SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
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 000-24811
SOUND FEDERAL BANCORP
(Exact name of registrant as specified in its charter)
Federal 13-4029393
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Mamaroneck Ave., Mamaroneck, New York 10543
(Address of principal executive offices)
(Zip Code)
(914) 698-6400
(Registrant's telephone number including area code)
N/A
____________________________________________________
(Former name, former address and former fiscal year,
if changed from last Report)
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 twelve 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 .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Shares
Class Outstanding at
Common Stock, February 10 , 2000
par value, $0.10 5,010,218
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
_______________________________
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at December 31, 1999 and March 31, 1999......................................1
Consolidated Statements of Income for the quarters and nine months
ended December 31, 1999 and 1998.........................................................................2
Consolidated Statement of Changes in Stockholders' Equity for the nine months
ended December 31, 1999..................................................................................3
Consolidated Statements of Cash Flows for the nine months
ended December 31, 1999 and 1998.........................................................................4
Notes to Unaudited Consolidated Financial Statements.....................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................................15
PART II -- OTHER INFORMATION
____________________________
Item 1. Legal Proceedings.......................................................................................16
Item 2. Changes in Securities and Use of Proceeds...............................................................16
Item 3. Defaults upon Senior Securities.........................................................................16
Item 4. Submission of Matters to a Vote of Security Holders.....................................................16
Item 5. Other Information.......................................................................................16
Item 6. Exhibits and Reports on Form 8-K........................................................................16
Signatures..............................................................................................17
Part 1. - Financial Information
_______________________________
Item 1. Financial Statements
Sound Federal Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Unaudited)
( Dollars in thousands, except per share data) December 31, March 31,
1999 1999
-------------------- ------------
Assets
Cash and due from banks....................................................... $ 8,531 $ 5,082
Federal funds sold................................................... 26,000 44,400
Certificates of deposit....................................................... 11,074 10,686
Securities:
Available-for-sale, at fair value.......................................... 57,270 39,402
Held-to-maturity, at amortized cost (fair value of $36,555 and $45,087 at
December 31, 1999 and March 31, 1999, respectively)..................... 37,561 45,590
------------ ------------
Total securities..................................................... 94,831 84,992
------------ ------------
Loans, net:
Mortgage loans............................................................ 173,916 143,626
Consumer loans............................................................ 914 1,004
Allowance for loan losses (Note 4)........................................ (1,169) (1,094)
------------- -------------
Total loans, net..................................................... 173,661 143,536
------------ ------------
Accrued interest receivable................................................... 2,028 1,436
Federal Home Loan Bank stock.................................................. 1,884 1,884
Premises and equipment, net................................................... 3,794 1,935
Other assets.................................................................. 2,023 1,360
------------ -----------
Total assets........................................................ $ 323,826 $ 295,311
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits................................................................. $ 267,548 $ 237,279
Mortgagors' escrow funds................................................ 2,762 2,480
Accrued expenses and other liabilities................................... 1,406 568
------------ -----------
Total liabilities..................................................... 271,716 240,327
------------ -----------
Stockholders' equity:
Preferred stock ($0.01 par value; 10,000,000 shares
authorized; none issued and outstanding)................................ - -
Common stock ($0.10 par value; 20,000,000 shares authorized; 5,212,218 shares
issued)................................................................. 521 521
Additional paid-in capital................................................ 22,424 22,430
Treasury stock, at cost (202,000 shares at December 31, 1999)............. (2,025) --
Common stock held by Employee Stock Ownership Plan ("ESOP") .............. (1,537) (1,681)
Recognition and Retention Plan ("RRP") stock awards....................... (769) --
Retained earnings......................................................... 34,733 33,846
Accumulated other comprehensive loss, net of taxes (Note 5)............... (1,237) (132)
------------ -----------
Total stockholders' equity............................................ 52,110 54,984
------------ -----------
Total liabilities and stockholders' equity............................ $ 323,826 $ 295,311
============ ===========
See accompanying notes to the unaudited consolidated financial statements.
1
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
For the Quarter Ended For the Nine Months Ended
December 31, December 31,
--------------------- -------------------------
1999 1998 1999 1998
-------- ---------- -------- ---------
Interest and Dividend Income
Loans..................................................... $ 3,219 $ 2,791 $ 9,051 $ 8,263
Mortgage-backed and other securities...................... 1,506 1,003 4,266 3,141
Federal funds sold and certificates of deposit............ 526 860 1,604 2,271
Other earning assets...................................... 44 39 136 130
Total interest and dividend income........................ 5,295 4,693 15,057 13,805
Interest Expense
Deposits.................................................. 2,598 2,278 7,146 6,839
Other interest-bearing liabilities....................... 11 14 35 61
Total interest expense.................................... 2,609 2,292 7,181 6,900
Net interest income....................................... 2,686 2,401 7,876 6,905
Provision for loan losses (Note 4)........................ 25 71 75 222
Net interest income after provision for loan losses....... 2,661 2,330 7,801 6,683
Non-Interest Income
Service charges and fees................................. 51 44 151 133
Gain (loss) on sale of real estate owned................. (5) -- 76 --
Total non-interest income................................ 46 44 227 133
Non-Interest Expense
Compensation and benefits................................ 976 793 2,507 2,073
Occupancy and equipment.................................. 233 157 661 305
Data processing service fees............................. 159 100 314 220
Advertising and promotion................................ 192 54 388 122
Other.................................................... 448 285 1,456 796
Contribution of common stock to the Sound Federal
Savings and Loan Association Charitable Foundation.... -- 1,022 -- 1,022
Total non-interest expense............................... 2,008 2,411 5,326 4,538
Income (loss) before income tax expense................... 699 (37) 2,702 2,278
Income tax expense........................................ 250 57 965 960
Net income (loss)......................................... $ 449 $ (94) $ 1,737 $ 1,318
Basic and diluted earnings (loss) per common share
(Note 3)................................................... $ 0.09 $ (0.02) $ 0.35
See accompanying notes to the unaudited consolidated financial statements.
