loan and mortgage-backed securities amortization and maturing term deposits and investment securities are relatively predictable source of funds, deposit flows and loan and mortgage-backed securities prepayments are greatly influenced by market interest rates, economic conditions and competition. The levels of these assets are dependent on the Bank's operating, financing, lending and investing activities during any given period. The Bank has other sources of liquidity if a need for additional funds arises, including advances from the FHLB. At June 30, 2002, the Bank had short-term outstanding advances of $16.2 million and securities sold under agreements to repurchase of $20.3 million from the FHLB. The Bank anticipates that it will have sufficient funds available to meet its current loan commitments. At June 30, 2002, the Bank has outstanding commitments to originate loans of $8.3 million. Certificates of deposits scheduled to mature in one year or less at June 30, 2002, totaled $137.3 million. Management believes that, based upon its experience and the Bank's deposit flow history, a significant portion of such deposits will remain with the Bank. Under OTS regulations, each savings institution must maintain tangible capital equal to at least 1.5% of its total adjusted assets, core capital equal to at least 4.0% of its total adjusted assets and total capital equal to at least 8.0% of its risk-weighted assets. The following table sets forth the Bank's capital position at June 30, 2002 as compared to the minimum regulatory capital requirements:

SUPERVISORY EXAMINATION The Bank's financial statements are periodically examined by the OTS as part of their regulatory oversight of the thrift industry. As a result of these examinations, the regulators can direct that the Bank make adjustments to its financial statements based on their findings. Through the most recent examinations, no material adjustments were required. -12- LIBERTY BANCORP, INC. AND SUBSIDIARIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- GENERAL As with other savings institutions, the Bank's most significant form of market risk is interest rate risk. The Bank's assets, consisting primarily of mortgage loans, have longer maturities than its liabilities, consisting primarily of deposits. As a result, a principal part of the Bank's business strategy is to manage interest rate risk and manage the exposure of the Bank's net interest income to changes in market interest rates. Accordingly, the Board of Directors has established an Asset/Liability Management Committee which is responsible for evaluating the interest rate risk inherent in the Bank's assets and liabilities, determining the level of risk that is appropriate given the Bank's business strategy, operating environment, capital, liquidity and performance objectives, and managing this risk consistent with the guidelines approved by the Board of Directors. The Asset/Liability Management Committee consists of senior management operating under a policy adopted by the Board of Directors and meets at least quarterly to review the Bank's asset/liability polices and interest rate risk position. The Bank has pursued the following strategies to manage interest rate risk: (1) originating one-to-four family adjustable rate mortgage loans, (2) purchasing adjustable rate mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or GNMA, (3) increasing adjustable rate home equity lending and fixed-rate home equity lending with maturities of five years or less, (4) investing in shorter-term securities which generally have lower yields compared to longer term investments, but which better position the Bank to reinvest its assets if market interest rates increase and (5) originating commercial real estate loans with shorter maturities than residential loans. The Bank's current investment strategy is to maintain a securities portfolio that provides a source of liquidity and that contributes to the Bank's overall profitability and asset mix within given quality and maturity considerations. The securities portfolio consists primarily of U.S. Treasury, Federal Government and government sponsored corporation securities. Much of the Bank's investment securities and mortgage-backed securities are classified as available for sale to provide management with the flexibility to make adjustments to the portfolio in the event of changes in interest rates, to fulfill unanticipated liquidity needs, or to take advantage of alternative investment opportunities. At June 30, 2002, the Bank had adjustable mortgage loans of $49.3 million, or 24.3% of total loans. At the same date adjustable rate mortgage backed securities had a balance of $118.8 million or 84.5% of securities available for sale. NET PORTFOLIO VALUE The Bank's interest rate sensitivity is monitored by management through the use of the OTS model which estimates the change in the Bank's net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The OTS produces its analysis based upon data submitted to the OTS on the Bank's quarterly Thrift Financial Reports. -13- LIBERTY BANCORP, INC. AND SUBSIDIARIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKED RISK ---------------------------------------------------------- NET PORTFOLIO VALUE (CONT'D.) The following table presents the Bank's NPV at March 31, 2002, the latest information available, as calculated by the OTS, which is based upon quarterly information that the Bank provided voluntarily to the OTS. In the opinion of management, there have been no material changes to the Bank's NPV since March 31, 2002. Change in Net Portfolio Value -------------------------------------------------------------- Changes in Market Projected Estimated Amount of Interest Rates Change NPV Change ------------------- ------------- ------------- -------------- (basis points) (000's) (000's) 300 (50.00)% $ 20,320 $ (20,071) 200 (32.00)% 27,647 (12,744) 100 (15.00)% 34,303 (6,088) - - 40,391 - (100) 11.00 % 44,846 4,455 Because current interest rates are at such a low level, the OTS does not calculate the effect on NPV in an interest rate decline of greater than 100 basis points. Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in NPV requires 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 NPV table presented assumes that the composition of the Bank's interest sensitive assets and liabilities existing at the beginning of a period remain 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 NPV table provides an indication of the Bank's 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 the Bank's net interest income, and will differ from actual results. Additionally, the guidelines established by the Board of Directors is to limit projected NPV changes within the Board's guidelines, the Bank will not necessarily limit projected changes in NPV if the required action would present disproportionate risk to the Bank's continued profitability. -14- LIBERTY BANCORP, INC. AND SUBSIDIARIES PART II . OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which involve amounts that in the aggregate are believed by management to be immaterial to the financial condition or operations of the Company. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's 2001 Annual Meeting of Stockholders was held on May 22, 2002. The Annual Meeting was conducted for the purpose of considering and acting upon the election of two directors and the ratification of the appointment of Radics & Co., LLC as the Company's auditors for the year ending December 31, 2002. The following table reflects the tabulation of the votes with respect to each matter voted upon at the 2002 Annual Meeting.

ITEM 5. OTHER INFORMATION On July 10, 2002 the Company declared a quarterly cash dividend of $0.03 per share, to be paid on August 7, 2002, to stockholders of record on July 24, 2002. -15- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 16. Computation of earnings per common share. 99.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: On May 20, 2002 the Company filed a Form 8-K under Item 5, Other Events, to report the execution of a definitive merger agreement on May 15, 2002 with Northfield Savings Bank. -16- SIGNATURES ---------- Pursuant to the requirements 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. LIBERTY BANCORP, INC. Date: July 31, 2002 By /s/ John R. Bowen --------------------------- --------------------------------------- John R. Bowen President and Chief Executive Officer Date: July 31, 2002 By: /s/ Michael J. Widmer --------------------------- --------------------------------------- Michael J. Widmer Executive Vice President, Chief Operating Officer and Chief Financial Officer -17-

LIBERTY BANCORP INC /NJ/ 10-Q