SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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
-------------- February 12, 2001
Common Stock, -----------------
par value, $0.10 4,874,218
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at December 31, 2000
and March 31, 2000...................................................1
Consolidated Statements of Income for the Three and
Nine Months Ended December 31, 2000 and 1999.........................2
Consolidated Statement of Changes in Stockholders' Equity
for the Nine Months Ended December 31, 2000..........................3
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 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..........14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings...................................................15
Item 2. Changes in Securities and Use of Proceeds...........................15
Item 3. Defaults upon Senior Securities.....................................15
Item 4. Submission of Matters to a Vote of Security Holders.................15
Item 5. Other Information...................................................15
Item 6. Exhibits and Reports on Form 8-K....................................15
Signatures..........................................................16
i
Part 1. - Financial Information
Item 1. Financial Statements
Sound Federal Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
December 31, March 31,
2000 2000
------------------- -------------------
Assets
Cash and due from banks........................................................ $ 4,729 $ 7,567
Federal funds sold............................................................. 40,100 25,000
Certificates of deposit........................................................ 4,182 10,075
Securities:
Available for sale, at fair value........................................... 151,583 62,365
Held to maturity, at amortized cost (fair value of $29,808
and $34,799 at December 31, 2000 and March 31, 2000, respectively)....... 30,049 35,658
------------ ------------
Total securities...................................................... 181,632 98,023
------------ ------------
Loans, net:
Mortgage loans............................................................. 285,440 181,300
Consumer loans............................................................. 1,827 820
Allowance for loan losses (Note 5)......................................... (2,025) (1,188)
------------ ------------
Total loans, net...................................................... 285,242 180,932
------------ ------------
Accrued interest receivable.................................................... 3,640 2,116
Federal Home Loan Bank stock................................................... 3,745 2,195
Premises and equipment, net.................................................... 5,945 4,305
Deferred income taxes.......................................................... 1,134 1,386
Goodwill, net (Note 2)......................................................... 14,719 -
Other assets................................................................... 1,861 745
----------- -----------
Total assets......................................................... $ 546,929 $ 332,344
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits.................................................................. $ 469,459 $ 275,772
Borrowings................................................................ 14,625 86
Mortgagors' escrow funds.................................................. 4,781 2,765
Accrued expenses and other liabilities.................................... 2,099 1,032
------------ -----------
Total liabilities...................................................... 490,964 279,655
------------ -----------
Stockholders' equity:
Preferred stock ($0.10 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................................................. 22,402 22,415
Treasury stock, at cost (333,000 shares at December 31, 2000
and 207,000 shares at March 31,2000).................................... (3,193) (2,069)
Common stock held by the Employee Stock Ownership Plan ("ESOP")............ (1,345) (1,489)
Common stock awards under the Recognition and Retention Plan ("RRP")....... (576) (721)
Retained earnings.......................................................... 36,733 35,234
Accumulated other comprehensive income (loss), net of taxes (Note 6)....... 1,423 (1,202)
------------ ------------
Total stockholders' equity............................................ 55,965 52,689
------------ ------------
Total liabilities and stockholders' equity............................ $ 546,929 $ 332,344
============ ============
See accompanying notes to 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 For the Nine Months Ended
December 31, December 31,
-----------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Interest and Dividend Income
Loans...................................................... $ 5,533 $ 3,219 $ 14,089 $ 9,051
Securities................................................. 3,343 1,506 8,158 4,266
Federal funds sold and certificates of deposit............. 657 526 1,426 1,604
Other earning assets....................................... 102 44 302 136
