SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-24811
SOUND FEDERAL BANCORP
(Exact name of registrant as specified in its charter)
Federal 13-4029393
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Mamaroneck Ave., Mamaroneck, New York 10543
(Address of principal executive offices)
(Zip Code)
(914) 698-6400
(Registrant's telephone number including area code)
N/A
---------------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Shares
Class Outstanding at
-------------- August 13, 2001
Common Stock, ---------------
par value, $0.10 4,767,292
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2001 and March 31, 2001..........................................1
Consolidated Statements of Income for the Three Months
Ended June 30, 2001 and 2000.............................................................................2
Consolidated Statement of Changes in Stockholders' Equity for the Three Months
Ended June 30, 2001......................................................................................3
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 2001 and 2000.............................................................................4
Notes to Unaudited Consolidated Financial Statements.....................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................................... 9
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
Part 1. - Financial Information
Item 1. Financial Statements
Sound Federal Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands) June 30, March 31,
2001 2001
----------------- -----------------
Assets
Cash and due from banks.............................................................. $ 3,301 $ 5,849
Federal funds sold.......................................................... 15,000 35,000
Certificates of deposit.............................................................. 1,500 2,491
Securities:
Available for sale, at fair value (including $15,212 and $15,722 pledged
as collateral under repurchase
agreements at June 30, 2001 and March 31, 2001, respectively..................... 180,253 157,526
Held to maturity, at amortized cost (fair value of $28,317 at March 31, 2001 -- 28,215
------------ ------------
Total securities............................................................ 180,253 185,741
------------ ------------
Loans, net:
Mortgage loans................................................................... 320,704 293,954
Consumer loans................................................................... 2,098 1,900
Allowance for loan losses (Note 5)............................................... (2,072) (2,047)
------------- -------------
Total loans, net............................................................ 320,730 293,807
------------ ------------
Accrued interest receivable.......................................................... 3,463 3,448
Federal Home Loan Bank stock......................................................... 3,745 3,745
Premises and equipment, net.......................................................... 5,717 5,850
Deferred income taxes................................................................ 390 373
Goodwill, net (Note 2)............................................................... 13,970 13,970
Other assets......................................................................... 971 2,660
----------- -----------
Total assets............................................................... $ 549,040 $ 552,934
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits........................................................................ $ 471,167 $ 473,546
Borrowings (Note 6)............................................................. 14,771 14,698
Mortgagors' escrow funds....................................................... 3,548 4,486
Accrued expenses and other liabilities.......................................... 2,130 3,275
------------ -----------
Total liabilities............................................................ 491,616 496,005
------------ -----------
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....................................................... 22,403 22,399
Treasury stock, at cost (444,926 shares at June 30, 2001 and
399,926 shares at March 31,2001).............................................. (4,350) (3,867)
Common stock held by the Employee Stock Ownership Plan ("ESOP")................. (1,249) (1,297)
Common stock awards under the Recognition and Retention Plan ("RRP")............. (352) (392)
Retained earnings................................................................ 38,348 37,313
Accumulated other comprehensive income, net of taxes (Note 7).................... 2,103 2,252
------------- ------------
Total stockholders' equity.................................................. 57,424 56,929
------------ -----------
Total liabilities and stockholders' equity.................................. $ 549,040 $ 552,934
============ ============
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
June 30,
2001 2000
---- -------
Interest and Dividend Income
Loans....................................................... $ 5,813 $ 3,540
Mortgage-backed and other securities........................ 3,147 1,660
Federal funds sold and certificates of deposit.............. 329 477
Other earning assets........................................ 76 53
--------- ---------
Total interest and dividend income.......................... 9,365 5,730
--------- ---------
Interest Expense
Deposits.................................................... 5,054 2,883
Borrowings (Note 6)........................................ 269 2
Other interest-bearing liabilities......................... 16 11
--------- ---------
Total interest expense...................................... 5,339 2,896
---------- ---------
Net interest income......................................... 4,026 2,834
Provision for loan losses (Note 5).......................... 25 50
--------- ---------
Net interest income after provision for loan losses......... 4,001 2,784
--------- ---------
Non-Interest Income
Service charges and fees................................... 139 55
Gain on sale of real estate owned.......................... 57 -
--------- ---------
