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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-24811
SOUND FEDERAL BANCORP
(Exact name of registrant as specified in its charter)
Federal 13-4029393
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Mamaroneck Ave., Mamaroneck, New York 10543
(Address of principal executive offices)
(Zip Code)
(914) 698-6400
(Registrant's telephone number including area code)
N/A
------------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Shares
Outstanding at
Class November 10 , 1999
--------- ------------------
Common Stock, 5,072,218
par value, $0.10
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30, 1999 and March 31, 1999..1
Consolidated Statements of Income for the Quarters and Six Months
ended September 30, 1999 and 1998.....................................2
Consolidated Statement of Changes in Stockholders' Equity for the
Six Months ended September 30, 1999...................................3
Consolidated Statements of Cash Flows for the Six Months
ended September 30, 1999 and 1998.....................................4
Notes to Unaudited Consolidated Financial Statements..................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........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
<PAGE>
Part 1. - Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
Sound Federal Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS
(Unaudited)
( Dollars in thousands, except per share data) September 30, March 31,
Assets
<S> <C> <C>
Cash and due from banks....................................................... $ 7,976 $ 5,082
Federal funds sold............................................................ 26,500 44,400
Certificates of deposit....................................................... 12,078 10,686
Securities:
Available-for-sale, at fair value.......................................... 54,929 39,402
Held-to-maturity, at amortized cost (fair value of $38,456 and $45,087
at September 30, 1999 and March 31, 1999, respectively).................... 39,250 45,590
------------ ------------
Total securities..................................................... 94,179 84,992
------------ ------------
Loans, net:
Mortgage loans............................................................ 162,843 143,626
Consumer loans............................................................ 888 1,004
Allowance for loan losses (Note 4)........................................ (1,144) (1,094)
------------- -------------
Total loans, net..................................................... 162,587 143,536
------------ ------------
Accrued interest receivable................................................... 1,842 1,436
Federal Home Loan Bank stock.................................................. 1,884 1,884
Premises and equipment, net................................................... 2,999 1,935
Other assets.................................................................. 2,058 1,360
----------- -----------
Total assets........................................................ $ 312,103 $ 295,311
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits................................................................. $ 255,805 $ 237,279
Mortgagors' escrow funds................................................ 1,538 2,480
Accrued expenses and other liabilities................................... 1,244 568
------------ -----------
Total liabilities..................................................... 258,587 240,327
------------ -----------
Stockholders' equity:
Preferred stock ($0.01 par value; 10,000,000 shares
Common stock ($0.10 par value; 20,000,000 shares authorized; 5,212,218 shares
Additional paid-in capital................................................ 22,429 22,430
Common stock held by Employee Stock Ownership Plan ("ESOP") .............. (1,583) (1,681)
Retained earnings......................................................... 34,428 33,846
Treasury stock, at cost (135,000 shares at September 30, 1999)............ (1,393) --
Accumulated other comprehensive loss, net of taxes (Note 5)............... (886) (132)
-------------- -------------
Total stockholders' equity............................................ 53,516 54,984
------------ -----------
Total liabilities and stockholders' equity............................ $ 312,103 $ 295,311
============ ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
<PAGE>
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Quarter Ended For the Six Months Ended
September 30, September 30,
----------------------- --------------------------
1999 1998 1999 1998
---- ------- ---- ----
Interest and Dividend Income
<S> <C> <C> <C> <C>
Loans..................................................... $ 2,961 $ 2,736 $ 5,832 $ 5,472
Securities................................................ 1,419 1,041 2,760 2,138
Federal funds sold and certificates of deposit............ 513 739 1,078 1,411
Other earning assets...................................... 47 52 92 91
--------- --------- --------- ---------
Total interest and dividend income........................ 4,940 4,568 9,762 9,112
--------- --------- --------- ---------
Interest Expense
Deposits.................................................. 2,322 2,315 4,548 4,561
Other interest-bearing liabilities....................... 13 37 24 47
--------- --------- --------- ---------
Total interest expense.................................... 2,335 2,352 4,572 4,608
---------- --------- --------- ---------
Net interest income....................................... 2,605 2,216 5,190 4,504
Provision for loan losses (Note 4)........................ 25 70 50 151
--------- --------- --------- ---------
Net interest income after provision for loan losses....... 2,580 2,146 5,140 4,353
--------- --------- --------- ---------
Non-Interest Income
Service charges and fees................................. 51 39 100 89
Gain on sale of real estate owned........................ -- -- 81 --