--------- --------- --------- ---------
Total interest and dividend income......................... 9,635 5,295 23,975 15,057
--------- --------- --------- ---------
Interest Expense
Deposits................................................... 5,360 2,598 12,693 7,146
Borrowings................................................ 320 2 657 6
Other interest-bearing liabilities........................ 21 9 56 29
--------- --------- --------- ---------
Total interest expense..................................... 5,701 2,609 13,406 7,181
--------- ---------- --------- ---------
Net interest income........................................ 3,934 2,686 10,569 7,876
Provision for loan losses (Note 5)......................... 50 25 158 75
--------- --------- --------- ---------
Net interest income after provision for loan losses........ 3,884 2,661 10,411 7,801
--------- --------- --------- ---------
Non-Interest Income
Service charges and fees.................................. 96 51 239 151
Gain (loss) on sale of real estate owned.................. 50 (5) 28 76
--------- --------- --------- ---------
Total non-interest income................................. 146 46 267 227
--------- --------- --------- ---------
Non-Interest Expense
Compensation and benefits................................. 1,218 976 3,306 2,507
Occupancy and equipment................................... 492 233 1,199 661
Data processing service fees.............................. 260 159 427 314
Advertising and promotion................................. 222 192 522 388
Goodwill amortization (Note 2)............................ 255 - 510 -
Other..................................................... 421 448 1,342 1,456
--------- --------- --------- ---------
Total non-interest expense................................ 2,868 2,008 7,306 5,326
--------- --------- --------- ---------
Income before income tax expense........................... 1,162 699 3,372 2,702
Income tax expense......................................... 491 250 1,437 965
--------- --------- --------- ---------
Net income................................................. $ 671 $ 449 $ 1,935 $ 1,737
========= ========= ========= =========
Basic and diluted earnings per common share (Note 4)....... $ 0.14 $ 0.09 $ 0.40 $ 0.35
========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Nine Months Ended December 31, 2000 (Unaudited) (Dollars in thousands,
except per share data)
Common Common
Additional Stock Stock
Common Paid-In Treasury Held By Awards Retained
Stock Capital Stock ESOP Under RRP Earnings
----- ------- ----- ---- --------- --------
Balance at March 31, 2000..................... $ 521 $ 22,415 $(2,069) $ (1,489) $ (721) $ 35,234
Net income.................................... -- -- -- -- -- 1,935
Other comprehensive income (Note 6)........... -- -- -- -- -- --
Total comprehensive income (Note 6).........
Repurchase of common stock (126,000 shares).... -- -- (1,124) -- -- --
Dividends paid ($0.21 per share).............. -- -- -- -- -- (436)
Vesting of RRP shares......................... -- -- -- -- 145 --
ESOP shares committed to be released for
allocation................................. -- (13) -- 144 -- --
------ -------- ------ ------- -------- -------
Balance at December 31, 2000.................. $ 521 $ 22,402 $(3,193) $ (1,345) $ (576) $ 36,733
====== ======== ====== ======= ======== =======
Accumulated
Other Total
Comprehensive Stockholders'
Income (Loss) Equity
------------- ------
Balance at March 31, 2000..................... $ (1,202) $ 52,689
Net income.................................... -- 1,935
Other comprehensive income (Note 6)........... 2,625 2,625
-------
Total comprehensive income (Note 6)......... 4,560
Repurchase of common stock (126,000 shares).... -- (1,124)
Dividends paid ($0.21 per share).............. -- (436)
Vesting of RRP shares......................... -- 145
ESOP shares committed to be released for
allocation................................. -- 131
-------- -------
Balance at December 31, 2000.................. $ 1,423 $ 55,965
======== =======
See accompanying notes to unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Nine Months Ended
December 31,
------------------------------
2000 1999
------------- ------------
OPERATING ACTIVITIES
Net income............................................................ $ 1,935 $ 1,737
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses......................................... 158 75
Depreciation and amortization..................................... 255 177
ESOP and RRP expense.............................................. 276 330
Income taxes...................................................... 200 (150)
Goodwill amortization............................................. 510 -
Gain on sale of real estate owned................................. (28) (76)
Other adjustments, net............................................ (649) (368)
---------- ---------
Net cash provided by operating activities................... 2,713 1,725
---------- ---------
INVESTING ACTIVITIES
Purchases of securities available for sale........................... (2,784) (29,266)
Proceeds from sales of securities available for sale.................. 21,888 -
Proceeds from principal payments, maturities and calls of securities.. 21,842 17,510