Total non-interest income.................................. 196 55
--------- ---------
Non-Interest Expense
Compensation and benefits.................................. 1,225 899
Occupancy and equipment.................................... 321 328
Data processing service fees............................... 192 96
Advertising and promotion.................................. 156 168
Other...................................................... 440 397
--------- ---------
Total non-interest expense................................. 2,334 1,888
--------- ---------
Income before income tax expense............................ 1,863 951
Income tax expense.......................................... 688 356
--------- ---------
Net income.................................................. $ 1,175 $ 595
========= =========
Basic and diluted earnings per common share (Note 4)........ $ 0.25 $ 0.12
========= =========
See accompanying notes to unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended June 30, 2001 (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 Equity
----- ------- ----- ---- --------- -------- ------- ---------
Balance at March 31, 2001...... $ 521 $22,399 $(3,867) $(1,297) $(392) $37,313 $ 2,252 $ 56,929
Net income..................... -- -- -- -- - 1,175 -- 1,175
Other comprehensive loss
(Note 7)............. -- -- -- -- -- -- (149) (149)
----------
Total comprehensive income
(Note 7)......... 1,026
Repurchase of common stock
(45,000 shares)..... -- -- (483) -- -- -- -- (483)
Dividends paid
($0.07 per share)............ -- -- -- -- -- (140) -- (140)
Vesting of RRP shares.......... -- -- -- -- 40 -- -- 40
ESOP shares committed
to be released
for allocation................ -- 4 -- 48 -- -- -- 52
------- ----------- ------- ------- ---------- -------- ---------- ---------
Balance at June 30, 2001.......$ 521 $ 22,403 $ (4,350) $(1,249) $ (352) $ 38,348 $ 2,103 $ 57,424
======= ======== ======== ======== ========= ======== ========= =========
See accompanying notes to unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Three Months Ended
(In thousands) June 30,
------------------------
2001 2000
---------- -------------
OPERATING ACTIVITIES
Net income............................................................ $ 1,175 $ 595
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses......................................... 25 50
Depreciation and amortization..................................... (210) 111
ESOP and RRP expense.............................................. 92 96
Income taxes...................................................... 1,111 52
Gain on sale of real estate owned................................. (57) --
Other adjustments, net............................................ (584) (421)
----------- -------------
Net cash provided by operating activities................... 1,552 483
---------- ------------
INVESTING ACTIVITIES
Purchases of securities available for sale........................... (19,658) --
Proceeds from principal payments, maturities and calls of securities.. 25,433 2,785
Disbursements for loan originations................................... (43,873) (25,366)
Principal collection on loans......................................... 16,730 7,129
Net decrease in certificates of deposit............................... 991 2,894
Proceeds from sales of real estate owned.............................. 254 --
Purchases of premises and equipment................................... (37) (463)
----------- -------------
Net cash used in investing activities................. (20,160) (13,021)
----------- -------------
FINANCING ACTIVITIES
Net (decrease) increase in deposits................................... (2,379) 4,881
Net decrease in mortgagors' escrow funds.............................. (938) (863)
Purchases of treasury stock........................................... (483) --
Dividends paid on common stock........................................ (140) (155)
------------- ------------
Net cash (used in) provided by financing activities......... (3,940) 3,863
--------------------------------
Decrease in cash and cash equivalents................................. (22,548) (8,675)
Cash and cash equivalents at beginning of period...................... 40,849 32,567
------------ -----------
Cash and cash equivalents at end of period............................ $ 18,301 $ 23,892
============ ===========
SUPPLEMENTAL INFORMATION
Interest paid......................................................... $ 5,341 $ 2,878
Income taxes paid (received).......................................... (1,109) 645
Loans transferred to real estate owned............................... 118 203
============ ===========
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 completed 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, until April 1, 2001,
was being amortized to expense over a period of 15 years.
In July 2001, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
as well as all purchase method business combinations completed after June 30,
2001. SFAS No. 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
The Company adopted SFAS Nos. 141 and 142 as of April 1, 2001. As a result, the
Company ceased recording goodwill amortization which would have been $246,000
for the quarter ended June 30, 2001. Goodwill resulting from the Acquisition
totaled $15.2 million, and the remaining balance at June 30, 2001 was $14.0
million. As of April 1 (the date of adoption of SFAS No. 142) and as of June 30,
2001, the Company has not recognized any impairment of unamortized goodwill.
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
accounting principles generally accepted in the United States of America 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, 2002.
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, 2001,
included in the Company's 2001 Annual Report.
4. Earnings Per Share
Weighted average common shares used in calculating basic and diluted
earnings per share for the three months ended June 30, 2001 were 4,632,924 and
4,661,953, respectively. For the quarter ended June 30, 2000, weighted average
common shares used in calculating basic and diluted earnings per share were
4,787,363. 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 quarter ended June 30, 2001.
