SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
- -------------- November 12, 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 September 30, 2001 and March 31, 2001...........1
Consolidated Statements of Income for the Six Months
Ended September 30, 2001 and 2000..............................................2
Consolidated Statement of Changes in Stockholders' Equity for the Six Months
Ended September 30, 2001.......................................................3
Consolidated Statements of Cash Flows for the Six Months
Ended September 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...........15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings....................................................16
Item 2. Changes in Securities and Use of Proceeds............................16
Item 3. Defaults upon Senior Securities......................................16
Item 4. Submission of Matters to a Vote of Security Holders..................16
Item 5. Other Information....................................................16
Item 6. Exhibits and Reports on Form 8-K.....................................16
Signatures...........................................................17
Part 1. - Financial Information
Item 1. Financial Statements
Sound Federal Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands) September 30, March 31,
2001 2001
-------------- ------------
Assets
Cash and due from banks.............................................................. $ 2,557 $ 5,849
Federal funds sold.......................................................... 26,300 35,000
Certificates of deposit.............................................................. 1,000 2,491
Securities:
Available for sale, at fair value (including $15,286 and $15,722 pledged
as collateral under repurchase
agreements at September 30, 2001 and March 31, 2001, respectively)............... 161,920 157,526
Held to maturity, at amortized cost (fair value of $28,317 at March 31, 2001) -- 28,215
------------ ----------
Total securities............................................................ 161,920 185,741
------------ ----------
Loans, net:
Mortgage loans................................................................... 339,604 293,954
Consumer loans................................................................... 2,052 1,900
Allowance for loan losses (Note 5)............................................... (2,097) (2,047)
------------- -----------
Total loans, net............................................................ 339,559 293,807
------------ -----------
Accrued interest receivable.......................................................... 3,697 3,448
Federal Home Loan Bank stock......................................................... 3,695 3,745
Premises and equipment, net.......................................................... 5,613 5,850
Goodwill, net (Note 2)............................................................... 13,970 13,970
Other assets......................................................................... 797 3,033
----------- -----------
Total assets............................................................... $ 559,108 $ 552,934
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits........................................................................ $ 480,489 $ 473,546
Borrowings (Note 6)............................................................. 14,831 14,698
Mortgagors' escrow funds....................................................... 2,619 4,486
Accrued expenses and other liabilities.......................................... 1,849 3,275
------------ -----------
Total liabilities............................................................ 499,788 496,005
------------ -----------
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....................................................... 22,416 22,399
Treasury stock, at cost (444,926 shares at September 30, 2001 and
399,926 shares at March 31,2001).............................................. (4,350) (3,867)
Common stock held by the Employee Stock Ownership Plan ("ESOP")................. (1,200) (1,297)
Common stock awards under the Recognition and Retention Plan ("RRP")............. (316) (392)
Retained earnings................................................................ 39,587 37,313
Accumulated other comprehensive income, net of taxes (Note 7).................... 2,662 2,252
------------- ----------
Total stockholders' equity.................................................. 59,320 56,929
------------ ----------
Total liabilities and stockholders' equity.................................. $ 559,108 $ 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 Quarter Ended For the Six Months Ended
September 30, September 30,
----------------------------- ------------------------
2001 2000 2001 2000
---- ----- ---- ----
Interest and Dividend Income
Loans....................................................... $ 6,270 $ 5,016 $ 12,083 $ 8,556
Securities.................................................. 2,949 3,156 6,096 4,815
Federal funds sold and certificates of deposit.............. 151 292 480 769
Other earning assets........................................ 94 146 170 200
--------- --------- --------- ---------
Total interest and dividend income.......................... 9,464 8,610 18,829 14,340
--------- --------- --------- ---------
Interest Expense
Deposits.................................................... 4,683 4,449 9,737 7,333
Borrowings (Note 6)........................................ 257 335 526 337
Other interest-bearing liabilities......................... 21 24 37 35
--------- --------- --------- ---------
Total interest expense...................................... 4,961 4,808 10,300 7,705
---------- ---------- --------- ---------
Net interest income......................................... 4,503 3,802 8,529 6,635
Provision for loan losses (Note 5).......................... 25 58 50 108