Disbursements for loan originations................................... (63,590) (49,513)
Principal collection on loans......................................... 25,821 19,215
Net decrease (increase) in certificates of deposit.................... 5,893 (388)
Cash paid in purchase acquisition, net of cash acquired.............. (33,937) -
Proceeds from sales of real estate owned.............................. 286 309
Purchases of premises and equipment................................... (639) (2,036)
---------- ----------
Net cash used in investing activities................. (25,220) (44,169)
---------- ----------
FINANCING ACTIVITIES
Net increase in deposits.............................................. 41,326 30,269
Repayment of borrowings............................................... (5,000) -
Net increase in mortgagors' escrow funds.............................. 3 282
Purchases of treasury stock........................................... (1,124) (2,025)
Dividends paid on common stock........................................ (436) (850)
RRP stock awards funded through stock purchases....................... - (183)
---------- ----------
Net cash provided by financing activities................... 34,769 27,493
---------- ----------
Increase (decrease) in cash and cash equivalents...................... 12,262 (14,951)
Cash and cash equivalents at beginning of period...................... 32,567 49,482
---------- ----------
Cash and cash equivalents at end of period............................ $ 44,829 $ 34,531
========== ==========
SUPPLEMENTAL INFORMATION
Interest paid......................................................... $ 13,596 $ 7,020
Income taxes paid..................................................... 1,043 1,543
Liability for RRP awards not yet funded through stock purchases...... - 778
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 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 consisted
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 July 18, 2000, the Company consummated its acquisition of Peekskill
Financial Corporation ("Peekskill"). Peekskill and its wholly-owned subsidiary,
First Federal Savings Bank, merged with and into the Bank, with the Bank as the
surviving entity (the "Acquisition"). 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 was accounted for using the purchase method of
accounting and, accordingly, the assets acquired and liabilities assumed were
recorded by the Company at their fair values at the consummation date. Related
operating results are included in the Company's consolidated financial
statements for periods after 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 expense was $255,000 and
$510,000 for the three and nine months ended December 31, 2000, respectively.
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; however,
the Company believes that the disclosures are adequate to make the information
presented not misleading. 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 accounting principles generally accepted in the United States of America.
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. An estimate that is particularly susceptible to significant
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 4,766,212 for the three months and 4,788,280 for
the nine months ended December 31, 2000. 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 these periods. For the three and
nine months ended December 31, 1999, weighted average common shares used in
calculating basic earnings per share were 4,813,259 and 4,974,235, respectively.
For the three and nine months ended December 31, 1999, weighted average shares
used in calculating diluted earnings per share were 4,814,277 and 4,979,463,
respectively, and included common stock equivalents of 1,018 shares and 5,228
shares, respectively.
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:
Three Months Ended Nine Months Ended Year Ended
December 31, December 31, March 31,
------------------------------ ------------------------------ ---------
2000 1999 2000 1999 2000
------------- ------------- ------------- ------------ ----
(in thousands)
Balance at beginning of period.... $ 1,946 $ 1,144 $ 1,188 $ 1,094 $ 1,094
Provision for loan losses......... 50 25 158 75 100
Allowance transferred in Acquisition -- -- 784 -- --
Mortgage loans charged off........ -- -- (134) -- (6)
Recoveries........................ 29 -- 29 -- --
----------- ----------- ----------- ----------- --------------
Balance at end of period.......... $ 2,025 $ 1,169 $ 2,025 $ 1,169 $ 1,188
========= ========= ========= ========= ============
6. 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, as follows:
Other
Pre-Tax Tax Comprehensive
Income (Loss) Effect Income (Loss)
Three Months Ended: -------------- -------------- ----------------
(in thousands)
December 31, 2000 $ 1,998 $ (772) $ 1,226
December 31, 1999 (570) 219 (351)
Nine Months Ended:
December 31, 2000 4,343 (1,718) 2,625
December 31, 1999 (1,847) 742 (1,105)
Total comprehensive income (net income and other comprehensive income
or loss) amounted to $1.9 million and $98,000 for the three months ended
December 31, 2000 and 1999, respectively, and $4.6 million and $632,000 for the
nine months ended December 31, 2000 and 1999, respectively.
