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 June 30, 2000
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
------------- August 10, 2000
Common Stock, ---------------
par value, $0.10 5,005,218
i
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2000 and March 31, 2000.......1
Consolidated Statements of Income for the Three Months
Ended June 30, 2000 and 1999..........................................2
Consolidated Statement of Changes in Stockholders' Equity
for the Three Months Ended June 30, 2000..............................3
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 2000 and 1999..........................................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...........12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings....................................................13
Item 2. Changes in Securities and Use of Proceeds............................13
Item 3. Defaults upon Senior Securities......................................13
Item 4. Submission of Matters to a Vote of Security Holders..................13
Item 5. Other Information....................................................13
Item 6. Exhibits and Reports on Form 8-K.....................................13
Signatures...........................................................14
Part 1. - Financial Information
Item 1. Financial Statements
Sound Federal Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data) June 30, March 31,
2000 2000
-------------- -------------
Assets
Cash and due from banks............................................................ $ 7,492 $ 7,567
Federal funds sold................................................................. 16,400 25,000
Certificates of deposit............................................................ 7,181 10,075
Securities:
Available for sale, at fair value............................................... 60,758 62,365
Held to maturity, at amortized cost (fair value of $32,892 and $34,799 at
June 30 and March 31, 2000, respectively)................................... 33,792 35,658
------------ ------------
Total securities.......................................................... 94,550 98,023
------------ ------------
Loans, net:
Mortgage loans................................................................. 199,030 181,300
Consumer loans................................................................. 958 820
Allowance for loan losses (Note 5)............................................. (1,104) (1,188)
------------- -------------
Total loans, net.......................................................... 198,884 180,932
------------ ------------
Accrued interest receivable........................................................ 2,135 2,116
Federal Home Loan Bank stock....................................................... 2,195 2,195
Premises and equipment, net........................................................ 4,657 4,305
Deferred income taxes.............................................................. 1,630 1,386
Other assets....................................................................... 869 745
----------- -----------
Total assets............................................................. $ 335,993 $ 332,344
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits...................................................................... $ 280,653 $ 275,772
Mortgagors' escrow funds..................................................... 1,902 2,765
Accrued expenses and other liabilities........................................ 627 1,118
------------ -----------
Total liabilities.......................................................... 283,182 279,655
------------ -----------
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
Additional paid-in capital..................................................... 22,415 22,415
Treasury stock, at cost (207,000 shares)....................................... (2,069) (2,069)
Common stock held by Employee Stock Ownership Plan ("ESOP") ................... (1,441) (1,489)
Common stock awards under the Recognition and Retention Plan ("RRP")....... (673) (721)
Retained earnings.............................................................. 35,674 35,234
Accumulated other comprehensive loss, net of taxes (Note 5).................... (1,616) (1,202)
-------------- -------------
Total stockholders' equity................................................. 52,811 52,689
------------ -----------
Total liabilities and stockholders' equity................................. $ 335,993 $ 332,344
============ ============
See accompanying notes to the unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
For the Three Months Ended
June 30,
---------------------------
2000 1999
---- -------
Interest and Dividend Income
Loans....................................................... $ 3,540 $ 2,871
Mortgage-backed and other securities........................ 1,660 1,341
Federal funds sold and certificates of deposit.............. 477 565
Other earning assets........................................ 53 45
--------- ---------
Total interest and dividend income.......................... 5,730 4,822
--------- ---------
Interest Expense
Deposits.................................................... 2,883 2,226
Other interest-bearing liabilities......................... 13 11
--------- ---------
Total interest expense...................................... 2,896 2,237
---------- ---------
Net interest income......................................... 2,834 2,585