2
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine months Ended December 31, 1999 (Unaudited) (Dollars in thousands,
except per share data)
Common
Additional Stock RRP
Common Paid-In Treasury Held By Stock Retained
Stock Capital Stock ESOP Awards Earnings
----- ------- ----- ---- ------ --------
Balance at March 31, 1999..................... $ 521 $ 22,430 $ -- $ (1,681) $ -- $ 33,846
Net income.................................... -- -- -- -- 1,737
Other comprehensive loss (Note 5)............. -- -- -- -- -- --
Total comprehensive income (Note 5).........
Dividends declared ($0.21 per share).......... -- -- -- -- -- (850)
Repurchase of common stock (202,000 shares)... -- -- (2,025) -- -- --
Award of RRP shares........................... -- -- -- -- (961) --
Vesting of RRP shares......................... -- -- -- -- 192 --
ESOP shares committed to be released for
allocation................................. -- (6) -- 144 -- --
------- ----------------------- ------- ---------- --------
Balance at December 31, 1999.................. $ 521 $ 22,424 $(2,025) $ (1,537) $ (769) $ 34,733
======= ======== ======== ======== ========== ========
Accumulated
Other Total
Comprehensive Stockholders'
Loss Equity
---- ------
Balance at March 31, 1999..................... $ (132) $ 54,984
Net income................................... -- 1,737
Other comprehensive loss (Note 5)............ (1,105) (1,105)
----------
Total comprehensive income (Note 5)........ 632
Dividends declared ($0.21 per share)......... -- (850)
Repurchase of common stock (202,000 shares).. (2,025)
Award of RRP shares.......................... -- (961)
Vesting of RRP shares........................ -- 192
ESOP shares committed to be released for
allocation................................ -- 138
---------- ---------
Balance at December 31, 1999................. $ (1,237) $ 52,110
========== ==========
See accompanying notes to the unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months Ended
December 31,
----------------------------------
1999 1998
------------------- ------------
OPERATING ACTIVITIES
Net income............................................................ $ 1,737 $ 1,318
Adjustments to reconcile net income to net cash provided
by operating activities:
Contribution of common stock to the Sound Federal Savings and
Loan Association Charitable Foundation....................... -- 1,022
Provision for loan losses......................................... 75 222
Depreciation expense.............................................. 177 117
ESOP and RRP expense.............................................. 330 185
Deferred income tax expense (benefit)............................. 128 (15)
Gain on sale of real estate owned................................. (76) --
Other adjustments, net............................................ (646) (772)
------------ -------------
Net cash provided by operating activities................... 1,725 2,077
------------ ------------
INVESTING ACTIVITIES Purchases of securities:
Available-for-sale................................................ (29,266) (19,776)
Held-to-maturity.................................................. -- (9,976)
Proceeds from principal payments, maturities and calls of
securities .................................................... 17,510 20,338
Disbursements for loan originations................................... (49,513) (30,051)
Principal collection on loans......................................... 19,215 19,842
Net increase in certificates of deposit............................... (388) 1,391
Proceeds from sale of real estate owned............................... 309 --
Purchases of premises and equipment................................... (2,036) (263)
----------- -------------
Net cash used in investing activities....................... (44,169) (18,495)
----------- -------------
FINANCING ACTIVITIES
Net increase in deposits.............................................. 30,269 9,788
Net increase (decrease) in mortgage escrow deposits................... 282 (10)
Dividends paid........................................................ (850) --
Purchase of treasury stock............................................ (2,025) --
RRP stock awards funded through stock purchases....................... (183) --
Net proceeds from stock offering...................................... -- 20,022
------------- -----------
Net cash provided by financing activities................... 27,493 29,800
------------- -----------
(Decrease) increase in cash and cash equivalents...................... (14,951) 13,382
Cash and cash equivalents at beginning of period...................... 49,482 42,111
------------ -----------
Cash and cash equivalents at end of period............................ $ 34,531 $ 55,493
============ ===========
SUPPLEMENTAL INFORMATION
Interest paid......................................................... $ 7,020 $ 6,838
Income taxes paid..................................................... 1,543 1,360
Liability for RRP awards not yet funded through stock purchases...... 778 --
Loans transferred to real estate owned............................... 124 357
============ ===========
See accompanying notes to the unaudited consolidated financial statements.