The Company's accumulated other comprehensive income (loss), which is
included in stockholders' equity, represents the unrealized gain on securities
available for sale of $2.3 million less related income taxes of $909,000 at
December 31, 2000, and the unrealized loss of $2.0 million less related income
taxes of $809,000 at March 31, 2000.
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, other
general and administrative expenses, and goodwill amortization. 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 July 18, 2000, the Company consummated its acquisition of Peekskill
Financial Corporation ("Peekskill"). Peekskill and its wholly-owned subsidiary,
First Federal Savings Bank, merged with and into the Bank, with the Bank as the
surviving entity (the "Acquisition"). 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, related
operating results are included in the Company's consolidated financial
statements for periods after the acquisition date.
Financial Condition
The Company's total assets increased by $214.6 million to $546.9
million at December 31, 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 primarily reflects an
$83.6 million increase in securities to $181.6 million, a $104.3 million
increase in net loans to $285.2 million and a $14.7 million increase in
goodwill. The goodwill resulted from the Acquisition and is being amortized over
15 years. Total deposits amounted to $469.5 million at December 31, 2000, an
increase of $193.7 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
stockholders' equity increased $3.3 million to $56.0 million at December 31,
2000, as compared to $52.7 million at March 31, 2000.
Results of Operations
General. Net income amounted to $671,000 or $0.14 per common share for
the quarter ended December 31, 2000, as compared to $449,000 or $0.09 per common
share for the quarter ended December 31, 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 $860,000 increase in non-interest expenses
and a $241,000 increase in income tax expense.
For the nine months ended December 31, 2000, net income amounted to
$1.9 million or $0.40 per common share, as compared to $1.7 million for the same
period in the prior year. Net interest income increased $2.7 million for the
nine months ended December 31, 2000 as compared to the same period in 1999,
substantially offset by a $2.0 million increase in non-interest expenses and a
$472,000 increase in income tax expense.
The results for both the 2000 quarter and nine-month period reflect
increases in income and expense largely attributable to the Acquisition, as the
related operating results are included for the full quarter and approximately
six months for the year-to-date amounts.
The results for both the 1999 quarter and nine-month period included a
pre-tax charge of $193,000 attributable to the Sound Federal Savings and Loan
Association Recognition and Retention Plan (the "RRP"), as a full 20% of total
RRP shares were vested during the quarter, compared to RRP expense of $48,000
and $145,000, respectively, for the quarter and nine months ended December 31,
2000.
Net Interest Income. Net interest income for the quarter ended December
31, 2000 amounted to $3.9 million, a $1.2 million increase from the same period
in the prior year. The interest rate spread was 2.90% and 2.94% for the quarters
ended December 31, 2000 and 1999, respectively. The net interest margin for
those periods was 3.17% and 3.46%, respectively. For the nine months ended
December 31, 2000, net interest income amounted to $10.6 million as compared to
$7.9 million for the prior year. The interest rate spread for those same periods
remained unchanged at 2.97%. The net interest margin was 3.29% for the nine
months ended December 31, 2000 as compared to 3.53% for the same period in 1999.
The decreases in net interest margin are primarily a result of a
decrease in the ratio of interest-earning assets to interest-bearing
liabilities, to 1.04 for the quarter ended December 31, 2000 from 1.16 for the
same quarter in the prior year. For the nine months ended December 31, 2000, the
ratio was 1.08 as compared to 1.18 in the prior year. The lower ratios in the
current year reflect higher levels of non-earning assets (primarily goodwill)
and the use of earning assets to fund stock repurchases.