5. Allowance for Loan Losses
The allowance for loan losses is increased by provisions for loan
losses charged to income and decreased by charge-offs (net of recoveries).
Losses are charged to the allowance when all or a portion of a loan is deemed to
be uncollectible. Recoveries of loans previously charged-off are credited to the
allowance for loan losses when realized. Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrowers' ability to repay, the estimated value of underlying collateral, and
current economic conditions. Management believes that the allowance for loan
losses is adequate to absorb probable losses in the existing loan portfolio.
Establishing the allowance for loan losses involves significant
management judgements utilizing the best information available at the time of
review. Those judgements are subject to further review by various sources,
including the Company's regulators. Adjustments to the allowance may be
necessary in the future based on changes in economic and real estate market
conditions, further information obtained regarding known problem loans, the
identification of additional problem loans and other factors, certain of which
are outside of management's control.
Activity in the allowance for loan losses for the periods indicated is
summarized as follows (in thousands):
Three Months Ended Year Ended
-----------------------------
June 30, March 31,
----------------------------- ----------
2001 2000 2001
------------- ------------- ---------
Balance at beginning of period.... $ 2,047 $ 1,188 $ 1,188
Provision for loan losses......... 25 50 208
Allowance transferred in Acquisition -- -- 784
Mortgage loans charged off........ -- (134) (162)
Recoveries........................ -- -- 29
------------ ------------ ---------------
Balance at end of period.......... $ 2,072 $ 1,104 $ 2,047
========= ========= =============
6. Borrowings
The Company is a party to securities repurchase agreements with the
FHLB. These repurchase agreements were assumed in the Acquisition. Securities
repurchase agreements consist of the following at June 30, 2001 (dollars in
thousands):
Amortized Accrued
Maturity Date Call Features Rate Cost Interest
------------- ------------- ---- ---- --------
(dollars in thousands)
January 2008 Quarterly beginning January 2003 7.20% $ 9,730 $ 98
December 2008 Quarterly beginning November 2001 7.12% 4,955 20
------------ ---------
7.17% $ 14,685 $ 118
=========== =========
The securities transferred to the FHLB subject to these repurchase
agreements include U.S. Government and agency securities available for sale with
a carrying value of $5.0 million and mortgage-backed securities available for
sale with a carrying value of $10.2 million. Accrued interest related to the
respective securities was $122,000 and $53,000 at June 30, 2001.
An outstanding FHLB advance of $86,000 is included in borrowings in the
consolidated balance sheets at June 30, 2001 and March 31, 2001. This advance
bears interest at a fixed rate of 8.29% and matures in 2002.
7. Comprehensive 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
Loss Effect Loss
---------------- ----------------- ---------------
Three Months Ended: (in thousands)
June 30, 2001 $ (250) $ 101 $ (149)
June 30, 2000 (725) 311 (414)
Total comprehensive income (net income less other comprehensive loss)
amounted to $1.0 million and $181,000 for the quarters ended June 30, 2001 and
2000, respectively.
The Company's accumulated other comprehensive income, which is included
in stockholders' equity, represents the unrealized gain on securities available
for sale of $3.6 million less related income taxes of $1.5 million at June 30,
2001, and an unrealized gain of $3.8 million less related income taxes of $1.6
million at March 31, 2001.
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 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 amounted to $549.0 million at June 30, 2001
as compared to $552.9 million at March 31, 2001. Net loans increased $26.9
million or 9.2% to $320.7 million at June 30, 2001 as compared to March 31,
2001. This increase was funded principally by a $20.0 million decrease in
federal funds and a $5.5 million decrease in securities. The decrease in total
assets resulted from a decrease in cash and due from banks and certificates of
deposits held at other financial institutions. Total deposits amounted to $471.2
million at June 30, 2001, as compared to $473.5 million at March 31, 2001. Total
stockholders' equity increased $495,000 to $57.4 million at June 30, 2001 as
compared to $56.9 million at March 31, 2001.
Results of Operations
General. Net income amounted to $1.2 million or $0.25 per common share
for the quarter ended June 30, 2001, as compared to $595,000 or $0.12 per common
share for the quarter ended June 30, 2000. The increase in net income for the
current quarter was due primarily to a $1.2 million increase in net interest
income and a $141,000 increase in non-interest income offset by a $446,000
increase in non-interest expenses and a $332,000 increase in income tax expense.
The results for the current quarter reflects increases in income and
expense largely attributable to the Acquisition, as the related operating
results are included for the full quarter.
The results for the current quarter also include a $125,000 pre-tax
refund of real estate taxes related to branch locations.
