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, 1998
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 No X .
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Outstanding at
----- November 6, 1998
----------------
Common Stock, 5,212,218
par value, $0.10
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (unaudited)
Balance Sheets at September 30, 1998
and March 31, 1998. . . . . . . . . . . . . . . . . . . . . . . . . .1
Statements of Income for the Quarter and Six months
ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . .2
Statements of Cash Flows for the Six months
ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . .3
Notes to Unaudited Financial Statements . . . . . . . . . . . . . . .4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 6
Item 3. Quantitative and Qualitative Disclosures
about Market Risk . .. . . . . . . . . . . . . . . . . . . . . 13
PART II OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . 14
Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 14
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 1. Financial Statements
Sound Federal Savings and Loan Association
BALANCE SHEETS
(Unaudited) September 30, March 31,
(In thousands) 1998 1998
------------ ---------
Assets
Cash and due from banks $8,323 $5,711
Federal funds sold 53,800 36,400
Certificates of deposit 10,990 11,483
Securities:
Held-to-maturity, at amortized cost (fair value of $59,553
and $65,091 at September 30 and March 31, 1998, respectively) 61,619 64,898
Available-for-sale, at fair value 2,990 2,994
------ ------
Total securities 64,609 67,892
------ ------
Loans, net:
Mortgage loans 137,090 127,515
Consumer loans 1,141 2,027
Allowance for loan losses (Note 3) . (1,062) (984)
------- -------
Total loans, net 137,169 128,558
------- -------
Accrued interest receivable 1,254 888
Federal Home Loan Bank stock 1,745 1,745
Premises and equipment, net 1,658 1,552
Other assets 1,401 520
-------- --------
Total assets. $280,949 $254,749
======== ========
Liabilities and Equity
Liabilities:
Deposits $229,146 $219,913
Stock subscription proceeds 16,824 -
Mortgage escrow deposits 1,147 2,364
Other liabilities 525 571
-------- --------
Total liabilities 247,642 222,848
-------- --------
Equity:
Retained earnings 33,317 31,905
Net unrealized loss on securities available-for-sale (10) (4)
-------- --------
Total equity 33,307 31,901
-------- --------
Total liabilities and equity $280,949 $254,749
======== ========
See accompanying notes to the unaudited financial statements.
Sound Federal Savings and Loan Association
STATEMENTS OF INCOME
(Unaudited)
(In thousands)
For the Quarter Ended For the Six Months Ended
September 30, September 30,
--------------------- ------------------------
1998 1997 1998 1997
Interest and Dividend Income ---- ---- ---- ----
Loans $2,736 $2,617 $ 5,472 $5,16
Securities 1,041 1,084 2,138 2,182
Federal funds sold and certificates of deposit 739 706 1,411 1,372
Other earning assets 52 39 91 73
------ ----- ------- ------
Total interest and dividend income 4,568 4,446 9,112 8,792
------ ----- ------- ------
Interest Expense
Deposits 2,315 2,188 4,561 4,303
Other interest-bearing liabilities 37 11 47 21
----- ----- ----- -----
Total interest expense 2,352 2,199 4,608 4,324
----- ----- ----- -----
Net interest income 2,216 2,247 4,504 4,468
Provision for loan losses 70 39 151 76
----- ----- ----- -----
Net interest income after provision for loan losses 2,146 2,208 4,353 4,392
----- ----- ----- -----
Non-Interest Income
Service charges and fees 39 43 89 99
----- ----- ----- -----
Non-Interest Expense
Compensation and benefits 738 532 1,280 1,044
Occupancy and equipment 91 95 148 197
Federal deposit insurance costs 34 33 67 67
Data processing service fees 63 55 120 109
Advertising and promotion 30 52 68 83
Other 177 231 444 431
----- ----- ----- -----
Total non-interest expense 1,133 998 2,127 1,931
----- ----- ----- -----
Income before income tax expense 1,052 1,253 2,315 2,560
Income tax expense 386 522 903 1,067
----- ----- ----- -----
Net income $666 $731 $1,412 $1,493
===== ===== ===== =====
See accompanying notes to the unaudited financial statements.