--------- --------- --------- ---------
Net interest income after provision for loan losses......... 4,478 3,744 8,479 6,527
--------- --------- --------- ---------
Non-Interest Income
Service charges and fees................................... 169 88 308 143
Gain (loss) on sale of real estate owned................... -- (22) 57 (22)
--------- ---------- --------- ----------
Total non-interest income.................................. 169 66 365 121
--------- --------- --------- ---------
Non-Interest Expense
Compensation and benefits.................................. 1,251 1,188 2,476 2,088
Occupancy and equipment.................................... 372 379 693 707
Data processing service fees............................... 215 71 407 167
Advertising and promotion.................................. 153 132 309 300
Goodwill amortization (Note 2)............................. -- 255 -- 255
Other...................................................... 430 525 870 921
--------- --------- --------- ---------
Total non-interest expense................................. 2,421 2,550 4,755 4,438
--------- --------- --------- ---------
Income before income tax expense............................ 2,226 1,260 4,089 2,210
Income tax expense.......................................... 854 590 1,542 946
--------- --------- --------- ---------
Net income.................................................. $ 1,372 $ 670 $ 2,547 $ 1,264
========= ========= ========= =========
Basic earnings per common share (Note 4).................... $ 0.30 $ 0.14 $ 0.55 $ 0.26
========= ========= ========= ==========
Diluted earnings per common share (Note 4)................... $ 0.29 $ 0.14 $ 0.55 $ 0.26
========= ========= ========= ==========
See accompanying notes to unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended September 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................................. -- -- -- -- - 2,547 -- 2,547
Other comprehensive loss (Note 7).......... -- -- -- -- -- -- 410 410
--------
Total comprehensive income (Note 7)...... 2,957
Repurchase of common stock (45,000 shares) -- -- (483) -- -- -- -- (483)
Dividends paid ($0.07 per share)........... -- -- -- -- -- (273) -- (273)
Vesting of RRP shares...................... -- -- -- -- 76 -- -- 76
ESOP shares committed to be released for
allocation.............................. -- 17 -- 97 -- -- -- 114
------ -------- ------- ------- ---------- -------- -------- --------
Balance at September 30, 2001..............$ 521 $22,416 $(4,350) $(1,200) $ (316) $ 39,587 $ 2,662 $ 59,320
====== ======= ======== ======== ======== ======== ======== =========
See accompanying notes to unaudited consolidated financial statements.
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Six Months Ended
(In thousands) September 30,
---------------------------------------
2001 2000
---------------- ---------------
OPERATING ACTIVITIES
Net income............................................................ $ 2,547 $ 1,264
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses......................................... 50 108
Depreciation and amortization..................................... (496) 207
ESOP and RRP expense.............................................. 190 185
Income taxes...................................................... 2,253 (2)
Goodwill amortization............................................. -- 255
Gain on sale of real estate owned................................. (57) 22
Other adjustments, net............................................ (265) 215
----------- ------------
Net cash provided by operating activities................... 4,222 2,254
---------- ------------
INVESTING ACTIVITIES
Purchases of securities available for sale........................... (24,421) --
Proceeds from the sale of securities available for sale............... -- 21,888
Proceeds from principal payments, maturities and calls of securities.. 48,428 11,669
Disbursements for loan originations................................... (83,812) (42,769)
Principal collection on loans......................................... 37,578 15,737
Net decrease in certificates of deposit............................... 1,491 4,494
Cash paid in purchase acquisition, net of cash acquired............... -- (33,937)
Proceeds from sales of real estate owned.............................. 254 33
Purchases of premises and equipment................................... (52) (568)
----------- -------------
Net cash used in investing activities................. (20,534) (23,453)
----------- -------------
FINANCING ACTIVITIES
Net increase in deposits.............................................. 6,943 20,090
Net decrease in mortgagors' escrow funds.............................. (1,867) (2,048)
Purchases of treasury stock........................................... (483) (109)
Dividends paid on common stock........................................ (273) (312)
------------ ------------
Net cash (used in) provided by financing activities......... 4,320 17,621
------------ -----------
Decrease in cash and cash equivalents................................. (11,992) (3,578)
Cash and cash equivalents at beginning of period...................... 40,849 32,567
----------- -----------
Cash and cash equivalents at end of period............................ $ 28,857 $ 28,989
=========== ===========
SUPPLEMENTAL INFORMATION
Interest paid......................................................... $ 10,155 $ 7,879
Income taxes paid (received).......................................... (657) 708
Loans transferred to real estate owned............................... 253 291
============ ===========
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 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"). 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 September 30, 2001 as well
as all purchase method business combinations completed after September 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.