Provision for loan losses (Note 5).......................... 50 25
--------- ---------
Net interest income after provision for loan losses......... 2,784 2,560
--------- ---------
Non-Interest Income
Service charges and fees................................... 55 49
Gain on sale of real estate owned.......................... - 81
--------- ---------
Total non-interest income.................................. 55 130
--------- ---------
Non-Interest Expense
Compensation and benefits.................................. 899 735
Occupancy and equipment.................................... 328 193
Data processing service fees............................... 96 95
Advertising and promotion.................................. 168 76
Other...................................................... 397 506
--------- ---------
Total non-interest expense................................. 1,888 1,605
--------- ---------
Income before income tax expense............................ 951 1,085
Income tax expense.......................................... 356 424
--------- ---------
Net income.................................................. $ 595 $ 661
========= =========
Basic and diluted earnings per common share (Note 4)........ $ 0.12 $ 0.13
========= =========
See accompanying notes to the unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended June 30, 2000 (Unaudited) (Dollars in thousands,
except per share data)
Common Common Accumulated
Additional Stock Stock Other Total
Common Paid-In Treasury Held By Awards Retained Comprehensive Stockholders'
Stock Capital Stock ESOP Under RRP Earnings Loss Equity
----- ------- ----- ---- --------- -------- ---- ------
Balance at March 31, 2000............... $ 521 $ 22,415 $(2,069) $(1,489) $ (721) $ 35,234 $ (1,202) $ 52,689
Net income.............................. -- -- -- -- 595 -- 595
Other comprehensive loss (Note 5)....... -- -- -- -- -- -- (414) (414)
----------
Total comprehensive income (Note 5)... 181
Dividends declared ($0.07 per share).... -- -- -- -- -- (155) -- (155)
Vesting of RRP shares................... -- -- -- -- 48 -- -- 48
ESOP shares committed to be released
for Balance at June 30, 2000............$ 521 $ 22,415 $ (2,069) $(1,441) $ (673) $ 35,674 $ (1,616) $ 52,811
======= ======== ======== ======== ========== ======== ========== ==========
See accompanying notes to the unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Three Months Ended
June 30,
--------------------------
2000 1999
----------- ------------
OPERATING ACTIVITIES
Net income............................................................ $ 595 $ 661
Adjustments to reconcile net income to net cash provided
Provision for loan losses......................................... 50 25
Depreciation expense.............................................. 111 49
ESOP and RRP expense.............................................. 96 48
Deferred income tax expense (benefit)............................. 52 (10)
Gain on sale of real estate owned................................. - (81)
Other adjustments, net............................................ (421) (141)
-------- ---------
Net cash provided by operating activities................... 483 551
--------- --------
INVESTING ACTIVITIES
Purchases of securities available for sale........................... - (12,430)
Proceeds from principal payments, maturities and calls of
securities .................................................... 2,785 4,831
Disbursements for loan originations................................... (25,366) (15,563)
Principal collection on loans......................................... 7,129 5,971
Net increase in certificates of deposit............................... 2,894 (1,090)
Proceeds from sale of real estate owned............................... - 240
Purchases of premises and equipment................................... (463) (404)
-------- ---------
Net cash used in investing activities....................... (13,021) (18,445)
-------- ---------
FINANCING ACTIVITIES
Net increase in deposits.............................................. 4,881 3,652
Net decrease in mortgage escrow deposits.............................. (863) (781)
Dividends paid........................................................ (155) (365)
---------- --------
Net cash provided by financing activities................... 3,863 2,506
---------- -------
Decrease in cash and cash equivalents................................. (8,675) (15,388)
Cash and cash equivalents at beginning of period...................... 32,567 49,482
--------- -------
Cash and cash equivalents at end of period............................ $ 23,892 $ 34,094
========= =======
SUPPLEMENTAL INFORMATION
Interest paid......................................................... $ 2,878 $ 2,237
Income taxes paid..................................................... 645 465
Loans transferred to real estate owned............................... 203 -
========== =======
See accompanying notes to the unaudited consolidated financial statements.
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. 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. After deducting offering
costs of $1.1 million, the net cash proceeds from the Offering were $20.0
million.
2. Acquisition
On February 16, 2000, the Company entered into a definitive merger
agreement with Peekskill Financial Corporation ("Peekskill") providing for the
merger of Peekskill and its wholly-owned subsidiary, First Federal Savings Bank,
with and into the Bank, with the Bank as the surviving entity (the "Merger").