--------- --------- --------- --------
Total non-interest income................................ 51 39 181 89
--------- --------- --------- ---------
Non-Interest Expense
Compensation and benefits................................ 796 738 1,531 1,280
Occupancy and equipment.................................. 235 91 428 148
Data processing service fees............................. 60 63 155 120
Advertising and promotion................................ 120 30 196 68
Other.................................................... 502 211 1,008 511
--------- --------- --------- ---------
Total non-interest expense............................... 1,713 1,133 3,318 2,127
--------- --------- --------- ---------
Income before income tax expense.......................... 918 1,052 2,003 2,315
Income tax expense........................................ 291 386 715 903
--------- --------- --------- ---------
Net income................................................ $ 627 $ 666 $ 1,288 $ 1,412
========= ========= ========= =========
Basic earnings per common share (Note 3) $ 0.13 $ 0.26
========= =========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
<PAGE>
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Six Months Ended September 30, 1999
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Accumulated
Additional Stock Other Total
Common Paid-In Held By Retained Treasury Comprehensive Stockholders'
Stock Capital ESOP Earnings Stock Loss Equity
----- ------- ---- -------- ----- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1999.................... $ 521 $ 22,430 $ (1,681) $ 33,846 $ -- $ (132) $ 54,984
Net income................................... -- -- -- 1,288 -- -- 1,288
Other comprehensive loss (Note 5)............ -- -- -- -- -- (754) (754)
----------
Total comprehensive income (Note 5)........ 534
Dividends declared........................... -- -- -- (706) -- -- (706)
Repurchase of common stock (135,000 shares).. -- -- -- -- (1,393) -- (1,393)
ESOP shares committed to be released for
allocation (9,606 shares).................. -- (1) 98 -- -- -- 97
------ -------- ------- -------- ------- --------- ----------
Balance at September 30, 1999................ $ 521 $ 22,429 $ (1,583) $ 34,428 (1,393) $ (886) $ 53,516
====== ======== ======== ======== ======== ========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
<PAGE>
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
September 30,
----------------------------------------
1999 1998
------------------- ------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income............................................................ $ 1,288 $ 1,412
Adjustments to reconcile net income to net
Provision for loan losses...................................... 50 151
Depreciation expense........................................... 103 74
ESOP expense................................................ 97 --
Deferred income tax benefit.................................... (34) (140)
Gain on sale of real estate owned.............................. (81) --
Other adjustments, net......................................... 75 (583)
------------ -------------
Net cash provided by operating activities................... 1,498 914
------------ ------------
INVESTING ACTIVITIES
Available-for-sale................................................ (19,243) --
Held-to-maturity.................................................. -- (8,976)
Proceed from principal payments, maturities and calls of
securities .................................................... 8,720 11,967
Disbursements for loan originations................................... (29,939) (22,863)
Principal collection on loans......................................... 10,718 13,817
Net increase in certificates of deposit............................... (1,392) 493
Proceeds from sale of real estate owned............................... 314 --
Purchases of premises and equipment................................... (1,167) (180)
----------- -------------
Net cash used in investing activities....................... (31,989) (5,742)
----------- -------------
FINANCING ACTIVITIES
Net increase in deposits.............................................. 18,526 9,233
Net decrease in mortgage escrow deposits.............................. (942) (1,217)
Dividends paid........................................................ (706) --
Purchase of treasury stock............................................ (1,393) --
Proceeds from stock subscriptions..................................... -- 16,824
------------- -----------
Net cash provided by financing activities................... 15,485 24,840
------------- -----------
(Decrease) increase in cash and cash equivalents...................... (15,006) 20,012
Cash and cash equivalents at beginning of period...................... 49,482 42,111
------------ -----------
Cash and cash equivalents at end of period............................ $ 34,476 $ 62,123
============ ===========
SUPPLEMENTAL INFORMATION
Interest paid......................................................... $ 4,448 $ 4,578
Income taxes paid..................................................... 773 990
Loans transferred to real estate owned............................... 124 357
============ ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
<PAGE>
Sound Federal Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Reorganization and Stock Offering
On October 8, 1998, Sound Federal Bancorp issued shares of its common
stock in connection with a Plan of Reorganization ("the "Reorganization") and
related Subscription and Community Offering (the "Offering"). In the
Reorganization, Sound Federal Savings and Loan Association (the "Bank")
converted from a federally chartered mutual savings association to a federally
chartered stock savings association (the "Conversion"). The Bank became the
wholly-owned subsidiary of Sound Federal Bancorp, which became the
majority-owned subsidiary of Sound Federal, MHC (the "Mutual Holding Company").