4
Sound Federal Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Reorganization and Stock Offering
On October 8, 1998, Sound Federal Bancorp issued shares of its common
stock in connection with a Plan of Reorganization ("the "Reorganization") and
related Subscription and Community Offering (the "Offering"). In the
Reorganization, Sound Federal Savings and Loan Association (the "Bank")
converted from a federally chartered mutual savings association to a federally
chartered stock savings association (the "Conversion"). The Bank became the
wholly-owned subsidiary of Sound Federal Bancorp, which became the
majority-owned subsidiary of Sound Federal, MHC (the "Mutual Holding Company").
Collectively, Sound Federal Bancorp and the Bank are referred to herein as "the
Company".
Sound Federal Bancorp issued a total of 5,212,218 shares of its common
stock in the Reorganization and Offering, consisting of 2,810,510 shares (or
53.92%) issued to the Mutual Holding Company and 2,401,708 shares (or 46.08%)
issued to other stockholders. The shares issued to other stockholders consist of
192,129 shares purchased by the Company's Employee Stock Ownership Plan (the
"ESOP") using $1.9 million in proceeds from a loan made by Sound Federal
Bancorp; 102,200 shares contributed by the Company to establish the Sound
Federal Savings and Loan Association Charitable Foundation (the "Charitable
Foundation"); and 2,107,379 shares sold for cash of $21.1 million ($10.00 per
share) in the Offering. After deducting offering costs of $1.1 million, the net
cash proceeds from the Offering were $20.0 million.
The Charitable Foundation was established to provide funding to support
charitable and not-for-profit causes and community development activities in the
Company's market area. The fair value of the common shares contributed to the
Charitable Foundation ($1.0 million) was recognized as a charge to non-interest
expense at the contribution date (October 8, 1998).
2. Basis of Presentation
The consolidated financial statements included herein have been
prepared by the Company without audit. In the opinion of management, the
unaudited consolidated financial statements include all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. The
Company believes that the disclosures are adequate to make the information
presented not misleading; however, the results for the periods presented are not
necessarily indicative of results to be expected for the entire fiscal year
ending March 31, 2000.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, income and expense.
Actual results could differ significantly from these estimates. A material
estimate that is particularly susceptible to near-term change is the allowance
for loan losses, which is discussed in Note 4.
The unaudited interim consolidated financial statements presented
herein should be read in conjunction with the annual audited consolidated
financial statements of the Company for the fiscal year ended March 31, 1999,
included in the Company's 1999 Annual Report.
5
3. Earnings Per Share
Weighted average common shares of 4,813,259 and 4,974,235 were used in
calculating basic earnings per share for the quarter and nine months ended
December 31, 1999, respectively. In computing basic EPS, outstanding shares
include all shares issued to the Mutual Holding Company and contributed to the
Charitable Foundation, but exclude unallocated ESOP shares that have not been
committed to be released to participants and unvested stock awards pursuant to
the Bank's Recognition and Retention Plan. For purposes of computing diluted
earnings per share, weighted average shares were 4,814,277 and 4,979,463 and
included common stock equivalents of 1,018 shares and 5,228 shares for the
quarter and nine months ended December 31, 1999, respectively.
4. Allowance for Loan Losses
The allowance for loan losses is increased by provisions for loan
losses charged to income and decreased by charge-offs (net of recoveries). Loans
are charged to the allowance when all or a portion of a loan is deemed to be
uncollectible. Recoveries of loans previously charged-off are credited to the
allowance for loan losses when realized. Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrowers' ability to repay, the estimated value of underlying collateral, and
current economic conditions. Management believes that the allowance for loan
losses is adequate to absorb probable losses in the existing loan portfolio.
Establishing the allowance for loan losses involves significant
management judgements utilizing the best information available at the time of
review. Those judgements are subject to further review by various sources,
including the Company's regulators. Adjustments to the allowance may be
necessary in the future based on changes in economic and real estate market
conditions, further information obtained regarding known problem loans, the
identification of additional problem loans and other factors, certain of which
are outside of management's control.
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
Quarter Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
------------------------------ ------------------------------ ---------
1999 1998 1999 1998 1999
------------- ------------- ------------- ------------ ----
(in thousands)
Balance at beginning of period.... $ 1,144 $ 1,062 $ 1,094 $ 984 $ 984
Provision for loan losses......... 25 71 75 222 272
Mortgage loans charged off........ -- -- -- (73) (162)
---------- ---------- --------- ---------- -----------
Balance at end of period.......... $ 1,169 $ 1,133 $ 1,169 $ 1,133 $ 1,094
========= ========= ========= ========= ===============
6
5. Comprehensive Income (Loss)
The Company's other comprehensive income (loss) represents net
unrealized holding gains and losses arising during the period on securities
available-for-sale, net of related income taxes. The components are as follows
for the periods indicated.
Other
Pre-Tax Tax Comprehensive
Loss Effect Loss
-------------- ------------------ --------------------
Quarter Ended: (in thousands)
December 31, 1999 $ (570) $ 219 $ (351)
December 31, 1998 (45) 18 (27)
Nine months Ended:
December 31, 1999 (1,847) 742 (1,105)
December 31, 1998 (55) 22 (33)
Total comprehensive income (net income and other comprehensive income
or loss) amounted to $98,000 and $632,000, respectively, for the quarter and
nine months ended December 31, 1999. Total comprehensive income (loss) was
($121,000) and $1,285,000, respectively, for the quarter and nine months ended
December 31, 1998.