<page>
The Company adopted SFAS Nos. 141 and 142 as of April 1, 2001. As a result,
the Company ceased recording goodwill amortization. Goodwill resulting from the
Acquisition totaled $15.2 million, and the remaining balance at September 30,
2001 was $14.0 million. As of April 1 (the date of adoption of SFAS No. 142) and
as of September 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 September 30, 2001 were 4,613,294
and 4,670,645, respectively. For the quarter ended September 30, 2000, weighted
average common shares used in calculating basic and diluted earnings per share
were 4,793,260. 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 September 30, 2000. For the six months
ended September 30, 2001, weighted average shares for calculating basic and
diluted earnings per share were 4,627,392 and 4,672,320; for the six months
ended September 30, 2000 the respective weighted average shares were 4,795,336
and 5,031,204.
<page>
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 Six Months Ended Year Ended
September 30, September 30, March 31,
------------------------------ ------------------------------ ---------
2001 2000 2001 2000 2001
------------- ------------- ------------- ------------ ----
(in thousands)
Balance at beginning of period.... $ 2,072 $ 1,104 $ 2,047 $ 1,188 $ 1,188
Provision for loan losses......... 25 58 50 108 208
Allowance transferred in Acquisition -- 784 -- 784 784
Mortgage loans charged off........ -- -- -- (134) (162)
Recoveries........................ -- -- -- -- 29
--------- ---------- --------- ---------- --------
Balance at end of period.......... $ 2,097 $ 1,946 $ 2,097 $ 1,946 2,047
========= ========= ========= ========= ========
<page>
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 September 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% $ 9,774 $ 104
December 2008 Quarterly beginning November 2001 7.12% 4,973 20
------------ ---------
7.17% $ 14,747 $ 124
=========== =========
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 $6.1 million and mortgage-backed securities available for
sale with a carrying value of $9.2 million. Accrued interest related to the
respective securities was $117,000 and $32,000 at September 30, 2001.
An outstanding FHLB advance of $84,000 and $86,000 is included in
borrowings in the consolidated balance sheets at September 30, 2001 and March
31, 2001, respectively. This advance bears interest at a fixed rate of 8.29% and
matures in 2002.
7. Comprehensive Loss
The Company's other comprehensive income 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 Effect Income
-------- --------- -------------
(in thousands)
Three Months Ended:
September 30, 2001 $ 901 $ (342) $ 559
September 30, 2000 3,070 (1,257) 1,813
Six Months Ended:
September 30, 2001 661 (251) 410
September 30, 2000 2,345 (946) 1,399
<page>
Total comprehensive income (net income less other comprehensive loss)
amounted to $1.9 million and $2.5 million for the quarters ended September 30,
2001 and 2000, respectively. For the six months ended September 30, 2001, total
comprehensive income amounted to $2.9 million and $2.7 million, respectively.