Interest Income. Interest income totaled $9.6 million during the
quarter ended December 31, 2000 as compared to $5.3 million for the same period
in the prior year. This increase is due to a $190.2 million increase in average
interest-earning assets to $497.7 million during the quarter ended December 31,
2000 as compared to $307.5 million for the same quarter in the prior year, and
by an 85 basis point increase in the average yield on interest-earning assets to
7.68%. The increase in the average balance of interest-earning assets was due
primarily to the Acquisition. The increase in the average yield on
interest-earning assets reflects fixed-rate loan growth and adjustable-rate
security repricings during periods of rising interest rates (particularly the
first half of calendar 2000), as well as higher-yielding securities recorded in
the Acquisition. For the nine months ended December 31, 2000, interest income
totaled $24.0 million as compared to $15.1 million for the same period in the
prior year. This increase is due to a $130.5 million increase in the average
balance of interest-earning assets to $426.5 million and a 71 basis point
increase in the yield earned to 7.46%.
Loans. Interest income on loans increased $2.3 million or 71.9% to $5.5
million for the current quarter as compared to $3.2 million for the same quarter
in 1999. This increase is due to a $107.2 million increase in the average
balance of loans to $275.8 million and a 39 basis point increase in the yield
earned to 7.96%. For the nine months ended December 31, 2000, interest income on
loans increased $5.0 million or 55.7% to $14.1 million as compared to $9.1
million for the same period in 1999. This increase is due to an $83.5 million
increase in the average balance of loans to $241.6 million and a 14 basis point
increase in the yield earned to 7.74%.
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).
Mortgage-Backed Securities. Interest on mortgage-backed securities
increased $1.7 million to $2.5 million for the quarter ended December 31, 2000
due primarily to an increase of $82.3 million in the average balance of
mortgage-backed securities to $138.3 million and an increase of 138 basis points
in the average yield to 7.23%. Interest on mortgage-backed securities increased
$3.3 million to $5.7 million for the nine months ended December 31, 2000 due
primarily to an increase of $51.2 million in the average balance of
mortgage-backed securities to $107.8 million and an increase of 126 basis points
in the average yield to 7.05%. The higher average balances in the current year
reflect securities acquired in the Acquisition.
Other Securities. Interest on other securities increased $142,000 to
$822,000 for the quarter ended December 31, 2000, as compared to the same
quarter in 1999, due to a $2.5 million increase in the average balance of other
securities to $45.1 million and an 89 basis point increase in the average yield
earned to 7.23%. Interest on other securities increased $638,000 to $2.4 million
for the nine months ended December 31, 2000 as compared to the nine months ended
December 31, 1999 due to a $5.3 million increase in the average balance of other
securities to $42.9 million and a 118 basis point increase in the average yield
earned to 7.53%. The higher average balances in the current year reflect
securities acquired in the Acquisition, net of sales of securities which were
made in order to fund a portion of the Acquisition.
Federal Funds. For the quarter ended December 31, 2000, interest on
Federal funds increased $130,000 to $484,000, reflecting a $3.8 million increase
in the average balance to $29.0 million, and a 106 basis point increase in the
average yield earned to 6.63%. Interest on Federal funds decreased $77,000 to
$1.0 million for the nine months ended December 31, 1999 as compared to $1.1
million for the same period in 1999, resulting from a $6.2 million decrease in
the average balance to $22.7 million, which was partially offset by a 94 basis
point increase in the average yield earned to 6.04%. 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 December 31,
2000 totaled $5.7 million, as compared to $2.6 million for the quarter ended
December 31, 1999. The average balance of interest-bearing liabilities increased
$211.8 million to $478.0 million for the quarter ended December 31, 2000 from
$266.2 million for the same quarter in the prior year and the average cost of
these liabilities increased 89 basis points to 4.78%. For the nine months ended
December 31, 2000, interest expense totaled $13.4 million, as compared to $7.2
million for the nine months ended December 31, 1999. The average balance of
interest-bearing liabilities increased $144.9 million to $396.7 million for the
nine months ended December 31, 2000 from $251.8 million in the prior year and
the average cost of these liabilities increased 71 basis points to 4.49%. The
increase in interest-bearing liabilities is due primarily to the Acquisition.
