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 September 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
Outstanding at
Class November 10, 2000
------------- -----------------
par value, $0.10 4,993,218
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 2000 and March 31, 2000......... 1
Consolidated Statements of Income for the Three and Six Months
Ended September 30, 2000 and 1999..............................................2
Consolidated Statement of Changes in Stockholders' Equity for the Six Months
Ended September 30, 2000.......................................................3
Consolidated Statements of Cash Flows for the Six Months
Ended September 30, 2000 and 1999..............................................4
Notes to Unaudited Consolidated Financial Statements...........................5
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)
(Dollars in thousands)
September 30, March 31,
2000 2000
-------------------- ------------
Assets
Cash and due from banks........................................................ $ 11,489 $ 7,567
Federal funds sold............................................................. 17,500 25,000
Certificates of deposit........................................................ 5,581 10,075
Securities:
Available for sale, at fair value........................................... 153,732 62,365
Held to maturity, at amortized cost (fair value of $31,877 and
$34,799 at September 30, 2000 and March 31, 2000, respectively)............. 32,008 35,658
----------- ------------
Total securities...................................................... 185,740 98,023
------------ ------------
Loans, net:
Mortgage loans............................................................. 275,767 181,300
Consumer loans............................................................. 1,316 820
Allowance for loan losses (Note 5)......................................... (1,946) (1,188)
------------- -------------
Total loans, net...................................................... 275,137 180,932
------------ ------------
Accrued interest receivable.................................................... 3,172 2,116
Federal Home Loan Bank stock................................................... 3,745 2,195
Premises and equipment, net.................................................... 6,047 4,305
Deferred income taxes.......................................................... 2,061 1,386
Goodwill (Note 2).............................................................. 14,976 -
Other assets................................................................... 2,012 745
----------- -----------
Total assets......................................................... $ 527,460 $ 332,344
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits.................................................................. $ 448,223 $ 275,772
Borrowings............................................................... 19,539 86
Mortgagors' escrow funds................................................. 2,730 2,765
Accrued expenses and other liabilities................................... 1,852 1,032
------------ -----------
Total liabilities 472,344 279,655
------- -------
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 issued)................................................... 521 521
Additional paid-in capital................................................. 22,407 22,415
Treasury stock, at cost (219,000 shares at September 30, 2000
and 207,000 shares at March 31,2000).................................... (2,178) (2,069)
Common stock held by Employee Stock Ownership Plan ("ESOP")................ (1,393) (1,489)
Common stock awards under the Recognition and Retention Plan ("RRP")....... (624) (721)
Retained earnings ......................................................... 36,186 35,234
Accumulated other comprehensive income (loss), net of taxes (Note 5)....... 197 (1,202)
--- -------
Total stockholders' equity 55,116 52,689
------ ------
Total liabilities and stockholders' equity $ 527,460 $ 332,344
======= =======
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 Three Months Ended For the Six Months Ended
September 30, September 30,
------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
Interest and Dividend Income
Loans....................................................... $ 5,016 $ 2,961 $ 8,556 $ 5,832
Securities.................................................. 3,156 1,419 4,815 2,760
Federal funds sold and certificates of deposit.............. 292 513 769 1,078
Other earning assets........................................ 146 47 200 92
--------- --------- --------- ---------
Total interest and dividend income.......................... 8,610 4,940 14,340 9,762
--------- --------- --------- ---------
Interest Expense
Deposits.................................................... 4,449 2,322 7,333 4,548
Borrowings.................................................. 335 2 337 4
Other interest-bearing liabilities.......................... 24 11 35 20
-- -- -- --
Total interest expense...................................... 4,808 2,335 7,705 4,572
--------- --------- --------- ---------
Net interest income......................................... 3,802 2,605 6,635 5,190
Provision for loan losses (Note 5).......................... 58 25 108 50
--------- --------- --------- ---------
Net interest income after provision for loan losses......... 3,744 2,580 6,527 5,140
--------- --------- --------- ---------
Non-Interest Income
Service charges and fees................................... 88 51 143 100
Gain (loss) on sale of real estate owned................... (22) -- (22) 81
---------- --------- ---------- ---------
Total non-interest income.................................. 66 51 121 181
--------- --------- --------- ---------
Non-Interest Expense
Compensation and benefits.................................. 1,188 796 2,088 1,531
Occupancy and equipment.................................... 379 235 707 428
Data processing service fees 71 60 167 155
Advertising and promotion.................................. 132 120 300 196
Goodwill amortization (Note 2)............................. 255 - 255 -
Other...................................................... 525 502 921 1,008
--------- --------- --------- ---------
Total non-interest expense................................. 2,550 1,713 4,438 3,318
--------- --------- --------- ---------
Income before income tax expense............................ 1,260 918 2,210 2,003
Income tax expense.......................................... 590 291 946 715
--------- --------- --------- ---------
Net income.................................................. $ 670 $ 627 $ 1,264 $ 1,288
========= ========= ========= =========
Basic and diluted earnings per common share (Note 4) $ 0.14 $ 0.13 $ 0.26 $ 0.26
========= ========= ========= =========
See accompanying notes to the unaudited consolidated financial statements.