The Merger was consummated on July 18, 2000. As part of the transaction,
Peekskill's stockholders received $22 per share in cash. The transaction was
valued at approximately $41.7 million including the "in-the-money" portion of
outstanding stock options. On a pro-forma basis using June 30, 2000 data, the
Company estimates that its post-acquisition total assets and total deposits
approximate $500 million and $433 million, respectively.
The Merger is being accounted for using the purchase method of accounting.
Accordingly, the assets acquired and liabilities assumed have been recorded by
the Company at their fair values at the consummation date. The excess of the
Company's total acquisition cost over the fair value of the net assets acquired,
or "goodwill", has been recognized as an intangible asset and will be amortized
to expense over a period of 15 years. The Company's consolidated financial
statements will include amounts for Peekskill for periods subsequent to the
consummation date.
3. 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, 2001.
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 5.
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, 2000, included in
the Company's 2000 Annual Report.
4. Earnings Per Share
Weighted average common shares used in calculating both basic and diluted
earnings per share were 4,787,363 and 5,048,908 for the three months ended June
30, 2000 and 1999, respectively. In computing basic earnings per share,
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. With respect to
the calculation of diluted earnings per share, the application of the treasury
stock method did not result in incremental common equivalent shares or otherwise
have a dilutive effect on earnings per share for the quarters ended June 30,
2000 and 1999.
5. 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). Losses 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 (in thousands):
Three Months Ended Year Ended
June 30, March 31,
-----------------------------
2000 1999 2000
------------- ------------- ---------
Balance at beginning of period.... $ 1,188 $ 1,094 $ 1,094
Provision for loan losses......... 50 25 100
Mortgage loans charged off........ (134) -- (6)
-------------------------- ----------
Balance at end of period.......... $ 1,104 $ 1,119 $ 1,188
========= ========= ==========
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
----------- ---------- --------------
Three months ended: (in thousands)
June 30, 2000 $ (725) $ 311 $ (414)
June 30, 1999 (873) 355 (518)
Total comprehensive income (net income less other comprehensive loss)
amounted to $181,000 and $143,000 for the three months ended June 30, 2000 and
1999, respectively.
The Company's accumulated other comprehensive loss, which is included in
stockholders' equity, represents the unrealized loss on securities
available-for-sale of $2.7 million and $2.1 million at June 30, 2000 and March
31, 2000, respectively, less related income taxes of $1.1 million and $809,000,
respectively.
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.
Acquisition
On February 16, 2000, the Company entered into a definitive merger
agreement with Peekskill Financial Corporation ("Peekskill") providing for the
merger of Peekskill and its wholly-owned subsidiary, First Federal Savings Bank,
with and into the Bank, with the Bank as the surviving entity (the "Merger").
The Merger was consummated on July 18, 2000. As part of the transaction,
Peekskill's stockholders received $22 per share in cash. The transaction was
valued at approximately $41.7 million, including the "in-the-money" portion of
outstanding stock options. The acquisition is being accounted for using the
purchase method of accounting. On a pro-forma basis using June 30, 2000 data,
the Company estimates that its post-acquisition total assets and total deposits
approximate $500 million and $433 million, respectively. In addition, following
the Merger, the Bank's branch network has been expanded to include three
branches in Northern Westchester County, New York.
Financial Condition
The Company's total assets increased by $3.7 million to $336.0 million at
June 30, 2000 from $332.3 million at March 31, 2000. The increase in total
assets reflects an $18.0 million increase in net loans to $198.9 million, funded
principally by an $8.6 million decrease in Federal funds, a $2.9 million
decrease in interest-bearing deposits and a $3.5 million decrease in securities.
Total deposits amounted to $280.7 million at June 30, 2000, as compared to
$275.8 million at March 31, 2000. Total stockholders' equity increased $122,000
to $52.8 million at June 30, 2000 as compared to $52.7 million at March 31,
2000.
Results of Operations
General. Net income amounted to $595,000 or $0.12 per share for the quarter
ended June 30, 2000, as compared to $661,000 or $0.13 per share for the quarter
ended June 30, 1999. The decrease in net income for the current quarter was due
primarily to a $283,000 increase in non-interest expenses and a $75,000 decrease
in non-interest income, partially offset by a $249,000 increase in net interest
income and a $68,000 decrease in income tax expense.