Net Interest Income. Net interest income for the quarter ended June 30,
2001 amounted to $4.0 million, a $1.2 million increase from the same period in
the prior year. The interest rate spread was 2.90% and 3.00% for the quarters
ended June 30, 2001 and 2000, respectively. The net interest margin for those
periods was 3.13% and 3.53%, respectively. The decrease in net interest margin
is primarily a result of a decrease in the ratio of interest-earning assets to
interest-bearing liabilities, to 1.05 for the current quarter from 1.15 for the
same quarter in the prior year. The lower ratio in the current year reflects
higher levels of non-earning assets (primarily goodwill) and the use of earning
assets to fund stock repurchases. In addition, the decreases in interest rate
spread and net interest margin were also caused by borrowings that were assumed
as part of the Acquisition. The average balance of borrowings for the quarter
ended June 30, 2001 was $14.7 million with an average rate of 7.33% as compared
to $86,000 for the quarter ended June 30, 2000 with an average rate of 9.33%.
Interest Income. Interest income totaled $9.4 million during the
quarter ended June 30, 2001 as compared to $5.7 million for the same period in
the prior year. This increase is due to a $194.5 million increase in average
interest-earning assets to $516.1 million during the quarter ended June 30, 2001
as compared to $321.6 million for the same quarter in the prior year, and by a
13 basis point increase in the average yield on interest-earning assets to
7.28%. 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. However, interest rates declined in the latter half of 2000 and
in 2001, and as a result, the yields on interest earning assets have decreased.
Loans. Interest income on loans increased $2.3 million or 64.2% to $5.8
million for the current quarter as compared to $3.5 million for the same quarter
in 2000. This increase is due to a $116.8 million increase in the average
balance of loans to $305.7 million and an 11 basis point increase in the yield
earned to 7.63%.
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 $1.6 million to $2.5 million for the quarter ended June 30, 2001 due
primarily to an increase of $82.0 million in the average balance of
mortgage-backed securities to $138.4 million and an increase of 71 basis points
in the average yield to 7.19%. The higher average balances in the current year
reflect securities acquired in the Acquisition.
Other Securities. Interest on other securities decreased $84,000 to
$665,000 for the quarter ended June 30, 2001, as compared to the same quarter in
2000, due to a $3.5 million decrease in the average balance of other securities
to $38.8 million and a 23 basis point decrease in the average yield earned to
6.88%. The decrease in the average balance in the current year reflect the calls
of securities as interest rates decreased during the latter half of fiscal 2001.
Federal Funds. For the quarter ended June 30, 2001, interest on Federal
funds decreased $52,000 to $307,000, reflecting a 217 basis point decrease in
the average yield earned to 4.47%, partially offset by a $5.8 million increase
in the average balance to $27.5 million. The decrease in the average yield
earned reflects the declining interest rate environment during the latter half
of fiscal 2001.
Interest Expense. Interest expense for the quarter ended June 30, 2001
totaled $5.3 million, as compared to $2.9 million for the quarter ended June 30,
2000. The average balance of interest-bearing liabilities increased $209.5
million to $489.3 million for the quarter ended June 30, 2001 from $279.8
million for the same quarter in the prior year and the average cost of these
liabilities increased 23 basis points to 4.38%. 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 and, to a lesser extent, a change in our deposit mix to reflect a
higher proportion of time deposits in relation to total deposits.
Interest expense on time deposits totaled $4.3 million for the current
quarter as compared to $2.3 million for the same quarter in 2000. The increase
is due primarily to a $122.4 million increase in the average balance of time
deposits to $293.5 million from $171.1 million in the same quarter last year and
a 35 basis point increase in the average cost to 5.83%. Interest on savings
accounts amounted to $511,000 for the current quarter as compared to $333,000
for the quarter ended June 30, 2000. The average balance of savings accounts
increased $46.8 million to $107.8 million and the average cost decreased 29
basis points to 1.90%. Interest expense on other deposits (NOW and money market
accounts) amounted to $279,000 for quarter ended June 30, 2001 as compared to
$214,000 for the same quarter in the prior year. The average balance of these
accounts increased $23.0 million to $68.5 million and the average cost decreased
25 basis points to 1.63%.
For the quarter ended June 30, 2001, interest paid on borrowings
amounted to $269,000 as compared to $2,000 in the prior year. The average
balance of borrowings for the quarter was $14.7 million and the average cost was
7.33%. For the quarter ended June 30, 2000, the average balance of borrowings
was $86,000 and the average cost was 9.33%. 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.