The Company's accumulated other comprehensive income, which is included in
stockholders' equity, represents the unrealized gain on securities available for
sale of $4.5 million less related income taxes of $1.8 million at September 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.
<page>
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"). 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 $559.1 million at September 30, 2001
as compared to $552.9 million at March 31, 2001. Net loans increased $45.8
million or 15.6% to $339.6 million at September 30, 2001 as compared to March
31, 2001. This increase was funded principally by an $8.7 million decrease in
Federal funds and a $23.8 million decrease in securities. Total deposits
amounted to $480.5 million at September 30, 2001, as compared to $473.5 million
at March 31, 2001. Total stockholders' equity increased $2.4 million to $59.3
million at September 30, 2001 as compared to $56.9 million at March 31, 2001.
Results of Operations
General. Net income amounted to $1.4 million or basic earnings per share of
$0.30 for the quarter ended September 30, 2001, as compared to $670,000 or $0.14
per share for the quarter ended September 30, 2000, an increase of 96%. For the
six months ended September 30, 2001, net income amounted to $2.5 million or
basic earnings per share of $0.55 as compared to $1.3 million or $0.26 per share
for the same period in the prior year. The increase in net income for the
quarter ended September 30, 2001 as compared to the same quarter in the prior
year is attributable to a $701,000 increase in net interest income, a $103,000
increase in non-interest income and a $129,000 decrease in non-interest expense,
partially offset by a $264,000 increase in income tax expense. The increase in
net income for the six months ended September 30, 2001 is due to a $1.9 million
increase in net interest income, a $244,000 increase in non-interest income,
partially offset by a $317,000 increase in non-interest expense and a $596,000
increase in income tax expense.
The Company completed the acquisition of Peekskill Financial Corporation
(the "Acquisition") in July 2000. Accordingly, the results for the six months
ended September 30, 2000 includes the related operating results for period after
the acquisition date.
The results for the quarter and six months ended September 30, 2001 include
$45,000 and $170,000 of pre-tax refunds of real estate taxes related to branch
locations.
<page>
Net Interest Income. Net interest income for the quarter ended September
30, 2001 amounted to $4.5 million, a $701,000 increase from the same period in
the prior year. The interest rate spread was 3.11% and 3.00% for the quarters
ended September 30, 2001 and 2000, respectively. The net interest margin for
those periods was 3.44% and 3.39%, respectively. For the six months ended
September 30, 2001, net interest income amounted to $8.5 million as compared to
$6.6 million for the same period in the prior year. The interest rate spread was
3.03% and 2.98% and the net interest margin was 3.27% and 3.35% for the
respective periods. The increases in interest rate spread and net interest
margin are a result of decreasing market interest rates in calendar 2001. This
decrease in market interest rates has reduced the cost of interest-bearing
liabilities faster than the rates on interest-earning assets such as loans or
securities. However, if market interest rates decrease further, interest rate
spread and net interest margin may decrease since competitive factors could
prohibit further lowering of interest rates on deposit accounts.
Interest Income. Interest income totaled $9.5 million during the quarter
ended September 30, 2001 as compared to $8.6 million for the same period in the
prior year. This increase is due to a $74.7 million increase in average
interest-earning assets to $524.9 million during the quarter ended September 30,
2001 as compared to $450.2 million for the same quarter in the prior year,
partially offset by a 44 basis point decrease in the average yield on
interest-earning assets to 7.15%. For the six months ended September 30, 2001
interest income totaled $18.8 million as compared to $14.3 million for the same
period in the prior year. This increase is due to a $126.1 million increase in
average interest-earning assets to $520.9 million as compared to $394.8 million
for the same period in the prior year, partially offset by a 4 basis point
decrease in the average yield on interest-earning assets to 7.21%. The increase
in the average balance of interest-earning assets was due primarily to the
Acquisition. The decrease in the average yield on interest-earning assets
reflects declining market interest rates during the 2001 periods.