The Company's accumulated other comprehensive loss, which is included
in stockholders' equity, represents the unrealized loss on securities
available-for-sale of $2.1 million and $223,000 at December 31, 1999 and March
31, 1999, respectively, less related income taxes of $833,000 and $91,000,
respectively.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The financial condition and results of operations of the Company are
primarily dependent upon those of the Bank. The Bank's principal business has
historically consisted of offering savings and other deposits to the general
public and using the funds from such deposits to make loans secured by
residential real estate. The Company's results of operations depend primarily
upon its net interest income, which is the difference between the interest
income earned on its loan and securities portfolios and its cost of funds,
consisting primarily of the interest paid on its deposits. Net income is also
affected by, among other things, provisions for loan losses and non-interest
expense. The Company's principal operating expenses, other than interest
expense, consist of compensation and benefits, occupancy and equipment, and
other general and administrative expenses. Operating results are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates; government legislation and
policies affecting fiscal affairs, housing and financial institutions; monetary
policies of the Federal Reserve Board; and the actions of bank regulatory
authorities.
When used in this report on Form 10-Q, the words or phrases "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 certain risks and
uncertainties that could cause actual results to differ materially from
historical results and those presently anticipated or projected. Among others,
these risks and uncertainties include changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area and
competition. The Company wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made.
The Company wishes to advise readers that the factors listed above could affect
the Company's financial performance and could cause the Company's actual results
for future periods to differ materially from its forward-looking statements. The
Company does not undertake, and specifically declines any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Year 2000 Status
Like most providers of financial services, the Company relies upon
computers for the daily conduct of its business and for data processing
generally. There was a concern that on January 1, 2000 computers would not be
able to "read" the new year and, as a consequence, they would malfunction. The
operating systems of the Company have been performing properly since December
31, 1999 and there have been no interruptions in the Company's business
operations. In addition, the Company is not currently aware of any Year 2000
issues that have adversely affected third parties relied upon by the Company for
its daily transaction processing and other technology needs. Management
recognizes, however, that the possibility exists that adverse effects of the
Year 2000 issue may come to light in the future and will continue to monitor
this issue accordingly.
Costs related to the Year 2000 issue are expensed as incurred except
for the costs, if any, for new hardware and software that is purchased, which
are capitalized. At December 31, 1999, the cumulative costs incurred to address
the Year 2000 issue amounted to approximately $186,000. Based on the present
status of the issue, the Company does not anticipate incurring any further
significant costs related to the Year 2000 issue.
8
Stock Repurchase Program
On July 6, 1999 the Company began a stock repurchase program to acquire
up to 344,926 shares of its common stock, which represents approximately 15% of
the common stock held by persons other than the Mutual Holding Company. As of
December 31, 1999, the Company had acquired 202,000 shares of its common stock
at a total cost of approximately $2.0 million, or an average of $10.02 per
share.
Financial Condition
The Company's total assets were $323.8 million and $295.3 million at
December 31, 1999 and March 31, 1999, respectively. The $28.5 million increase
in assets was funded primarily by a $30.3 million increase in deposits. The
increase in total assets reflects a $30.1 million increase in net loans to
$173.7 million and a $9.8 million increase in total securities to $94.8 million,
partially offset by an $18.4 million decrease in Federal funds. The growth in
the securities and loan portfolios was funded by the deposit growth as well as
the decrease in Federal funds reflecting the Company's ongoing strategy to
redeploy short-term liquid assets into higher yielding loans and securities.
Total deposits amounted to $267.5 million at December 31, 1999, as
compared to total deposits of $237.3 million at March 31, 1999. Total equity
decreased $2.9 million to $52.1 million at December 31, 1999 as compared to
$55.0 million at March 31, 1999, primarily due to a $2.0 million increase in
treasury stock, a $1.1 million increase in the after-tax net unrealized loss on
securities available for sale, a $769,000 net increase in stock awards under the
Sound Federal Savings and Loan Association Recognition and Retention Plan (the
"RRP") and the payment of cash dividends totaling $850,000. These decreases in
stockholders' equity were partially offset by net income of $1.7 million for the
nine months ended December 31, 1999.
Results of Operations
General. The Company reported net income of $449,000 or $0.09 per share
for the quarter ended December 31, 1999, as compared to a net loss of $94,000 or
$0.02 per share for the quarter ended December 31, 1998. The results for the
current quarter include a pre-tax charge of $193,000 attributable to the vesting
of a full 20% of total RRP shares granted during the quarter. Net income for
the current quarter would have been approximately $536,000 or $0.11 per share
assuming quarterly RRP expense of $48,500. The results for the quarter ended
December 31, 1998 included a $1,022,000 pre-tax charge related to the
contribution of 102,200 shares of the Company's common stock to the Sound
Federal Savings and Loan Association Charitable Foundation (the "Foundation").