Provision for Loan Losses. The provision for loan losses was $25,000
for the quarter ended June 30, 2001 as compared to $50,000 for the quarter ended
June 30, 2000. Non-performing loans amounted to $1.1 million or 0.35% of total
loans at June 30, 2001, as compared to $806,000 or 0.40% of total loans at June
30, 2000. The allowance for loan losses amounted to $2.1 million and $2.0
million at June 30, 2001 and March 31, 2001, respectively. There were no
charge-offs in the quarter ended June 30, 2001. Charge-offs amounted to $134,000
for the quarter ended June 30, 2000.
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 $196,000 and $55,000
for the quarters ended June 30, 2001 and 2000, 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 $139,000 for the
quarter ended June 30, 2001 as compared to $55,000 for the same quarter in 2000.
The quarter ended June 30, 2001 included a gain on the sale of real estate owned
of $57,000.
Non-Interest Expense. Non-interest expense totaled $2.3 million for the
quarter ended June 30, 2001 as compared to $1.9 million for the quarter ended
June 30, 2000. This increase is due primarily to increases of $326,000 in
compensation and benefits, $96,000 in data processing service fees and $43,000
in other non-interest expenses.
The increases in non-interest expenses are due primarily to the
Acquisition, as well as continuing internal growth. The number of full time and
part time employees increased 21 and 14, respectively during the comparative
periods primarily as a result of the Acquisition. Non-interest expense for the
current quarter also includes a $125,000 pre-tax refund of real estate taxes
related to branch locations.
Income Taxes. Income tax expense amounted to $688,000 and $356,000
for the quarters ended June 30, 2001 and 2000, respectively. The effective
tax rates for those same periods were 36.9% and 37.4%, respectively.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, the proceeds from
principal and interest payments on loans and mortgage-backed securities, and the
proceeds from maturities of investments. While maturities and scheduled
amortization of loans and securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The Company's primary investing activities are the origination of
mortgage loans, and the purchase of short-term investments, government agency
bonds and adjustable rate mortgage-backed securities. These activities are
funded primarily by deposit growth and principal repayments on loans,
mortgage-backed securities and other investment securities. For the quarter
ended June 30, 2001, the Company originated loans totaling $43.9 million and
purchased $19.7 million of securities. In addition, cash outlays of $483,000
were used to purchase the Company's common stock during the quarter ended June
30, 2001. These disbursements were funded by $25.4 million in principal
payments, maturities and calls of securities and $16.7 million in loan principal
repayments. For the year ended March 31, 2001, the Company originated $88.7
million of loans and purchased $28.9 million of securities.
Liquidity management for the Company is both a daily and long-term
process which is part of the Company's overall management strategy. Excess funds
are generally invested in short-term investments such as Federal funds and
certificates of deposit. In the event that the Bank should require additional
sources of funds, it could borrow from the Federal Home Loan Bank of New York
under an available line of credit.
At June 30, 2001, the Company had outstanding loan commitments of $58.1
million. The Company anticipates that it will have sufficient funds available to
meet its current loan commitments. Time deposits scheduled to mature in one year
or less from June 30, 2001, totaled $256.3 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 June 30, 2001, 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
June 30, 2001 and March 31, 2001. 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.
OTS Requirements
-----------------------------------------------
Minimum Capital Classification as
Bank Actual Adequacy Well Capitalized
--------------------- --------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- --------- ------- -------- -------
(Dollars in thousands)
June 30, 2001
Tangible capital.................... $ 35,571 6.6% $ 8,078 1.5%
Tier I (core) capital............... 35,571 6.6 21,541 4.0 $ 26,927 5.0%
Risk-based capital:
Tier I........................... 35,571 14.3 14,936 6.0
Total............................ 37,643 15.1 19,915 8.0 24,894 10.0
March 31, 2001
Tangible capital.................... $ 34,247 6.4% $ 8,029 1.5%
Tier I (core) capital............... 34,247 6.4 21,410 4.0 $ 26,763 5.0%
Risk-based capital:
Tier I........................... 34,247 14.8 13,847 6.0
Total............................ 36,294 15.7 18,463 8.0 23,079 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, New York and Fairfield County, Connecticut, is also subject
to risks associated with the local economy. The Company does not own any trading
assets. At June 30, 2001, the Company did not have any hedging transactions in
place, such as interest rate swaps and caps. The Company's interest rate risk
management program focuses primarily on evaluating and managing the composition
of the Company's assets and liabilities in the context of various interest rate
scenarios. Factors beyond management's control, such as market interest rates
and competition, also have an impact on interest income and interest expense.
During the quarter ended June 30, 2001, 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
August 13, 2001