Loans. Interest income on loans increased $1.3 million or 25.0% to $6.3
million for the current quarter as compared to $5.0 million for the same quarter
in 2000. This increase is due to a $72.9 million increase in the average balance
of loans to $327.9 million, partially offset by a 21 basis point decrease in the
yield earned to 7.59%. For the six months ended September 30, 2001, interest
income on loans amounted to $12.1 million as compared to $8.6 million for the
same six-month period in 2000. This increase is due to a $93.8 million increase
in the average balance of loans partially offset by a 3 basis point decrease in
the yield earned to 7.55%.
The growth of the loan portfolio is principally a result of the strong
demand for fixed rate loans (the Company's primary mortgage loan product) as
market interest rates declined during 2001. The Company originated $33.7 million
and $69.4 million of fixed rate loans during the quarter and six months ended
September 30, 2001. As a result, the yield earned on the loan portfolio may
decrease further until market interest rates begin to increase.
<page>
Mortgage-Backed Securities. Interest on mortgage-backed securities was
virtually unchanged at $2.3 million for the quarter ended September 30, 2001 and
2000. The average balance of mortgage-backed securities increased $4.5 million
to $128.6 million and the average yield decreased 28 basis points to 7.04%. For
the six months ended September 30, 2001, interest on mortgage-backed securities
increased $1.6 million to $4.8 million as compared to $3.2 million for the same
period in the prior year. The increase in interest on mortgage-backed securities
was due to a $36.8 million increase in the average balance to $132.1 million and
a 50 basis point increase in the yield earned to 7.20%. The increase in the
average balance and yield earned was a result of the securities acquired in the
Acquisition.
Other Securities. Interest on other securities decreased $200,000 to
$665,000 for the quarter ended September 30, 2001, as compared to $865,000 for
the same quarter in 2000, due to a $952,000 decrease in the average balance of
other securities to $42.7 million and a 169 basis point decrease in the average
yield earned to 6.18%. For the six months ended September 30, 2001, interest on
other securities amounted to $1.3 million as compared to $1.6 million for the
six months ended September 30, 2000. This decrease was due to a $2.1 million
decrease in the average balance of other securities to $40.8 million and a 99
basis point decrease in the average yield earned to 6.50%. The decreases in
average balance and average yield earned in the current year reflect the calls
of securities as interest rates decreased during 2001.
Federal Funds. For the quarter ended September 30, 2001, interest on
Federal funds decreased $92,000 to $137,000, reflecting a 348 basis point
decrease in the average yield earned to 2.75%, partially offset by a $5.2
million increase in the average balance to $19.8 million. The decrease in the
average yield earned reflects the declining interest rate environment during
2001.
Interest Expense. Interest expense for the quarter ended September 30, 2001
totaled $5.0 million, as compared to $4.8 million for the quarter ended
September 30, 2000. The average balance of interest-bearing liabilities
increased $63.8 million to $492.1 million for the quarter ended September 30,
2001 from $428.3 million for the same quarter in the prior year and the average
cost of these liabilities decreased 55 basis points to 4.04%. The increase in
average interest-bearing liabilities is due primarily to the Acquisition. The
decrease in the cost of interest-bearing liabilities is a result of declining
market interest rates. For the six months ended September 30, 2001, interest
expense on interest-bearing liabilities increased $2.6 million to $10.3 million
as compared to $7.7 million for the six months ended September 30, 2000. For
these same periods, the average balance of interest-bearing liabilities
increased $131.7 million and the average cost of these liabilities decreased 9
basis points to 4.18%. The increase in average interest-bearing liabilities is
due primarily to the Acquisition.