Net Interest Income. Net interest income for the quarter ended June 30,
2000 amounted to $2.8 million, a $249,000 increase from the same period in the
prior year. The interest rate spread was 3.00% and 3.01% for the quarters ended
June 30, 2000 and 1999, respectively. The net interest margin for those periods
was 3.53% and 3.61%, respectively. The relatively flat interest rate spread
reflects the increase in interest rates during the past year, and changes in the
asset and deposit mix of the Bank. The yield on earning assets increased 41
basis points to 7.15% for the quarter ended June 30, 2000 as compared to the
same quarter in 1999, as rising interest rates caused the Bank's adjustable rate
securities to reprice. In addition, the reallocation of funds from the
securities portfolios and short-term investments into loans (which have higher
yields) caused the yield on interest-earning assets to increase. However, rising
market interest rates caused the cost of deposits to increase 42 basis points to
4.15%. In addition, time deposits, which have a higher cost than other deposits,
represented 61.2% of average interest-bearing liabilities for the current
quarter as compared to 57.1% for the prior year quarter.
Interest Income. Interest income totaled $5.7 million during the quarter
ended June 30, 2000 as compared to $4.8 million for the same period in the prior
year. This increase is due to a $34.7 million increase in average
interest-earning assets to $321.7 million during the quarter ended June 30, 2000
as compared to $287.0 million for the same quarter in the prior year, and by a
41 basis point increase in the average yield on interest-earning assets to
7.15%. The increase in the average balance of interest-earning assets was due
primarily to the investment of funds from deposit growth during the past year.
Loans. Interest income on loans increased $669,000 or 23.3% to $3.5 million
for the current quarter as compared to $2.9 million for the same quarter in
1999. This increase is due to a $40.9 million increase in the average balance of
loans to $188.9 million partially offset by a 26 basis point decrease in the
yield earned to 7.52%. The growth of the loan portfolio is a result of the
Company's efforts to expand its loan products offered and markets served, as
well as the strong demand for fixed rate loans (the Company's primary mortgage
loan product). Comparatively 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 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 portfolio as a whole.
Mortgage-Backed Securities. Interest on mortgage-backed securities
increased $60,000 to $911,000 for the quarter ended June 30, 2000 due primarily
to an increase of 57 basis points in the average yield to 6.48%, partially
offset by a $1.3 million decrease in the average balance to $56.4 million. Many
of these mortgage-backed securities have rates that adjust annually, typically
based on Treasury bill rates. As interest rates increased over the last twelve
months, these securities began to reprice to higher interest rates. The decrease
in the average balance reflects the use of principal repayments to fund the
growth of the loan portfolio and the purchase of securities other than
mortgage-backed securities.
Other Securities. Interest on other securities increased $259,000 to
$749,000 for the quarter ended June 30, 2000 as compared to the same quarter in
1999 due to a $10.1 million increase in the average balance to $42.3 million and
a 99 basis point increase in the average yield earned to 7.11%. 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. The increase in the average yield reflects higher
market interest rates.
Federal Funds. Interest on Federal funds decreased $48,000 to $359,000,
reflecting a $12.5 million decrease in the average balance to $21.7 million
partially offset by a 187 basis point increase in the average
yield earned to 6.64%. 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 $118,000 for the quarter ended June 30,
2000 as compared to $158,000 for the same quarter in the prior year. This
decrease reflects a $2.9 million decrease in the average balance to $8.5 million
for the 2000 quarter as compared to $11.4 million for the same quarter in 1999.
Interest Expense. Interest expense for the quarter ended June 30, 2000
totaled $2.9 million, as compared to $2.2 million for the quarter ended June 30,
1999. The average balance of interest-bearing liabilities increased $39.3
million to $279.8 million for the quarter ended June 30, 2000 from $240.5
million for the same quarter in the prior year and the average cost of these
liabilities increased 42 basis points to 4.15%. The increase in the average
balance is due primarily to a $33.8 million increase in the average balance of
time deposits to $171.1 million from $137.3 million in the same quarter last
year. This growth in time deposits reflects marketing campaigns to celebrate the
opening of the Bank's Greenwich branch in September 1999. Interest expense on
time deposits totaled $2.3 million for the current quarter as compared to $1.7
million for the same quarter in 1999. The increase is due to the increase in the
average balance of time deposits as well as a 55 basis point increase in the
average rate paid to 5.48%.