Sound Federal Savings and Loan Association
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months Ended
September 30,
------------------------
1998 1997
OPERATING ACTIVITIES ---------- ----------
Net income $1,412 $1,493
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses. 151 76
Depreciation expense 74 56
Amortization of deferred fees, premiums and discounts, net 44 (100)
Deferred income tax (benefit) expense (140) 2
Other adjustments, net (627) (118)
------ ------
Net cash provided by operating activities 914 1,409
------ ------
INVESTING ACTIVITIES
Purchases of securities:
Held-to-maturity (8,976) (6,436)
Available-for-sale - (1,000)
Proceed from principal payments, maturities and calls of
securities held-to-maturity 11,967 6,281
Disbursements for loan originations (22,863) (13,718)
Principal collection on loans 13,817 10,178
Net decrease (increase) in certificates of deposit 493 (486)
Purchases of premises and equipment (180) (54)
------- -------
Net cash used in investing activities (5,742) (5,235)
------- -------
FINANCING ACTIVITIES
Net increase in deposits 9,233 2,079
Net decrease in mortgage escrow deposits (1,217) (1,249)
Proceeds from stock subscriptions 16,824 -
------- -------
Net cash provided by financing activities 24,840 830
------- -------
Increase (decrease) in cash and cash equivalents 20,012 (2,996)
Cash and cash equivalents at beginning of period 42,111 39,552
------- -------
Cash and cash equivalents at end of period $62,123 $36,556
======= =======
SUPPLEMENTAL INFORMATION
Interest paid $4,578 $4,328
Income taxes paid 990 1,084
Loans transferred to real estate owned 357 -
======= =======
See accompanying notes to the unaudited financial statements.
Sound Federal Savings and Loan Association
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation
On October 8 1998, Sound Federal Bancorp (the "Company") completed the
ssuance of 5,212,218 shares of common stock in connection with a Plan of
Reorganization ("the "Reorganization"). As part of 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 and became a wholly- owned subsidiary of the Company. The Company
became the majority-owned subsidiary of Sound Federal, MHC (the "Mutual
Holding Company" or "MHC"), a federal mutual holding company.
The Mutual Holding Company owns 53.92% or 2,810,510 shares of the
Company's outstanding common stock. The remaining 46.08% (or 2,401,708
shares) of the common stock is owned by the minority stockholders (the
"Minority Stockholders") and the Sound Federal Savings and Loan Association
Charitable Foundation (the "Charitable Foundation"). The Company contributed
1.96% or 102,200 shares of the Company's common stock issued in the
Reorganization to the Charitable Foundation, which resulted in a charge to
expense equal to the fair value of those shares (approximately $1.0 million
before taxes) in the quarter ending December 31, 1998.
The Bank provides banking services primarily to individuals from its main
office in Mamaroneck and two full-service branches in Rye Brook and Harrison,
New York.
As a result of the completion of the Reorganization and stock offering
subsequent to September 30, 1998, the financial statements presented herein
are for the Bank only. The balance sheets, statements of income and
statements of cash flows will, in future periods, be reported on a
consolidated basis for the Company and the Bank. The financial statements
included herein have been prepared by the Bank without audit. In the opinion
of management, the unaudited financial statements include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the financial position and results of operations for the periods presented.
Certain information and footnote disclosures normally included in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. The Company believes that the disclosures are adequate to make
the information presented not misleading; however, the results for the periods
presented are not necessarily indicative of results to be expected for the
entire fiscal year ending March 31, 1999.
The unaudited quarterly and year-to-date financial statements presented
herein should be read in conjunction with the annual audited financial
statements of the Bank for the fiscal year ended March 31, 1998, included in
the Company's prospectus dated August 13, 1998.
2. Earnings Per Share
The Company completed the Reorganization and offering in October 1998.
Since the Company had no common stock outstanding during the periods reported
herein, earnings per share data has not been presented.