Interest expense on time deposits totaled $4.0 million for the current
quarter as compared to $3.6 million for the same quarter in 2000. The increase
is due primarily to a $49.0 million increase in the average balance of time
deposits to $293.6 million from $244.6 million in the same quarter last year and
a 48 basis point decrease in the average cost to 5.34%. The decrease in the
average cost is due to a decrease in market interest rates during 2001. For the
six months ended September 30, 2001, interest expense on time deposits amounted
to $8.2 million as compared to $5.9 million for the same period in the prior
year. This $2.3 million increase is due to an $81.1 million increase in the
average balance of time deposits to $293.7 million as compared to $212.6 million
in the prior year. The average cost of time deposits increased 2 basis points
during the same periods to 5.58%. The increases in the average balance of time
deposits are primarily a result of the Acquisition.
<page>
Interest on savings accounts amounted to $455,000 for the quarter ended
September 30, 2001 as compared to $617,000 for the quarter ended September 30,
2000. The average balance of savings accounts increased $10.0 million to $109.4
million and the average cost decreased 81 basis points to 1.65%. For the six
months ended September 30, 2001, interest on savings accounts increased $16,000
to $966,000 as compared to the same period in the prior year. The average
balance of savings accounts increased $26.1 million to $109.0 million for the
six months ended September 30, 2001 as compared to the six months ended
September 30, 2000. The average cost of savings accounts decreased 52 basis
points to 1.77% for the same periods. The increases in the average balance of
time deposits are primarily a result of the Acquisition. The decreases in the
average cost are due to decreases in market interest rates during 2001.
Interest expense on other deposits (NOW and money market accounts) amounted
to $275,000 for quarter ended September 30, 2001 as compared to $245,000 for the
same quarter in the prior year. The average balance of these accounts increased
$13.6 million to $70.1 million and the average cost decreased 16 basis points to
1.56%. For the six months ended September 30, 2001, interest expense on other
deposits amounted to $554,000 as compared to $458,000 for the same period in the
prior year. For the same respective periods, the average balance of other
deposits was $69.4 million and $52.0 million and the average cost was 1.59% and
1.76%.
For the quarter ended September 30, 2001, interest paid on borrowings
amounted to $257,000 as compared to $335,000 in the prior year. The average
balance of borrowings for the quarter was $14.8 million and the average cost was
6.90%. For the quarter ended September 30, 2000, the average balance of
borrowings was $15.9 million and the average cost was 8.38%. For the six months
ended September 30, 2001, interest expense on borrowings was $526,000 as
compared to $337,000 for the same period in the prior year. The average balance
of borrowings increased $5.7 million to $14.8 million for the six months ended
September 30, 2001 as compared to $9.1 million for the same period in 2000. The
average cost was 7.11% and 7.39% for the same respective periods. 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 September 30, 2001 as compared to $58,000 for the quarter
ended September 30, 2000. Non-performing loans amounted to $1.1 million or 0.33%
of total loans at September 30, 2001, as compared to $1.3 million or 0.43% of
total loans at September 30, 2000. The allowance for loan losses amounted to
$2.1 million and $2.0 million at September 30, 2001 and March 31, 2001,
respectively. There were no charge-offs in the quarter or six months ended
September 30, 2001 or the quarter ended September 30, 2000. Charge-offs amounted
to $134,000 for the six months ended September 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.
<page>
Non-Interest Income. Non-interest income totaled $169,000 and $66,000 for
the quarters ended September 30, 2001 and 2000, respectively. For the six months
ended September 30, 2001, non-interest income amounted to $365,000 as compared
to $121,000 for the same period in 2000. Non-interest income consists
principally of service charges on deposit accounts, late charges on loans and
various other service fees. Service fees amounted to $169,000 for the quarter
ended September 30, 2001 as compared to $88,000 for the same quarter in 2000.
For the six months ended September 30, 2001, service fees totaled $308,000 as
compared $143,000 for the same period in the prior year. The increase in service
fees was due to increased levels of service charges on deposit accounts, late
charges on loans and various other service fees as well as the Acquisition.
Non-interest income for the quarter ended September 30, 2000 included a loss of
$22,000 on the sale of real estate owned. The 2001 six-month period includes a
gain on the sale of real estate owned of $57,000 as compared to a loss of
$22,000 in 2000.