2
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended September 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 Income (Loss) Equity
----- ------- ----- ---- --------- -------- ------------- ------
Balance at March 31, 2000................. $ 521 $ 22,415 $(2,069) $ (1,489) $ (721) $ 35,234 $ (1,202) $ 52,689
Net income................................ -- -- -- -- 1,264 -- 1,264
Other comprehensive income (Note 5)....... -- -- -- -- -- -- 1,399 1,399
-------
Total comprehensive income (Note 5)..... 2,663
Repurchase of common stock................ - - (109) - - - - (109)
Dividends declared ($0.14 per share)...... -- -- -- -- -- (312) -- (312)
Vesting of RRP shares..................... -- -- -- -- 97 -- -- 97
ESOP shares committed to be released for
allocation............................. -- (8) -- 96 -- -- -- 88
------- --------------------- ------- ---------- -------- ---------- ------
Balance at September 30, 2000............. $ 521 $ 22,407 $(2,178) $(1,393) $ (624) $36,186 $ 197 $ 55,116
====== ======== ======== ======== ========== ======= ========== =======
See accompanying notes to the unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months Ended
September 30,
---------------------------------
2000 1999
OPERATING ACTIVITIES ---------- ----------
Net income............................................................ $ 1,264 $ 1,288
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses......................................... 108 50
Depreciation and amortization.................................... 207 103
ESOP and RRP expense............................................. 185 97
Deferred income tax benefit...................................... (2) (34)
Goodwill amortization............................................ 255 -
Loss (gain) on sale of real estate owned......................... 22 (81)
Other adjustments, net........................................... 215 75
---------- ----------
Net cash provided by operating activities......... 2,254 1,498
---------- ----------
INVESTING ACTIVITIES
Purchases of securities available for sale........................... - (19,243)
Proceeds from the sale of securities available for sale............... 21,888 -
Proceeds from principal payments, maturities and calls of securities 11,669 8,720
Disbursements for loan originations................................... (42,769) (29,939)
Principal collection on loans......................................... 15,737 10,718
Net decrease (increase) in certificates of deposit.................... 4,494 (1,392)
Cash paid in purchase acquisition, net of cash acquired.............. (33,937) -
Proceeds from sale of real estate owned............................... 33 314
Purchases of premises and equipment................................... (568) (1,167)
---------- ----------
Net cash used in investing activities....................... (23,453) (31,989)
---------- ----------
FINANCING ACTIVITIES
Net increase in deposits 20,090 18,526
Net decrease in mortgagors' escrow funds (2,048) (942)
Purchase of treasury stock (109) (1,393)
Dividends paid (312) (706)
Net cash provided by financing activities 17,621 15,485
Decrease in cash and cash equivalents (3,578) (15,006)
Cash and cash equivalents at beginning of period 32,567 49,482
Cash and cash equivalents at end of period $ 28,989 $ 34,476
SUPPLEMENTAL INFORMATION
Interest paid $ 7,879 $ 4,448
SUPPLEMENTAL INFORMATION
Interest paid......................................................... $ 7,879 $ 4,448
Income taxes paid..................................................... 708 773
Loans transferred to real estate owned............................... 291 124
============ ===========
Acquisition accounted for by the purchase method:
Fair value of assets acquired, including goodwill of $15,231...... $ 212,850 $ -
Fair value of liabilities assumed................................. (174,081) -
------------ ------------
Cash paid in acquisition.......................................... $ 38,769 $ -
============ ============
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
"Acquisition"). The Acquisition 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. At the time of the
Acquisition, Peekskill had total assets of $201.5 million and total deposits of
$152.4 million (historical carrying amounts before purchase accounting
adjustments).