The results for the 1998 quarter also include a pre-tax charge of $185,000
attributable to a full-year contribution to the Bank's Employee Stock Ownership
Plan (the "ESOP"). Since the Company's Offering was completed in the quarter
ended December 31, 1998, and the ESOP plan year ends on December 31, the entire
cost was charged to expense in that quarter. Net income for the 1998 quarter
would have been approximately $633,000 or $0.14 per share excluding the
contribution to the Foundation and assuming quarterly ESOP expense of $46,000.
For the nine months ended December 31, 1999, net income was $1.7
million or $0.35 per share as compared to $1.3 million for the same period in
1998. Assuming RRP expense of $145,500 for the nine-month period ended December
31, 1999 (rather than a full-year expense), net income would have been
approximately $1.8 million or $0.37 per share. For the nine months ended
December 31, 1998, net income would have been approximately $2.0 million
excluding the contribution to the Foundation and assuming ESOP expense of
$138,000 (rather than a full-year expense).
9
Net Interest Income. Net interest income for the quarter ended December
31, 1999 amounted to $2.7 million, a $285,000 increase from the same period in
the prior year. The interest rate spread was 2.94% and 2.84% for the quarters
ended December 31, 1999 and 1998, respectively. The net interest margin for
those periods was 3.46% and 3.49%, respectively. The increase in the interest
rate spread in the current quarter was due to rising interest rates in the
second half of 1999 which resulted in an increase in the yields earned on
securities and Federal funds. The yields earned on these assets have increased
faster than the cost of interest-bearing liabilities. However, over time, the
difference in the yield earned on interest-earning assets and the cost of funds
will diminish if interest rates continue to rise.
For the nine months ended December 31, 1999, net interest income
increased $971,000 to $7.9 million as compared to the same period in the prior
year. The interest rate spread was 2.97% for the nine months ended December 31,
1999 as compared to 3.04% for the same period in the prior year. For both of
those periods, the net interest margin was 3.53%. The decrease in the interest
rate spread in the nine month period is a result of the general decrease in
interest rates on loans and securities, and the increase in time deposits which
represented 58.3% of average interest-bearing liabilities for the nine months
ended December 31, 1999 as compared to 54.0% for the same period last year. The
comparatively low interest rates during 1998 and the first half of 1999 caused
many homeowners to refinance existing home mortgages and created demand for
loans to purchase new homes. Most customers opted for a fixed rate loan which is
the Bank's primary mortgage product. This resulted in the overall growth of the
loan portfolio, but this growth was at lower interest rates than the existing
loan portfolio. In addition, the low interest rates resulted in accelerated
prepayments of mortgage-backed securities. The cash flows from mortgage-backed
securities were also reinvested at lower rates than the existing securities
portfolio. The increases in interest rates since mid-1999 have caused loan
demand to decrease.
Interest Income. Interest income totaled $5.3 million during the
quarter ended December 31, 1999 as compared to $4.7 million for the same period
in the prior year. This increase is due to a $32.9 million increase in average
interest-earning assets to $307.5 million during the quarter ended December 31,
1999 as compared to $274.6 million for the same quarter in the prior year, and
by a 5 basis point increase in the average yield on interest-earning assets to
6.83%. The increase in the average balance of interest-earning assets was due to
investment of funds from deposit growth during the past year and the Offering
proceeds.
For the nine months ended December 31, 1999, interest income increased
$1.3 million or 9.1% to $15.1 million as compared to $13.8 million for the nine
months ended December 31, 1998. Average interest-earning assets increased $36.1
million to $296.0 million from $259.9 million for the comparable nine month
period last year. The increase in interest-earning assets was partially offset
by a 30 basis point decrease in the average yield earned on total
interest-earning assets to 6.75%.
Loans. Interest income on loans increased $428,000 or 15.3% to $3.2
million for the current quarter as compared to $2.8 million for the same quarter
in 1998. This increase is due to a $30.3 million increase in the average balance
of loans to $168.6 million partially offset by a 43 basis point decrease in the
yield earned to 7.57%. The growth of the loan portfolio is a result of the low
interest rate environment during 1998 and the first half of 1999, which created
a strong demand for fixed rate loans (the Company's primary mortgage loan
product). The low interest rates also created a strong market for home purchases
and the refinancing of existing mortgage loans in the Company's market area. The
new loan production and the refinancing activity were also the primary reasons
for the decrease in the yield earned on mortgage loans since the rates on these
loans are lower than those of the existing portfolio. The increases in interest
rates since mid-1999 have caused loan demand to decrease.
Interest income on loans totaled $9.1 million during the nine months
ended December 31, 1999 as compared to $8.3 million for the same period in 1998.
The average balance of loans increased $23.9 million to $158.1 million and the
average yield earned decreased 57 basis points to 7.60%.
10
Mortgage-Backed Securities. Interest income on mortgage-backed
securities amounted to $826,000 for the quarter ended December 31, 1999 as
compared to $753,000 for the same quarter in 1998. This increase was due to a 29
basis points increase in the yield earned to 5.85% as compared to the same
quarter last year and a $2.3 million increase in the average balance of
mortgage-backed securities to $56.0 million from $53.7 million a year ago.