Non-Interest Expense. Non-interest expense totaled $2.4 million for the
quarter ended September 30, 2001 as compared to $2.6 million for the quarter
ended September 30, 2000. This decrease is due primarily to a decrease of
$95,000 in other non-interest expense and the absence of $255,000 in goodwill
amortization partially offset by increases of $63,000 in compensation and
benefits and $144,000 in data processing service fees. For the six months ended
September 30, 2001, non-interest expense increased $317,000 to $4.8 million as
compared to $4.4 million for the same period in the prior year. This increase is
due to a $388,00 increase in compensation and benefits and a $240,000 increase
in data processing fees, partially offset by a $51,000 decrease in other
non-interest expense and the absence of $255,000 in goodwill amortization.
The increase in non-interest expense for the current six-month period is
due primarily to the Acquisition, offset by the absence of goodwill
amortization. Non-interest expense for the quarter and six months ended
September 30, 2001 also include a $45,000 and $170,000 pre-tax refund of real
estate taxes related to branch locations.
Income Taxes. Income tax expense amounted to $854,000 and $590,000 for the
quarters ended September 30, 2001 and 2000, respectively. The effective tax
rates for those same periods were 38.4% and 46.8%, respectively. For the six
months ended September 30, 2001 and 2000, income tax expense amounted to $1.5
million and $946,000, respectively. The effective tax rates for those same
periods were 37.7% and 42.8%, respectively. The higher effective tax rates in
the prior fiscal year are a result of the non-deductibility of goodwill
amortization.
<page>
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 principal repayments on loans, mortgage-backed securities and other
investment securities as well as by deposit growth. For the quarter and six
months ended September 30, 2001, the Company originated loans totaling $39.9
million and $83.8 million, respectively, and purchased $4.8 million and $24.4
million of securities, respectively. In addition, cash outlays of $483,000 were
used to purchase the Company's common stock during the six months ended
September 30, 2001 (no stock repurchases occurred during the quarter ended
September 30, 2001). These disbursements were funded by $23.0 million in
principal payments, maturities and calls of securities and $20.8 million in loan
principal repayments during the quarter ended September 30, 2001 and by $48.4
million in principal payments, maturities and calls of securities and $37.6
million in loan principal repayments for the six-month period. 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 September 30, 2001, the Company had outstanding loan commitments of
$56.8 million. The Company anticipates that it will have sufficient funds
available to meet its current loan commitments. Time deposits scheduled to
mature in one year or less from September 30, 2001, totaled $268.8 million.
Management believes that a significant portion of such deposits will remain with
the Company.
<page>
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
September 30, 2001, the Bank exceeded all of the OTS minimum regulatory capital
requirements, and was classified as a well-capitalized institution for
regulatory purposes.
<page>
The following table sets forth the capital position of the Bank as of
September 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)
September 30, 2001
Tangible capital.................... $ 36,023 6.6% $ 8,237 1.5%
Tier I (core) capital............... 36,023 6.6 21,968 4.0 $ 27,458 5.0%
Risk-based capital:
Tier I........................... 36,023 13.8 15,709 6.0
Total............................ 38,120 14.6 20,946 8.0 26,182 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 September 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 September 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
The Company held its Annual Meeting of Stockholders on August 9, 2001. The
purpose of the meeting was the election of three directors of the Company and
the ratification of the appointment of KPMG LLP as auditors for the Company for
the fiscal year ending March 31, 2002. The results of the votes were as follows:
Proposal 1 - Election of Directors
For Withheld
----------------- ---------------------
Joseph Dinolfo 4,481,999 14,040
Eldorus Maynard 4,482,183 13,856
Samuel T. Telerico 4,441,006 55,033
Proposal 2 - Ratification of Appointment of KPMG LLP
For Against Abstain
------------------ ---------------------- -----------------
4,470,276 24,377 1,386
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
November 13, 2001