The increase in the cost of interest-bearing liabilities is a result of
borrowings that were assumed in the Acquisition, an increase in the amount of
time deposits in relation to total deposits and, to a lesser extent, an increase
in interest rates during calendar year 2000. Time deposits carry interest rates
that are higher than other deposit accounts. For the quarter and nine months
ended December 31, 2000, the average balance of time deposits accounted for
62.1% and 61.6%, respectively, of average total deposits as compared to 60.7%
and 58.8% for the same respective periods in the prior year.
Interest expense on time deposits totaled $4.4 million for the current
quarter as compared to $2.1 million for the same quarter in 1999. The increase
is due primarily to a $123.2 million increase in the average balance of time
deposits to $283.4 million from $160.2 million in the same quarter last year and
a 96 basis point increase in the average cost to 6.10%. Interest on savings
accounts amounted to $665,000 for the current quarter as compared to $317,000
for the quarter ended December 31, 1999. The average balance of savings accounts
increased $47.8 million to $108.1 million and the average cost increased 35
basis points to 2.44%. Interest expense on other deposits (NOW and money market
accounts) amounted to $336,000 for quarter ended December 31, 2000 as compared
to $205,000 for the same quarter in the prior year. The average balance of these
accounts increased $21.8 million to $65.1 million and the average cost increased
17 basis points to 2.05%.
For the quarter ended December 31, 2000, interest paid on borrowings
amounted to $320,000 as compared to $2,000 in the prior year. The average
balance of borrowings for the quarter was $17.1 million and the average cost was
7.43%. For the quarter ended December 31, 1999, the average balance of
borrowings was $86,000 and the average cost was 9.23%. The increase in
borrowings consists of FHLB advances that were a component of Peekskill's
capital management strategy and that were assumed in the Acquisition.
Interest expense on time deposits totaled $10.0 million for the nine
months ended December 31, 2000 as compared to $5.5 million for the same period
in 1999. The increase is due to an $88.3 million increase in the average balance
of time deposits and a 67 basis point increase in the average cost to 5.67%.
Interest on savings accounts amounted to $1.9 million for the current period as
compared to $938,000 for the nine months ended December 31, 1999. The average
balance of savings accounts increased $29.9 million to $90.0 million and the
average cost increased 66 basis points to 2.73%. Interest expense on other
deposits (NOW and money market accounts) amounted to $792,000 for the nine
months ended December 31, 2000 as compared to $675,000 for the same period in
the prior year. The average balance of these accounts increased $14.1 million to
$56.7 million and the average cost decreased 25 basis points to 1.85%.
For the nine months ended December 31, 2000, interest on borrowings
amounted to $657,000 as compared to $6,000 in the prior year. The average
balance of borrowings for the current nine-month period was $11.2 million and
the average cost was 7.75%, again reflecting borrowings assumed in the
Acquisition.
Provision for Loan Losses. The provision for loan losses was $50,000
for the quarter ended December 31, 2000 as compared to $25,000 for the quarter
ended December 31, 1999. For the nine months ended December 31, 2000, the
provision for loan losses was $158,000 as compared to $75,000 for the same
period in the prior year. Non-performing loans amounted to $1.6 million or 0.54%
of total loans at December 31, 2000, as compared to $809,000 or 0.46% of total
loans at December 31, 1999. The allowance for loan losses amounted to $2.0
million and $1.2 million at December 31, 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 quarters ended December 31, 2000
and 1999. Charge-offs, net of recoveries, amounted to $105,000 for the nine
months ended December 31, 2000 (none for the nine months ended December 31,
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 $146,000 and $46,000
for the quarters ended December 31, 2000 and 1999, respectively. For the nine
months ended December 31, 2000 and 1999, non-interest income amounted to
$267,000 and $227,000, 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 $96,000 and $51,000 for the quarters
ended December 31, 2000 and 1999, respectively. For the nine months ended
December 31, 2000 and 1999, service fees amounted to $239,000 and $151,000,
respectively. The quarter and nine months ended December 31, 2000 included gains
on the sale of real estate owned of $50,000 and $28,000, respectively, as
compared to a $5,000 loss and a $76,000 gain for the respective periods in the
prior year.