For the nine months ended December 31, 1999, interest income on
mortgage-backed securities amounted to $2.5 million as compared to $2.4 million
for the same period in the prior year. The average balance of mortgage-backed
securities increased $3.3 million to $56.6 million. The increase in the average
balance was partially offset by a 28 basis point decrease in the yield earned to
5.79%. Many of these mortgage-backed securities have rates that adjust annually,
typically based on Treasury bill rates. As a result, these securities repriced
to lower rates as interest rates remained low during 1998 and the first half of
1999. In addition, principal prepayments resulted in the acceleration of the
amortization of premiums on these securities. This also reduced the yields
earned on the mortgage-backed securities portfolio.
Other Securities. Interest on other securities increased $430,000 to
$680,000 for the quarter ended December 31, 1999 as compared to $250,000 for the
same quarter in 1998. The average balance of other securities was $42.6 million
for the quarter ended December 31, 1999 as compared to $15.8 million for the
same quarter in the prior year, and the average yield earned increased 4 basis
points to 6.34%. The increase in the average balance was due to the investment
of funds from deposit growth and the Company's ongoing strategy to redeploy
short-term liquid assets into higher yielding loans and securities.
Interest on other securities increased $1.1 million to $1.8 million for
the nine months ended December 31, 1999 as compared to $706,000 for the same
period in 1998. The average balance of other securities was $37.6 million for
the nine months ended December 31, 1999 as compared to $15.2 million for the
same period in the prior year, and the average yield earned increased 17 basis
points to 6.35%.
Federal Funds. Interest on Federal funds decreased $339,000 to $355,000
for the quarter ended December 31, 1999, reflecting a $28.9 million decrease in
the average balance to $25.2 million which was partially offset by a 51 basis
point increase in the average yield earned to 5.59%.
Interest on Federal funds decreased $642,000 to $1.1 million during the
nine months ended December 31, 1999 as compared to $1.8 million for the same
period in 1998. This decrease is due to an $14.7 million decrease in the average
balance of Federal funds to $28.9 million and a 24 basis point decrease in the
average yield earned to 5.10%. The decrease in the average balance of Federal
funds reflects the Company's ongoing strategy to redeploy short-term liquid
assets into higher yielding loans and securities.
Certificates of Deposit. Interest income on certificates of deposit at
other financial institutions amounted to $171,000 for the quarter ended December
31, 1999 as compared to $167,000 for the same quarter in the prior year. This
increase reflects a $1.9 million increase in the average balance to $11.9
million for the 1999 quarter as compared to the same quarter in 1998, partially
offset by an 89 basis point decrease in the average yield earned to 5.69%.
For the nine months ended December 31, 1999, interest income on
certificates of deposit at other financial institutions amounted to $494,000 as
compared to $519,000 for the same period in 1998. The decrease in interest
earned is due to a 60 basis point decrease in the yield earned to 5.65%,
partially offset by a $580,000 increase in the average balance to $11.6 million.
Interest Expense. Interest expense for the quarter ended December 31,
1999 totaled $2.6 million, as compared to $2.3 million for the quarter ended
December 31, 1998. The average balance of interest-bearing liabilities increased
$36.5 million to $266.2 million for the quarter ended December 31, 1999 from
11
$229.7 million for the same quarter in the prior year, and the average cost of
these liabilities decreased 5 basis points to 3.89%.
Interest on time deposits totaled $2.1 million for the current quarter
as compared to $1.6 million for the same quarter in 1999. This increase is
primarily a result of a $34.7 million or 27.6% increase in the average balance
of time deposits to $160.2 million for the quarter ended December 31, 1999 as
compared to the same quarter in 1998. The increase in the average balance of
time deposits was partially offset by a 7 basis point decrease in the average
cost to 5.14%. This growth in time deposits reflects the openings of the Bank's
supermarket branch in December 1998 and the Greenwich branch in September 1999.
Total interest expense on other deposit accounts (passbook, club,
money market and NOW accounts) amounted to $522,000 for the quarter ended
December 31, 1999 as compared to $619,000 for the same quarter in the prior
year. The average balance of these accounts was $103.6 million for the 1999
quarter as compared to $98.5 million for the same quarter in 1998, and the
overall average rate was 2.00% and 2.49% for the respective periods.
For the nine months ended December 31, 1999, interest expense totaled
$7.2 million as compared to $6.9 million in the same period last year. The
average balance of interest-bearing liabilities for these same periods increased
$23.6 million and the average cost of these liabilities decreased 23 basis
points to 3.78%.
For the nine months ended December 31, 1999, interest on time deposits
totaled $5.5 million as compared to $4.9 million for the same quarter in 1998.
This increase is primarily a result of an $23.5 million increase in the average
balance of time deposits to $146.8 million as compared to $123.3 million for the
same period in 1998. The increase in the average balance of time deposits was
partially offset by a 32 basis point decrease in the average cost to 5.00%.
Total interest expense on other deposit accounts (passbook, club, money
market and NOW accounts) amounted to $1.6 million for the nine months ended
December 31, 1999 as compared to $1.9 million for the same period in the prior
year. The average balance of these accounts was $102.8 million for the 1999
period as compared to $100.7 million for the same period in 1998, and the
overall average rate was 2.08% and 2.49% for the respective periods.