3. 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). Loans 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 Bank'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
the review. Those judgements are subject to further review by various
sources, including the Bank'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:
Quarter Ended Six months Ended Year Ended
September 30, September 30, March 31,
-------------- ---------------- ----------
1998 1997 1998 1997 1998
------ ------ ------- ------- ----------
(Dollars in thousands)
Balance at beginning of period $1,065 $882 $984 $845 $845
Provision for loan losses 70 39 151 76 155
LOANS CHARGED OFF
Real estate (73) (16) (73) (16) (16)
Other loans 0 0 0 0 0
------ ------ ------ ------ ------
Total loans charged off (73) (16) (73) (16) (16)
------ ------ ------ ------ ------
RECOVERIES
Real estate 0 0 0 0 0
Other loans 0 0 0 0 0
------ ------ ------ ------ ------
Total recoveries 0 0 0 0 0
------ ------ ------ ------ ------
Net charge-offs (73) (16) (73) (16) (16)
------ ------ ------ ------ ------
Balance at end of period $1,062 $905 $1,062 $905 $984
====== ====== ====== ====== ======
Ratio of net charge-offs to average net
loans outstanding (annualized) 0.22% 0.05% 0.11% 0.03% 0.01%
====== ====== ====== ====== ======
4. Comprehensive Income
During the quarter ended September 30, 1998, the Bank adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. In accordance with the provisions of SFAS No. 130 the Bank's
total comprehensive income for the quarter and six months ended September
30,1998 totaled $663,000 and $1,406,000, respectively. For those same periods
in 1997, total comprehensive income was $733,000 and $1,496,000, respectively.
The difference between the Bank's net income and total comprehensive income
for these periods equals the change in the net unrealized loss on securities
available for sale during the applicable periods.
5. Legal Proceedings
The Bank 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 Bank's financial condition and results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Sound Federal Bancorp (the "Company") is the holding company for Sound
Federal Savings and Loan Association (the "Bank"). The financial condition
and results of operations of the Company are primarily dependent upon those of
the Bank.
On October 8, 1998, the Company completed the issuance of 5,212,218
shares of common stock in connection with a Plan of Reorganization ("the
"Reorganization"). As part of the Reorganization, the Bank converted from a
federally chartered mutual savings association to a federally chartered stock
savings association and became a wholly-owned subsidiary of the Company. The
Company became the majority-owned subsidiary of Sound Federal, MHC (the
"Mutual Holding Company" or "MHC"), a federal mutual holding company.
The Mutual Holding Company owns 53.92% or 2,810,510 shares of the
Company's outstanding common stock. The remaining 46.08% (or 2,401,708
shares) of the common stock is owned by the minority stockholders (the
"Minority Stockholders") and the Sound Federal Savings and Loan Association
Charitable Foundation (the "Charitable Foundation"). The Charitable
Foundation was established in furtherance of the Bank's commitment to its
local community. The Company contributed 1.96% or 102,200 shares of the
Company's common stock issued in the Reorganization to the Charitable
Foundation, which resulted in a charge to expense equal to the fair value of
those shares (approximately $1.0 million before taxes) in the quarter ending
December 31, 1998.
As a result of the completion of the Reorganization and stock offering
subsequent to September 30, 1998, the discussion and analysis set forth below
is for the Bank only. The results of operations and financial condition will,
in future periods, be reported on a consolidated basis for the Company and the
Bank.
This report on Form 10-Q contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and business of the Company and the Bank. These estimates are
subject to various factors that could cause actual results to differ
materially from these estimates. Such factors include (i) the effect that an
adverse movement in interest rates could have on the Bank's net interest
income, (ii) customer preferences, (iii) national and local economic and
market conditions, (iv) higher than anticipated operating expenses and (v) a
lower level of or higher cost for deposits than anticipated. The Company
disclaims any obligation to publicly announce future events or developments
that may affect the forward-looking statements herein.
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 Bank'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. The Bank's net income is also affected by, among other things,
provisions for loan losses and non-interest expense. The Bank's principal
operating expenses, other than interest expense, consist of compensation and
benefits, occupancy expenses, federal deposit insurance premiums 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 System and the actions of bank regulatory authorities.
Capability of the Bank's Data Processing to Accommodate the Year 2000
Like many financial institutions, the Bank relies upon computers for the
daily conduct of its business and for data processing generally. There is a
concern that on January 1, 2000 computers will be unable to "read" the new
year and as a consequence, there may be widespread computer malfunctions.