The Acquisition has been 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
is being amortized to expense over a period of 15 years. Goodwill resulting from
the Acquisition totaled $15.2 million and the related amortization was $255,000
for the quarter ended September 30, 2000. Financial statement amounts for
Peekskill and its subsidiary are included in the Company's consolidated
financial statements beginning on the acquisition 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
5
disclosures are adequate to make the information presented not misleading;
however, the operating results for the periods presented are not necessarily
indicative of results to be expected for any other interim period or 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 4,793,260 and 4,967,074 for the three months ended
September 30, 2000 and 1999, respectively. For the six months ended September
30, 2000 and 1999, weighted average common shares used in calculating basic and
diluted earnings per share were 4,795,336 and 5,031,204, 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 three months and six months ended September 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.
6
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
Three Months Ended Six Months Ended Year Ended
September 30, September 30, March 31,
------------------------------ --------------------------- ---------
2000 1999 2000 1999 2000
------------- ------------- ------------- ------------ ----
(in thousands)
Balance at beginning of period.... $ 1,104 $ 1,119 $ 1,188 $ 1,094 $ 1,094
Provision for loan losses......... 58 25 108 50 100
Allowance transferred in Acquisition 784 - 784 - -
Mortgage loans charged off........ -- - (134) - (6)
---------- ---------- ---------- ---------- -----------
Balance at end of period.......... $ 1,946 $ 1,144 $ 1,946 $ 1,144 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
Income (Loss) Effect Income (Loss)
--------------- ----------------- ----------------
Three Months Ended: (in thousands)
September 30, 2000 $ 3,070 $ (1,257) $ 1,813
September 30, 1999 (404) 168 (236)
Six Months Ended:
September 30, 2000 2,345 (946) 1,399
September 30, 1999 (1,277) 523 (754)
Total comprehensive income (net income and other comprehensive income or
loss) amounted to $2.5 million and $391,000 for the three months ended September
30, 2000 and 1999, respectively, and $2.7 million and $534,000 for the six
months ended September 30, 2000 and 1999, respectively.
The Company's accumulated other comprehensive income (loss), which is
included in stockholders' equity, represents the unrealized gain (loss) on
securities available for sale of $334,000 and $2.0 million at September 30, 2000
and March 31, 2000, respectively, less related income taxes of $137,000 and
$809,000, 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.
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
"Acquisition"). The Acquisition was consummated on July 18, 2000. As further
described in Note 2 to the unaudited consolidated financial statements in Item
1, the acquisition has been accounted for using the purchase method of
accounting and, accordingly, financial statement amounts for Peekskill and its
subsidiary are included in the Company's consolidated financial statements
beginning on the acquisition date.
Financial Condition
The Company's total assets increased by $195.1 million to $527.5 million at
September 30, 2000 from $332.3 million at March 31, 2000, primarily due to the
Acquisition. At the time of the Acquisition, Peekskill had total assets of
$201.5 million. The increase in total assets includes an $87.7 million increase
in securities to $185.7 million, a $94.2 million increase in net loans to $275.1
million and a $15.0 million increase in goodwill which resulted from the
Acquisition. Total deposits amounted to $448.2 million at September 30, 2000, an
increase of $172.4 million compared to $275.8 million at March 31, 2000. At the
time of the Acquisition, Peekskill had total deposits of $152.4 million. Total
8
stockholders' equity increased $2.4 million to $55.1 million at September 30,
2000, as compared to $52.7 million at March 31, 2000.
Results of Operations
General. Net income amounted to $670,000 or $0.14 per common share for the
quarter ended September 30, 2000, as compared to $627,000 or $0.13 per common
share for the quarter ended September 30, 1999. The increase in net income for
the current quarter was due primarily to a $1.2 million increase in net interest
income, substantially offset by an $837,000 increase in non-interest expenses
and a $299,000 decrease in income tax expense.
For both six-month periods ended September 30, 2000 and 1999, net income
amounted to $1.3 million or $0.26 per common share. Net interest income
increased $1.4 million for the six months ended September 30, 2000 as compared
to the same period in 1999, offset by a $1.1 million increase in non-interest
expenses and a $231,000 increase in income tax expense.