Provision for Loan Losses. The provision for loan losses was $25,000 in
the quarter ended December 31, 1999 as compared to $71,000 for the quarter ended
December 31, 1998. For the nine months ended December 31, 1999 and 1998, the
provision for loan losses amounted to $75,000 and $222,000, respectively. The
lower provision for loan losses is appropriate in light of the Bank's improved
asset quality compared to prior periods. Non-performing loans amounted to
$809,000 or 0.46% of total loans at December 31, 1999, as compared to $1.1
million or 0.75% of total loans at March 31, 1999 and $1.5 million or 1.06% of
total loans at December 31, 1998. The allowance for loan losses amounted to $1.2
million and $1.1 million at December 31, 1999 and March 31, 1999, respectively.
The Company had no charge-offs or recoveries for the three and nine months ended
December 31, 1999, as compared to charge-offs of $72,000 for both the three and
nine months ended December 31, 1998.
In determining the adequacy of the allowance for loan losses,
management considers historical loan loss experience, the level of
non-performing loans, the volume and type of lending conducted and general
economic conditions in the Company's market area. Although the Company maintains
its allowance for loan losses at a level which it considers to be adequate to
provide for probable losses on existing loans, there can be no assurance that
such losses will not exceed the current estimated amounts. As a result, higher
provisions for loan losses may be necessary in future periods which would
adversely affect operating results.
12
Non-Interest Income. Non-interest income totaled $46,000 and $44,000
for the quarters ended December 31, 1999 and 1998, respectively. For the nine
months ended December 31, 1999 and 1998, non-interest income totaled $227,000
and $133,000, respectively. The 1999 nine month period included net gains on the
sale of real estate owned totaling $76,000. Non-interest income consists
principally of service charges on deposit accounts, late charges on loans and
various other service fees.
Non-Interest Expense. Non-interest expense totaled $2.0 million for the
quarter ended December 31, 1999 as compared to $2.4 million for the quarter
ended December 31, 1998. This decrease is due primarily to the absence in 1999
of the $1.0 million contribution to the Foundation partially offset by increases
of $183,000 in compensation and benefits, $76,000 in occupancy and equipment
costs, $138,000 in advertising and promotion, and $163,000 in other non-interest
expenses. The increase in compensation and benefits is due primarily to the
$193,000 charge related to the RRP. The RRP was approved by stockholders of the
Company in October 1999 and provides for awards of common stock to certain
employees and Directors. A total of 105,369 shares were awarded under the RRP in
October 1999, and the grant-date fair value of these shares ($961,000) was
charged to stockholders' equity. The awards vest at a rate of 20% on each of
five annual vesting dates. Since the RRP was adopted in the quarter ended
December 31, 1999, and the first vesting date was January 1, 2000, a full 20% of
the total equity charge for RRP shares (or $193,000) was expensed in the current
quarter. The increases in occupancy and equipment expense and advertising and
promotion expense are primarily a result of the new branches in Greenwich,
Connecticut and New City, New York. The Greenwich branch was opened in September
1999 and the New City branch was opened in December 1998. In addition, occupancy
and equipment in the 1999 quarter includes various expenses related to the
remodeling of the Harrison and Rye branches. The increase in other non-interest
expenses was due primarily to additional costs related to operations as a public
company and costs incurred in establishing the new branches.
For the nine months ended December 31, 1999, non-interest expense
totaled $5.3 million as compared to $4.5 million for the same period last year.
This increase was due primarily to increases of $434,000 in compensation and
benefits, $356,000 in occupancy and equipment, $266,000 in advertising and
promotion, and $660,000 in other non-interest expenses. These increases were
partially offset by the absence of the $1.0 million contribution to the
Foundation made in the 1998 period. The increases in compensation and benefits
are primarily due to the RRP expense of $193,000, described above, as well as
staff additions and normal salary increases. The increases in occupancy and
equipment expense and advertising and promotion expense are primarily due to the
new branches and the remodeling of existing branches. Other non-interest expense
for the 1999 nine-month period includes $225,000 related to the establishment of
a real estate investment trust ("REIT") and operating costs related to the new
branches.
Income Taxes. Income tax expense amounted to $250,000 and $57,000 for
the quarters ended December 31, 1999 and 1998, respectively. The effective tax
rate was 35.8% for the quarter ended December 31, 1999. The Company reported a
net loss for the same quarter in the prior year. For the nine months ended
December 31, 1999 and 1998, income tax expense amounted to $965,000 and
$960,000, respectively, and the effective tax rates were 35.7% and 42.1%,
respectively. The lower effective tax rates in the current year reflect the
implementation of the REIT.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, the proceeds from
principal and interest payments on loans and mortgage-backed securities, and the
proceeds from maturities of investments. While maturities and scheduled
amortization of loans and securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
13
The Bank is required to maintain an average daily balance of liquid
assets as a percentage of net withdrawable deposit accounts plus short-term
borrowings as defined by the regulations of the Office of Thrift Supervision
("OTS"). The minimum required liquidity ratio is currently 4%. At December 31,
1999, the Bank's liquidity ratio under OTS regulations was approximately 30%.