Management has reviewed this issue and has been advised by the Bank's data
processing service center that they are addressing this issue and that it
should not affect the Bank's external data processing. Management has
developed a formal plan to resolve the year 2000 issue. The Bank is in the
process of testing its computer applications and hardware to ensure that they
will be able to read the year 2000. Based on the current timetable, testing
is expected to be completed by March, 1999. Given the near-term timing of the
test plan, the Bank has not developed a contingency plan, but will do so if
testing results are not satisfactory. The Bank has contacted each of its
vendors to ensure that they will be able to provide service in light of the
year 2000 issue. Most vendors have represented to management that they are
addressing the year 2000 issue and expect to be able to provide the services
for which the Bank has contracted. Management will continue to monitor this
issue and report to the Board of Directors on a quarterly basis until full
compliance is obtained from all vendors. Costs related to the year 2000 issue
will be expensed as incurred except for the costs, if any, for new hardware
and software that is purchased, which will be capitalized. At September 30,
1998, the costs incurred to address the year 2000 issue have not been
significant. Management does not expect that the additional costs to be
incurred in connection with the year 2000 issue will have a material impact on
the Bank's financial condition or results of operations. Since over 98% of
the Bank's loans are secured by real property and the remaining portion of the
loan portfolio is composed of consumer loans and personal loans, the ability
of the Bank's borrowers to be year 2000 compliant is not material to the
Bank's lending.
The costs of the year 2000 project are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes and similar uncertainties. In addition, there can be no guarantee that
the systems of other companies on which the Bank's systems rely will be timely
converted, or that a failure to convert by another company, or that a
conversion that is incompatible with the Bank's systems, would not have a
material adverse effect on the Bank.
Financial Condition
The Bank's total assets were $280.9 million and $254.7 million at
September 30, 1998 and March 31, 1998, respectively. The $26.2 million
increase was due primarily to the receipt of stock subscription proceeds of
$16.8 million. These proceeds were invested in Federal funds, which totaled
$53.8 million at September 30, 1998 as compared to $36.4 million at March 31,
1998. The increase in total assets also reflects an $8.6 million increase in
net loans to $137.2 million at September 30, 1998. Loan demand continues to
be strong as a result of the low interest rates currently available to
borrowers. The increase in loans was funded primarily through deposit growth.
Total deposits amounted to $229.1 million at September 30, 1998, an increase
of $9.2 million compared to total deposits of $219.9 million at March 31,
1998. Total equity increased $1.4 million to $33.3 million at September 30,
1998 as compared to $31.9 million at March 31, 1998, primarily due to net
income for the six months ended September 30, 1998.
Results of Operations
General. Net income was $666,000 for the quarter ended September 30,
1998, as compared to $731,000 for the quarter ended September 30, 1997. For
the six months ended September 30, 1998, the Bank earned $1.4 million as
compared to $1.5 million for the same period in 1997.
Net Interest Income. Net interest income for the quarter ended
September 30, 1998 amounted to $2.2 million, a $31,000 decrease from the same
period in the prior year. The Bank's interest rate spread was 3.04% and 3.32%
for the quarters ended September 30, 1998 and 1997, respectively. The Bank's
net interest margin for those periods was 3.42% and 3.72%, respectively.
Average net interest earning assets totaled $24.4 million during the quarter
ended September 30, 1998 as compared to $23.7 million for the same quarter in
the prior year. For the six months ended September 30, 1998, net interest
income increased $36,000 to $4.5 million as compared to the same period in the
prior year. The Bank's interest rate spread was 3.16% for the six months
ended September 30, 1998 as compared to 3.34% for the same period in the prior
year. For those same periods, the net interest margin was 3.55% and 3.73%,
respectively. For the six months ended September 30, 1998, average net
interest earning assets totaled $24.8 million as compared to $23.5 million for
the same period in 1997. The decreases in the Bank's interest rate spread and
net interest margin are a result of the general decrease in interest rates on
loans and mortgage-backed securities.
Interest Income. Interest income totaled $4.6 million in the quarter
ended September 30, 1998 as compared to $4.4 million for the same period in
the prior year. This increase is due to an increase in average
interest-earning assets to $257.1 million during the quarter ended September
30, 1998 as compared to $239.7 million for the same quarter in the prior year,
partially offset by a 31 basis point decrease in the average yield earned on
interest-earning assets to 7.05%. The increase in the average balance of
interest-earning assets was due to an increase in deposits and the receipt of
stock subscription proceeds during the quarter as part of the Company's
offering.