Net Interest Income. Net interest income for the quarter ended September
30, 2000 amounted to $3.8 million, a $1.2 million increase from the same period
in the prior year. The interest rate spread was 3.00% and 2.97% for the quarters
ended September 30, 2000 and 1999, respectively. The net interest margin for
those periods was 3.39% and 3.54%, respectively. For the six months ended
September 30, 2000, net interest income amounted to $6.6 million as compared to
$5.2 million for the prior year. The interest rate spread for those same periods
was 3.00% and 2.99%, respectively. The net interest margin was 3.35% for the six
months ended September 30, 2000 as compared to 3.57% for the same period in
1999.
Interest Income. Interest income totaled $8.6 million during the quarter
ended September 30, 2000 as compared to $4.9 million for the same period in the
prior year. This increase is due to a $157.8 million increase in average
interest-earning assets to $450.2 million during the quarter ended September 30,
2000 as compared to $292.4 million for the same quarter in the prior year, and
by an 89 basis point increase in the average yield on interest-earning assets to
7.59%. The increase in the average balance of interest-earning assets was due
primarily to the Acquisition. The increase in the average yield earned is a
result of the assets acquired, as well as an overall increase in interest rates
during the first half of calendar 2000. For the six months ended September 30,
2000, interest income totaled $14.3 million as compared to $9.8 million for the
same period in the prior year. This increase is due to a $104.8 million increase
in the average balance of interest-earning assets to $394.8 million and a 54
basis point increase in the yield earned to 7.25%.
Loans. Interest income on loans increased $2.0 million or 69.4% to $5.0
million for the current quarter as compared to $3.0 million for the same quarter
in 1999. This increase is due to a $97.5 million increase in the average balance
of loans to $255.1 million and a 35 basis point increase in the yield earned to
7.80%. For the six months ended September 30, 2000, interest income on loans
increased $2.7 million or 46.7% to $8.6 million as compared to $5.8 million for
the same period in 1999. This increase is due to a $72.6 million increase in the
average balance of loans to $225.3 million, partially offset by a 4 basis point
decrease in the yield earned to 7.58%.
The growth of the loan portfolio is principally a result of the Acquisition
(Peekskill had net loans of $67.3 million at the acquisition date), as well as
efforts by the Company to expand its loan products offered and markets served
and 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.
Mortgage-Backed Securities. Interest on mortgage-backed securities
increased $1.5 million to $2.3 million for the quarter ended September 30, 2000
due primarily to an increase of $68.5 million in the average balance of
mortgage-backed securities to $124.1 million and an increase of 167 basis
9
points in the average yield to 7.32%. Interest on mortgage-backed securities
increased $1.6 million to $3.2 million for the six months ended September 30,
2000 due primarily to an increase of $38.7 million in the average balance of
mortgage-backed securities to $95.3 million and an increase of 91 basis points
in the average yield to 6.70%. The higher average balances in the current year
reflect securities acquired in the Acquisition.
Other Securities. Interest on other securities increased $238,000 to
$865,000 for the quarter ended September 30, 2000 as compared to the same
quarter in 1999 due to a $5.0 million increase in the average balance of other
securities to $43.6 million and a 142 basis point increase in the average yield
earned to 7.87%. Interest on other securities increased $497,000 to $1.6 million
for the six months ended September 30, 2000 as compared to the six months ended
September 30, 1999 due to a $7.6 million increase in the average balance of
other securities to $43.0 million and a 119 basis point increase in the average
yield earned to 7.49%. The higher average balances in the current year reflect
securities acquired in the Acquisition, net of sales of certain acquired
securities which were made in order to fund a portion of the Acquisition cost.
Federal Funds. Interest on Federal funds decreased $120,000 to $229,000 for
the quarter ended September 30, 2000 as compared to $349,000 for the same period
in 1999. This decrease is due to an $11.8 million decrease in the average
balance to $14.6 million, partially offset by a 98 basis point increase in the
average yield earned to 6.23%. For the six months ended September 30, 1999,
interest on Federal funds decreased $169,000 to $587,000 as compared to the same
period in 1999, reflecting a $12.2 million decrease in the average balance to
$18.4 million, partially offset by a 145 basis point increase in the average
yield earned to 6.37%. The lower level of Federal funds in the current year
reflects the utilization of certain of the Company's liquid assets to fund a
portion of the Acquisition cost.