Interest expense on other deposits (savings, NOW and money market accounts)
amounted to $547,000 for the quarter ended June 30, 2000 as compared to $539,000
for the same quarter in the prior year. The average balance of these accounts
increased $5.0 million to $106.6 million and the average rate paid decreased 7
basis points to 2.06%
Provision for Loan Losses. The provision for loan losses was $50,000 for
the quarter ended June 30, 2000 as compared to $25,000 for the quarter ended
June 30, 1999. Non-performing loans amounted to $806,000 or 0.40% of total loans
at June 30, 2000, as compared to $817,000 or 0.53% of total loans at June 30,
1999. The allowance for loan losses amounted to $1.1 million at June 30, 2000
and 1999, respectively. Charge-offs amounted to $134,000 during the three months
ended June 30, 2000 (none for the three months ended June 30, 1999).
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.
Non-Interest Income. Non-interest income totaled $55,000 and $130,000 for
the quarters ended June 30, 2000 and 1999, respectively. The quarter ended June
30, 1999 included a net gain of $81,000 on the sale of real estate owned.
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 $1.9 million for the
quarter ended June 30, 2000 as compared to $1.6 million for the quarter ended
June 30, 1999. This increase is due primarily to increases of $164,000 in
compensation and benefits, $135,000 in occupancy and equipment costs and $92,000
in advertising and promotion, partially offset by a $109,000 decrease in other
non-interest expenses. The increase in compensation and benefits is due
primarily to staff hired for the Greenwich branch, expense of $47,000 related to
the Recognition and Retention Plan established in October 1999, and normal
salary increases. The increase in occupancy and equipment costs includes various
expenses related to the remodeling of the Harrison and Rye branches and the new
branch in Greenwich, Connecticut. The increase in advertising and promotion is
primarily due to promotional events for the grand opening of the Greenwich
branch and the re-opening of the remodeled branches.
Income Taxes. Income tax expense amounted to $356,000 and $424,000 for the
quarters ended June 30, 2000 and 1999, respectively. The effective tax rate for
those same periods was 37.4% and 39.1%, respectively.
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.
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 June 30, 2000, the Bank's
liquidity ratio under OTS regulations was approximately 25%.
The primary investing activities of the Company are the origination of
loans and the purchase of securities. For the three months ended June 30, 2000
and for the year ended March 31, 2000, the Company originated loans totaling
$24.8 million and $62.5 million, respectively. The Company did not purchase any
securities during the quarter ended June 30, 2000 in anticipation of liquidity
needed to fund the Acquisition. The Company purchased $35.2 million of
securities for the year ended March 31, 2000.
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 June 30, 2000, the Company had outstanding loan commitments of $34.5
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 June 30, 2000, totaled $157.6 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 regulations. At June 30, 2000, the Bank exceeded all
of the OTS minimum regulatory capital requirements, and was classified as a
well-capitalized institution for regulatory purposes.
The following table sets forth the historical capital position of the Bank
as calculated at June 30, 2000 prior to the Merger. 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)
June 30, 2000
Tangible capital.................... $ 46,372 13.7% $ 5,071 1.5%
Tier I (core) capital............... 46,372 13.7 13,522 4.0 $ 16,903 5.0%
Risk-based capital:
Tier I........................... 46,372 31.1 8,938 6.0
Total............................ 47,476 31.9 11,918 8.0 14,898 10.0
Tangible capital.................... $ 45,786 13.7% $ 5,007 1.5%
Tier I (core) capital............... 45,786 13.7 13,353 4.0 $ 16,690 5.0%
Risk-based capital:
Tier I........................... 45,786 32.9 8,352 6.0
Total............................ 46,909 33.7 11,136 8.0 13,920 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 June 30, 2000, 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 June 30, 2000, there were no significant changes
in the Company's assessment of market risk.
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
None
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.
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
August 11, 2000