Interest income on loans increased $119,000 or 4.5% to $2.7 million for
the current quarter, due primarily to an $11.3 million increase in the average
balance to $134.2 million. The increase in the average balance of loans was
partially offset by a 36 basis point decrease in the yield earned to 8.09% for
the quarter ended September 30, 1998 as compared to the same quarter in the
prior year. The growth of the loan portfolio is a result of the low interest
rate environment, which has created a strong demand for fixed rate loans (the
Bank's primary mortgage loan product). The low interest rates have also
created a strong market for home purchases and the refinancing of existing
mortgage loans in the Bank's market area. The new loan production and the
refinancing activity were also the primary reason for the decrease in the
yields earned on mortgage loans since the rates on these loans are lower than
those of the existing portfolio. Interest on Federal funds increased $52,000
to $565,000 for the quarter ended September 30, 1998 as compared to $513,000
for the same quarter in 1997. The average balance of Federal funds was $42.0
million for the quarter ended September 30, 1998 as compared to $34.9 million
for the same quarter in the prior year. The increase in the average balance
was partially offset by a 49 basis point decrease in the yield earned to
5.34%. Interest earned on certificates of deposit at other financial
institutions decreased $19,000 to $174,000 for the 1998 quarter as compared to
$193,000 for the quarter ended September 30, 1997. Interest income on
mortgage-backed securities amounted to $811,000 for the quarter ended
September 30, 1998 as compared to $878,000 for the same quarter in 1997. This
decrease is due to a $1.2 million decrease in the average balance of
mortgage-backed securities to $51.9 million and a 36 basis point decrease in
the yield earned to 6.19%. These mortgage-backed securities have rates that
adjust annually, typically based on Treasury bill rates. As a result, these
securities have also experienced declining yields. Interest income on other
securities amounted to $230,000 for the quarter ended September 30, 1998 as
compared to $206,000 for the same quarter in the prior year. This increase
reflects a 28 basis point increase in the average yield earned to 6.33% and a
$909,000 increase in the average balance of other securities to $14.4 million
for the 1998 quarter from $13.5 million for the same quarter in 1997.
For the six months ended September 30, 1998, interest income increased
$320,000 or 3.6% to $9.1 million as compared to $8.8 million for the six
months ended September 30, 1997. For those same periods, average interest-
earning assets increased $14.2 million to $253.0 million from $238.8 million.
The increase in interest-earning assets was partially offset by a 16 basis
point decrease in the average yield earned on total interest-earning assets to
7.18%.
Interest income on loans totaled $5.5 million during the six months ended
September 30, 1998 as compared to $5.2 million for the same period in 1997,
due primarily to a $9.9 million increase in the average balance to $132.3
million. The increase in the average balance of loans was partially offset by
a 17 basis point decrease in the yield earned to 8.25% during the six months
ended September 30, 1998 as compared to 8.42% for the same period in 1997.
Interest earned on Federal funds increased $70,000 to $1.1 million for the six
months ended September 30, 1998 as compared to $989,000 for the same period in
1997. This increase was due to a $4.3 million increase in the average balance
of Federal funds to $39.0 million for the quarter ended September 30, 1998 as
compared to $34.7 million for the same quarter in 1997, partially offset by a
27 basis point decrease in the yield earned to 5.42%. Interest income on
certificates of deposit decreased $32,000 to $351,000. Interest income on
mortgage- backed securities amounted to $1.7 million for the six months ended
September 30, 1998 as compared to $1.8 million for the same period in 1997.
This decrease is due to a $382,000 decrease in the average balance of
mortgage-backed securities to $52.7 million and a 21 basis point decrease in
the yield earned to 6.37%. Interest income on other securities amounted to
$457,000 during the six months ended September 30, 1998 as compared to
$432,000 for the same period in 1997. The average balance of other
securities increased $894,000 to $14.7 million from $13.8 million for those
same periods and the yield earned decreased to 6.22% from 6.26%.
Interest Expense. Interest expense for the quarter ended September 30,
1998 totaled $2.4 million as compared to $2.2 million for the quarter ended
September 30, 1997, due primarily to a $127,000 increase in interest expense
on deposits to $2.3 million. The average balance of interest-bearing
liabilities increased $16.9 million to $232.8 million for the quarter ended
September 30, 1998 from $215.9 million for the same quarter in the prior year.