Interest Expense. Interest expense for the quarter ended September 30, 2000
totaled $4.8 million, as compared to $2.3 million for the quarter ended
September 30, 1999. The average balance of interest-bearing liabilities
increased $172.4 million to $420.3 million for the quarter ended September 30,
2000 from $247.9 million for the same quarter in the prior year and the average
cost of these liabilities increased 85 basis points to 4.59%. For the six months
ended September 30, 2000, interest expense totaled $7.7 million, as compared to
$4.6 million for the six months ended September 30, 1999. The average balance of
interest-bearing liabilities increased $115.1 million to $359.7 million for the
six months ended September 30, 2000 from $244.6 million in the prior year and
the average cost of these liabilities increased 54 basis points to 4.27%. The
increase in interest-bearing liabilities is due primarily to the Acquisition.
Interest expense on time deposits totaled $3.6 million for the current
quarter as compared to $1.8 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 91
basis point increase in the average cost to 5.82%. Interest on savings accounts
amounted to $617,000 for the current quarter as compared to $318,000 for the
quarter ended June 30, 1999. The average balance of savings accounts increased
$39.1 million to $99.4 million and the average cost increased 37 basis points to
2.46%. Interest expense on other deposits (NOW and money market accounts)
amounted to $245,000 for quarter ended September 30, 2000 as compared to
$237,000 for the same quarter in the prior year. The average balance of these
accounts increased $13.9 million to $56.5 million and the average cost decreased
49 basis points to 1.72%.
For the quarter ended September 30, 2000, interest on borrowings amounted
to $335,000 as compared to $2,000 in the prior year. The average balance of
borrowings for the quarter was $15.9 million and the average rate paid was 8.39%
as compared to $86,000 and 9.29%, respectively, for the same quarter in 1999.
The increase in borrowings consists of FHLB advances that were a component of
Peekskill's capital management strategy and were assumed in the Acquisition.
Interest expense on time deposits totaled $5.9 million for the six months
ended September 30, 2000 as compared to $3.5 million for the same period in
1999. The increase is due to a $72.5 million increase in the average balance of
time deposits and a 64 basis point increase in the average cost to 5.56%.
Interest on savings accounts amounted to $950,000 for the current period as
compared to
10
$621,000 for the six months ended June 30, 1999. The average balance of savings
accounts increased $22.7 million to $82.9 million and the average cost increased
23 basis points to 2.29%. Interest expense on other deposits (NOW and money
market accounts) amounted to $458,000 for the six months ended September 30,
2000 as compared to $471,000 for the same period in the prior year. The average
balance of these accounts increased $9.6 million to $52.0 million and the
average cost increased 46 basis points to 1.76%.
For the six months ended September 30, 2000, interest on borrowings
amounted to $337,000 as compared to $4,000 in the prior year. The average
balance of borrowings for the six months ended September 30, 2000 was $9.1
million as compared to $86,000 for the same period in 1999. The average rate
paid was 8.05% and 9.30% for those same respective periods.
Provision for Loan Losses. The provision for loan losses was $58,000 for
the quarter ended September 30, 2000 as compared to $25,000 for the quarter
ended September 30, 1999. For the six months ended September 30, 2000, the
provision for loan losses was $108,000 as compared to $50,000 for the same
period in the prior year. Non-performing loans amounted to $1.3 million or 0.43%
of total loans at September 30, 2000, as compared to $759,000 or 0.46% of total
loans at September 30, 1999. The allowance for loan losses amounted to $1.9
million and $1.2 million at September 30, 2000 and March 31, 2000, respectively.
The increase in the allowance for loan losses is primarily a result of the
Acquisition. There were no charge-offs in the 2000 quarter as compared to
charge-offs of $6,000 in the quarter ended September 30, 1999. Charge-offs
amounted to $134,000 for the six months ended September 30, 2000 as compared to
$6,000 for the six months ended September 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 $66,000 and $51,000 for
the quarters ended September 30, 2000 and 1999, respectively. For the six months
ended September 30, 2000 and 1999, non-interest income amounted to $121,000 and
$181,000, respectively. Non-interest income consists principally of service
charges on deposit accounts, late charges on loans and various other service
fees. Service fees amounted to $88,000 and $51,000 for the quarters ended
September 30, 2000 and 1999, respectively. For the six months ended September
30, 2000 and 1999, service fees amounted to $143,000 and $100,000, respectively.
The increases in service fees are primarily attributable to the Acquisition. The
quarter and six months ended September 30, 2000 included a loss of $22,000 on
the sale of real estate owned. The six months ended September 30, 1999 included
an $81,000 gain on the sale of real estate owned.