Non-Interest Expense. Non-interest expense totaled $2.9 million for the
quarter ended December 31, 2000 as compared to $2.0 million for the quarter
ended December 31, 1999. This increase is due primarily to increases of $242,000
in compensation and benefits, $259,000 in occupancy and equipment costs,
$101,000 in data processing service fees, $30,000 in advertising and promotion,
and $255,000 in goodwill amortization.
For the nine months ended December 31, 2000, non-interest expense
totaled $7.3 million as compared to $5.3 million for the same period in 1999.
This increase is due primarily to increases of $799,000 in compensation and
benefits, $538,000 in occupancy and equipment costs, $113,000 in data processing
service fees, $134,000 in advertising and promotion and $510,000 in goodwill
amortization, partially offset by a $114,000 decrease in other non-interest
expenses.
The increases in non-interest expenses are due primarily to the
Acquisition, as well as continuing internal growth. In addition to ongoing
expenses attributable to the acquired operations, non-interest expense for the
quarter and nine months ended December 31, 2000 includes $87,000 and $216,000,
respectively, in costs related to the conversion of Peekskill's data processing
system to the Bank's data processing system and customer service costs incurred
during the conversion process.
Income Taxes. Income tax expense amounted to $491,000 and $250,000 for
the quarters ended December 31, 2000 and 1999, respectively. The effective tax
rates for those same periods were 42.3% and 35.8%, respectively. For the nine
months ended December 31, 2000 and 1999, income tax expense amounted to $1.4
million and $965,000, respectively. The effective tax rates for those same
periods were 42.6% 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 December 31,
2000, the Bank's liquidity ratio under OTS regulations was approximately 21.9%.
The primary investing activities of the Company are the origination of
loans and the purchase of securities. For the quarter and nine months ended
December 31, 2000, the Company originated loans totaling $21.1 million and $63.6
million, respectively. For the year ended March 31, 2000, the Company originated
$62.5 million of loans. For both the quarter and nine months ended December 31,
2000, the Company purchased $2.8 million of securities. The Company purchased
$35.2 million of securities during the year ended March 31, 2000, including
$29.3 million during the nine months ended December 31, 1999. During the nine
months ended December 31, 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. Cash paid in the Acquisition, net of Peekskill's cash
acquired, was $33.7 million.
Liquidity management for the Company is both a daily and long-term
process which is part of the Company's overall management strategy. Excess funds
are generally invested in short-term investments such as Federal funds and
certificates of deposit. In the event that the Bank should require additional
sources of funds, it could borrow from the Federal Home Loan Bank of New York
under an available line of credit.
At December 31, 2000, the Company had outstanding loan commitments of
$39.6 million. The Company anticipates that it will have sufficient funds
available to meet its current loan commitments. Time deposits scheduled to
mature in one year or less from December 31, 2000, totaled $223.8 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
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 December 31, 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 of
December 31, 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 December 31, 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)
December 31, 2000
Tangible capital.................... $ 32,844 6.1 % $ 8,066 1.5 %
Tier I (core) capital............... 32,844 6.1 21,510 4.0 $ 26,888 5.0 %
Risk-based capital:
Tier I........................... 32,844 14.1 13,950 6.0
Total............................ 34,869 15.0 18,600 8.0 23,250 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 December 31, 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 December 31, 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
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sound Federal Bancorp
--------------------------------
(Registrant)
By: /s/ Anthony J. Fabiano
--------------------------------
Anthony J. Fabiano
Duly Authorized and Chief
Financial and Accounting Officer
February 13, 2001