The increase in the average balance is due primarily to a $12.6 million
increase in the average balance of deposits to $226.8 million from $214.2
million in the prior year. In addition, the average balance of subscription
proceeds received as part of the Company's stock offering totaled $4.2 million
for the quarter ended September 30, 1998. Upon completion of the
reorganization and offering on October 8, 1998, net proceeds became part of
consolidated stockholders' equity, and, as a result, became a
non-interest-bearing funding source. The average cost of interest-bearing
liabilities decreased 3 basis points to 4.01% for the quarter ended September
30, 1998 as compared to the same quarter in the prior year.
Interest on time deposits totaled $1.7 million for the current quarter as
compared to $1.6 million for the same quarter in 1997. This increase is
primarily a result of an $11.6 million or 10.3% increase in the average
balance of time deposits to $124.3 million for the quarter ended September 30,
1998 as compared to the same quarter in 1997. The increase in the average
balance of time deposits was partially offset by a 10 basis point decrease in
the average cost to 5.36%. Total interest expense on other deposit accounts
(passbook, club, money market and NOW accounts) remained virtually unchanged
at $636,000 for the quarter ended September 30, 1998 as compared to $637,000
for the same quarter in the prior year. The average balance of those accounts
was $102.5 million for the 1998 quarter as compared to $101.5 million for the
same quarter in 1997. The overall average rate on these deposits was 2.46%
for the quarter ended September 30, 1998 as compared to 2.49% for the same
quarter in 1997.
For the six months ended September 30, 1998, interest expense totaled
$4.6 million as compared to $4.3 million for the corresponding period in the
prior year, due primarily to a $258,000 increase in interest on deposits to
$4.6 million. The average balance of interest-bearing liabilities for these
same periods increased $12.9 million and the average cost of these liabilities
increased 2 basis points to 4.03%. The increase in the average balance of
interest- bearing liabilities is due primarily to a $10.5 million increase in
the average balance of deposits to $224.1 million for the six months ended
September 30, 1998 from $213.6 million for the same period in the prior year.
Interest expense on time deposits totaled $3.3 million for the six months
ended September 30, 1998 as compared to $3.0 million for the same period in
the prior year. This increase was due primarily to a $10.1 million increase
in the average balance of time deposits to $122.2 million for the six months
ended September 30, 1998 as compared to $112.2 million for the same period in
1997. The average rate paid on these deposits remained virtually unchanged at
5.38%. Total interest expense on other deposit accounts amounted to $1.3
million for both the six months ended September 30, 1998 and 1997. The
average balance of these deposits totaled $101.9 million and $101.4 million
for those same respective periods and the average cost of these deposits was
2.48% and 2.50%, respectively.
Provision for Loan Losses. The provision for loan losses was $70,000 in
the quarter ended September 30, 1998 as compared to $39,000 for the quarter
ended September 30, 1997. For the six months ended September 30, 1998 and
1997, the provision for loan losses amounted to $151,000 and $76,000,
respectively. Non-performing loans amounted to $1.0 million or 0.76% of total
loans at September 30, 1998 as compared to $2.0 million or 1.50% of total
loans at March 31, 1998 and $2.2 million or 1.73% of total loans at September
30, 1997. The allowance for loan losses amounted to $1.1 million at September
30, 1998 as compared to $984,000 at March 31, 1998. Charge-offs, net of
recoveries, were $73,000 for both the quarter and six months ended September
30, 1998 as compared to $16,000 for both the quarter and six months ended
September 30, 1997.
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 Bank's market area. Although the Bank 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 $39,000 and $43,000
for the quarters ended September 30, 1998 and 1997, respectively. For the six
months ended September 30, 1998 and 1997, non-interest income totaled $89,000
and $99,000, respectively. Non-interest income consists principally of
service charges on deposit accounts, late charges on loans and various other
service fees.