Non-Interest Expense. Non-interest expense totaled $2.6 million for the
quarter ended September 30, 2000 as compared to $1.7 million for the quarter
ended September 30, 1999. This increase is due primarily to increases of
$392,000 in compensation and benefits, $144,000 in occupancy and equipment
costs, $12,000 in advertising and promotion, $255,000 in goodwill amortization
and $23,000 in other non-interest expenses.
For the six months ended September 30, 2000, non-interest expense totaled
$4.5 million as compared to $3.3 million for the same period in 1999. This
increase is due primarily to increases of $557,000 in compensation and benefits,
$279,000 in occupancy and equipment costs, $104,000 in advertising and promotion
and $255,000 in goodwill amortization, partially offset by an $87,000 decrease
in other non-interest expenses.
11
The increases in non-interest expenses are due primarily to the Acquisition
and the opening of the Bank's Cos Cob branch in September 1999.
Income Taxes. Income tax expense amounted to $590,000 and $291,000 for the
quarters ended September 30, 2000 and 1999, respectively. The effective tax rate
for those same periods was 46.8% and 31.7%, respectively. For the six months
ended September 30, 2000 and 1999, income tax expense amounted to $946,000 and
$715,000, respectively. The effective tax rate for those same periods was 42.8%
and 35.7%, respectively. The higher effective tax rates in the current year are
primarily due to the amortization of goodwill which is not deductible for tax
purposes.
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 September 30, 2000, the
Bank's liquidity ratio under OTS regulations was approximately 16.8%.
The primary investing activities of the Company are the origination of
loans and the purchase of securities. For the three months ended September 30,
2000 and for the year ended March 31, 2000, the Company originated loans
totaling $42.5 million and $62.5 million, respectively. The Company did not
purchase any securities during the quarter and six months ended September 30,
2000, other than securities acquired in the Acquisition. The Company purchased
$35.2 million of securities during the year ended March 31, 2000, including
$19.2 million during the six months ended September 30, 1999. During the quarter
ended September 30, 2000, the Company sold $21.9 million of securities available
for sale. These securities were part of Peekskill's portfolio and were recorded
by the Company at their fair value in accordance with the purchase method of
accounting. The securities were sold by the Company immediately thereafter and,
as a result of the fair value adjustment, there was no gain or loss on the sale.
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 September 30, 2000, the Company had outstanding loan commitments of
$40.4 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 September 30, 2000, totaled $243.8 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. Goodwill and most
other intangible assets are deducted in determining regulatory
12
capital for purposes of all capital ratios. 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 September 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 capital position of the Bank as
calculated at September 30, 2000 and March 31, 2000. The actual capital amounts
and ratios set forth below are for the Bank only and, accordingly, do not
include additional capital retained by Sound Federal Bancorp. The decreases in
the Bank's actual capital amounts and ratios at September 30, 2000 compared to
March 31, 2000 are primarily attributable to the deduction of goodwill from
regulatory capital and the increase in the Bank's total assets caused by the
Acquisition.
OTS Requirements
-----------------------------------------
Minimum Capital Classification as
Bank Actual Adequacy Well Capitalized
------------------ ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
September 30, 2000
Tangible capital.................... $ 31,998 6.2% $ 7,690 1.5%
Tier I (core) capital............... 31,998 6.2 20,507 4.0 $ 25,634 5.0%
Risk-based capital:
Tier I........................... 31,998 14.3 13,412 6.0
Total............................ 33,944 15.2 17,883 8.0 22,354 10.0
March 31, 2000
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 September 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 September 30, 2000, there were no significant
changes in the Company's assessment of market risk.
13
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 its Annual Meeting of Stockholders on August 10, 2000. The
purpose of the meeting was the election of two directors of the Company and the
ratification of the appointment of KPMG LLP as auditors for the Company for the
fiscal year ending March 31, 2001. The results of the votes were as follows:
Proposal 1 - Election of Directors
For Withheld
------------ -----------
Donald H. Heithaus 4,667,400 37,381
Joseph A. Lanza 4, 661,950 42,831
Proposal 2 - Ratification of Appointment of KPMG LLP
For Against Abstain
--------- -------- --------
4,653,023 5,550 46,208
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
The Company filed a report on Form 8-K on July 21, 2000 and
subsequently filed a Form 8-K/A on September 29, 2000.
These reports provided the required information with respect
to the Acquisition.
* Submitted only with filing in electronic format.
14
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
November 13, 2000
15