The primary investing activities of the Company are the origination of
loans and the purchase of securities. For the quarter and nine months ended
December 31, 1999 and for the year ended March 31, 1999, the Company originated
loans totaling $16.8 million, $46.7 million and $44.2 million, respectively. The
Company purchased securities, including mortgage-backed securities, totaling
$10.0 million and $29.2 million for the quarter and nine months ended December
31, 1999, respectively, and $47.3 million for the year ended March 31, 1999.
Liquidity management for the Company is both a daily and long-term
process which is part of the Company's overall management strategy. Excess funds
are generally invested in short-term investments such as Federal funds and
certificates of deposit. In the event that the Bank should require additional
sources of funds, it could borrow from the Federal Home Loan Bank of New York
under an available line of credit.
At December 31, 1999, the Company had outstanding loan commitments of
$28.9 million. The Company anticipates that it will have sufficient funds
available to meet its current loan commitments. Time deposits scheduled to
mature in one year or less from December 31, 1999, totaled $149.1 million.
Management believes that a significant portion of such deposits will remain with
the Company.
The Bank is subject to certain minimum leverage, tangible and
risk-based capital requirements established by regulations of the OTS. These
regulations require savings associations to meet three minimum capital
standards: a tangible capital ratio requirement of 1.5% of total assets as
adjusted under the OTS regulations; a leverage ratio requirement of 4.0% of core
capital to such adjusted total assets; and a risk-based capital ratio
requirement of 8.0% of core and supplementary capital to total risk-based
assets. The OTS prompt corrective action regulations impose a 4.0% core capital
requirement for categorization as an "adequately capitalized" thrift and a 5.0%
core capital requirement for categorization as a "well capitalized" thrift. In
determining the amount of risk-weighted assets for purposes of the risk-based
capital requirement, a savings association must compute its risk-based assets by
multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of assets. At December 31, 1999, the Bank exceeded all of
the OTS minimum regulatory capital requirements, and was classified as a
well-capitalized institution for regulatory purposes.
14
The following table sets forth the capital position of the Bank as
calculated at December 31, 1999. The Bank's capital level reflects the receipt
of $9.0 million from Sound Federal Bancorp for the Bank's issuance of common
stock, equal to approximately 50% of the net proceeds received in the Offering.
Accordingly, the actual capital amounts and ratios set forth below do not
include additional capital retained by Sound Federal Bancorp.
OTS Requirements
---------------------------------------------
Minimum Capital Classification as
Bank Actual Adequacy Well Capitalized
------------------ -------------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------- ----- ------ -----
(Dollars in thousands)
December 31, 1999
Tangible capital.................... $ 45,180 13.9% $ 4,886 1.5%
Tier I (core) capital............... 45,180 13.9 13,029 4.0 $ 16,285 5.0%
Risk-based capital:
Tier I........................... 45,180 34.1 7,955 6.0
Total............................ 46,281 34.9 10,607 8.0 13,258 10.0
March 31, 1999
Tangible capital.................... $ 43,551 14.8% $ 4,439 1.5%
Tier I (core) capital............... 43,551 14.8 8,878 3.0 $ 14,796 5.0%
Risk-based capital:
Tier I........................... 43,551 38.3 6,820 6.0
Total............................ 44,577 39.2 9,094 8.0 11,367 10.0
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's most significant form of market risk is interest rate
risk, as the majority of the Company's assets and liabilities are sensitive to
changes in interest rates. The Company's assets consist primarily of fixed rate
mortgage loans, which have longer maturities than the Company's liabilities
which consist primarily of deposits. The Company's mortgage loan portfolio,
consisting primarily of loans secured by residential real property located in
Westchester County, is also subject to risks associated with the local economy.
The Company does not own any trading assets. At December 31, 1999, the Company
did not have any hedging transactions in place, such as interest rate swaps and
caps. The Company's interest rate risk management program focuses primarily on
evaluating and managing the composition of the Company's assets and liabilities
in the context of various interest rate scenarios. Factors beyond management's
control, such as market interest rates and competition, also have an impact on
interest income and interest expense.
During the quarter ended December 31, 1999, there were no significant
changes in the Company's assessment of market risk.
15
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. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition and results of operations.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a Special Meeting of Stockholders on October 14, 1999.
The purpose of the meeting was to consider and act upon (i) the approval of the
Sound Federal Bancorp 1999 Stock Option Plan and (ii) the approval of the Sound
Federal Bancorp 1999 Recognition and Retention Plan. The results of the votes
were as follows:
Proposal 1- Sound Federal Bancorp 1999 Stock Option Plan
For Against Abstain
- --------------- ------------ ------------
3,839,388 201,671 20,950
Proposal 2 - Sound Federal Bancorp 1999 Recognition and Retention Plan
For Against Abstain
- ------------- ----------- -------------
3,837,921 203,538 20,550
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27--Financial Data schedule*
(b) Reports on Form 8-K
None
* Submitted only with filing in electronic format.
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.
Sound Federal Bancorp
----------------------------------
(Registrant)
By: /s/ Anthony J. Fabiano
-----------------------------------
Anthony J. Fabiano
Duly Authorized and Chief
Financial and Accounting Officer
February 11, 2000
17