Non-Interest Expense. Non-interest expense totaled $1.1 million for the
quarter ended September 30, 1998 as compared to $998,000 for the quarter ended
September 30, 1997. This increase is due primarily to an increase of
$206,000 in compensation and benefits to $738,000 in the quarter ended
September 30, 1998 as compared to $532,000 in the quarter ended September 30,
1997. The increase in compensation and benefits was partially offset by a
$54,000 decrease in other non-interest expenses to $177,000 for the quarter
ended September 30, 1998. For the six months ended September 30, 1998,
non-interest expense totaled $2.1 million as compared to $1.9 million for the
same period last year. This increase was due primarily to a $236,000 increase
in compensation and benefits to $1.3 million, partially offset by a $49,000
decrease in occupancy and equipment to $148,000 for the six months ended
September 30, 1998 as compared to the six months ended September 30, 1997.
The increases in compensation and benefits are primarily due to increased
costs associated with the Bank's reorganization and stock offering as well as
normal salary increases.
Income Taxes. Income tax expense amounted to $386,000 for the quarter
ended September 30, 1998 as compared to $522,000 for the same period in the
prior year. The effective tax rates for those same periods were 36.7% and
41.7%, respectively. For the six months ended September 30, 1998, income tax
expense amounted to $903,000 as compared to $1.1 million for the same period
in 1997. The effective tax rates for those periods were 39.0% and 41.7%,
respectively.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, the proceeds from
principal and interest payments on loans and mortgage-backed securities, and
the proceeds from maturities of investments. While maturities and scheduled
amortization of loans and securities are a predictable source of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.
The Bank is required to maintain an average daily balance of liquid
assets as a percentage of net withdrawable deposit accounts plus short-term
borrowings as defined by the regulations of the OTS. The minimum required
liquidity ratio is currently 4.0%. At September 30, 1998, the Bank's
liquidity ratio under OTS regulations was 38.17%.
The primary investing activities of the Bank are the origination of loans
and the purchase of securities. For the quarter and six months ended
September 30, 1998 and for the year ended March 31, 1998, the Bank originated
loans totaling $13.6 million, $22.8 million and $29.4 million, respectively.
The Bank purchased securities, including mortgage-backed securities, totaling
$9.0 million for the six months ended September 30, 1998 and $22.4 million for
the year ended March 31, 1998.
Liquidity management for the Bank is both a daily and long-term function
of the Bank's 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, 1998, the Bank had outstanding loan commitments of $15.4
million. The Bank 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, 1998, totaled $108.7 million. Management
believes that a significant portion of such deposits will remain with the
Bank.
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 3.0% 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 3.0% core
capital requirement has been effectively superseded by the OTS prompt
corrective action regulations, which impose a 4.0% core capital requirement
for categorization as an "adequately capitalized" thrift and a 5.0% core
capital requirement for categorization as a "well capitalized" thrift. In
determining the amount of risk-weighted assets for purposes of the risk-based
capital requirement, a savings association must compute its risk-based assets
by multiplying its assets and certain off-balance sheet items by risk-weights,
which range from 0% for cash and obligations issued by the United States
Government or its agencies to 100% for consumer and commercial loans, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of assets. At September 30, 1998, the Bank exceeded all
of the OTS minimum regulatory capital requirements.
The following table sets forth the capital position of the Bank as calculated
at September 30, 1998:
OTS Requirements
------------------------------------
Minimum Capital Classification as
Bank Actual Adequacy Well Capitalized
----------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
September 30, 1998
- ------------------
Tangible Capital $33,307 11.9% $4,214 1.5%
Tier 1 (core) capital 33,307 11.9 8,428 3.0 $14,047 5.0%
Risk-based capital:
Tier 1 33,307 32.0 6,250 6.0
Total 34,369 33.0 8,333 8.0 10,417 10.0
March 31, 1998
- --------------
Tangible Capital $31,901 12.5% $3,821 1.5%
Tier 1 (core) capital 31,901 12.5 7,642 3.0 $12,737 5.0%
Risk-based capital:
Tier 1 31,901 33.9 5,645 6.0
Total 32,885 34.9 7,527 8.00 9,409 10.0
The following is a reconciliation of the Bank's equity under generally
accepted accounting principles ("GAAP") and its regulatory capital (in
thousands):
September 30, March 31,
1998 1998
---- ----
GAAP equity (equals tangible, tier I core and
tier I risk-based capital) $33,307 $31,901
General allowance for loan losses 1,062 984
------- -------
Total risk-based capital 34,369 32,885
======= =======
Recent Accounting Pronouncements
In October 1998, the Financial Accounting Standards Board issued SFAS No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise". SFAS No. 134 provides for the classification of such retained
securities as held for investment, available for sale, or trading in
accordance with SFAS No. 115. Prior accounting standards limited the
classification of these securities to the trading category. SFAS No. 134 is
effective for the first fiscal quarter beginning after December 15, 1998 and
is not expected to have a material impact on the Company's consolidated
financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Bank's most significant form of market risk is interest rate risk, as
the majority of the Bank's assets and liabilities are sensitive to changes in
interest rates. The Bank's assets consist primarily of fixed rate mortgage
loans, which have longer maturities than the Bank's liabilities which consist
primarily of deposits. The Bank's mortgage loan portfolio, consisting
primarily of loans secured by residential real property located in Westchester
County, is also subject to risks associated with the local economy. The Bank
does not own any trading assets. At September 30, 1998, the Bank did not have
any hedging transactions in place, such as interest rate swaps and caps. The
Bank's interest rate risk management program focuses primarily on evaluating
and managing the composition of the Bank'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 six months ended September 30, 1998, there were no significant
changes in the Bank's assessment of market risk.
Part II OTHER INFORMATION
Item 1. Legal Proceedings
The information set forth in Note 5 to the unaudited financial statements
("Legal Proceedings") in Part I, Item 1, is incorporated herein by reference.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data schedule*
(b) Reports on Form 8-K
None
* Submitted only with filing in electronic format.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sound Federal Bancorp
------------------------------------
(Registrant)
By: /s/ Anthony J. Fabiano
------------------------------------
Anthony J. Fabiano
Duly Authorized and Chief Accounting
Officer
November 10, 1998
Exhibit 27
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from the
Bank's balance sheet and the statement of income, and is qualified in its
entirety by reference to such financial statements.
Item Number Item Description Amount
9-03(1) Cash and due from banks $8,323
9-03(2) Interest-bearing assets 10,990
9-03(3) Federal funds sold 53,800
9-03(4) Trading account assets 0
9-03(6) Investment and mortgage backed securities held for sale 2,990
9-03(6) Investments held to maturity carrying value 61,619
9-03(6) Investments held to maturity market value 59,553
9-03(7) Loans 138,231
9-03(7)(2) Allowance for losses 1,062
9-03(11) Total assets 280,949
9-03(12) Deposits 229,146
9-03(13) Short-term borrowings 87
9-03(15) Other liabilities 18,409
9-03(16) Long-term debt 0
9-03(19) Preferred stock - mandatory redemption 0
9-03(20) Preferred stock - no mandatory redemption 0
9-03(21) Common Stock 0
9-03(22) Other stockholders' equity 33,307
9-03(23) Total liabilities and stockholders' equity 280,949
9-04(1) Interest and fees on loans 5,472
9-04(2) Interest and dividends on investments 2,138
9-04(4) Other interest income 1,502
9-04(5) Total interest income 9,112
9-04(6) Interest on deposits 4,561
9-04((9) Total interest expense 4,608
9-04(10) Net interest income 4,504
9-04(11) Provision for loan losses 151
9-04(13)(h) Investment securities gains/losses 0
9-04(14) Other expenses 2,127
9-04(15) Income/loss before income tax 2,315
9-04(17) Income/loss before extraordinary items 2,315
9-04(18) Extraordinary items, less tax 0
9-04(19) Cumulative change in accounting principles 0
9-04(20) Net income or loss 1,412
9-04(21) Earnings per share - primary 0
9-04(21) Earnings per share - fully diluted 0
1.B.5 Net yield - interest earning assets
3.55%
III.C.1(a) Loans on non-accrual 1,048
III.C.1(b) Accruing loans past due 90 days 0
III.C.1(c) Troubled debt restructuring 0
III.C.2 Potential problem loans 0
IV.A.1 Allowance for loan loss beginning of period 984
IV.A.2 Total charge-offs 73
IV.A.3 Total recoveries 0
IV.A.4 Allowance for loan loss end of period 1,062
IV.B.1 Loan loss allowance domestic 1,062
IV.B.2 Loan loss allowance foreign 0
IV.B.3 Loan loss allowance unallocated 0