Collectively, Sound Federal Bancorp and the Bank are referred to herein as "the
Company".
Sound Federal Bancorp issued a total of 5,212,218 shares of its common
stock in the Reorganization and Offering, consisting of 2,810,510 shares (or
53.92%) issued to the Mutual Holding Company and 2,401,708 shares (or 46.08%)
issued to other stockholders. The shares issued to other stockholders consist of
192,129 shares purchased by the Company's Employee Stock Ownership Plan (the
"ESOP") using $1.9 million in proceeds from a loan made by Sound Federal
Bancorp; 102,200 shares contributed by the Company to establish the Sound
Federal Savings and Loan Association Charitable Foundation (the "Charitable
Foundation"); and 2,107,379 shares sold for cash of $21.1 million ($10.00 per
share) in the Offering. After deducting offering costs of $1.1 million, the net
cash proceeds from the Offering were $20.0 million.
Sound Federal Bancorp utilized net proceeds of approximately $9.0
million to purchase all of the Bank's common shares issued in the Conversion,
and retained the remaining $11.0 million which was invested initially in
interest-bearing deposits with the Bank.
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. The fair value of the common shares contributed to the
Charitable Foundation ($1.0 million) was recognized as a charge to non-interest
expense at the contribution date (October 8, 1998).
2. Basis of Presentation
The consolidated financial statements included herein have been
prepared by the Company without audit. In the opinion of management, the
unaudited consolidated financial statements include all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. The
Company believes that the 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, 2000.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, income and expense.
Actual results could differ significantly from these estimates. A material
estimate that is particularly susceptible to near-term change is the allowance
for loan losses, which is discussed in Note 4.
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, 1999,
included in the Company's 1999 Annual Report.
<PAGE>
3. Earnings Per Share
Weighted average common shares of 4,967,074 and 5,031,204 were used in
calculating basic earnings per share for the quarter and six months ended
September 30, 1999, respectively. In computing basic EPS, outstanding shares
include all shares issued to the Mutual Holding Company and contributed to the
Charitable Foundation, but exclude unallocated ESOP shares that have not been
committed to be released to participants. For the quarter and six months ended
September 30,1999, the Company had no outstanding stock options or other
contracts that could result in the issuance of additional common shares and,
accordingly, diluted earnings per share has not been presented. The Company
completed the Reorganization and Offering on October 8, 1998. As a result, per
share data has not been presented for the quarter and six months ended September
30, 1998.
4. 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 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:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended Year Ended
September 30, September 30, March 31,
----------------------------- --------------------------- ---------
1999 1998 1999 1998 1999
------------- ------------- ------------- ------------ ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.... $ 1,119 $ 1,065 $ 1,094 $ 984 $ 984
Provision for loan losses......... 25 70 50 151 272
Mortgage loans charged off........ -- (73) -- (73) (162)
---------- -------------------------- ---------- -----------
Balance at end of period.......... $ 1,144 $ 1,062 $ 1,144 $ 1,062 1,094
========= ========= ========= ========== ==========
</TABLE>
<PAGE>
5. Comprehensive Income (Loss)
The Company's other comprehensive income (loss) represents net
unrealized holding gains and losses arising during the period on securities
available-for-sale, net of related income taxes. The components are as follows
for the periods indicated.
Other
Pre-Tax Tax Comprehensive
Loss Effect Loss
------------ ------------ ---------------
Quarter Ended:
September 30, 1999 $ (404) $ 168 $ (236)
September 30, 1998 (5) 2 (3)
Six Months Ended:
September 30, 1999 (1,277) 523 (754)
September 30, 1998 (10) 4 (6)
Total comprehensive income (net income and other comprehensive income
or loss) amounted to $391,000 and $534,000, respectively, for the quarter and
six months ended September 30, 1999, compared to $663,000 and $1,406,000,
respectively, for the quarter and six months ended September 30, 1998.
The Company's accumulated other comprehensive loss, which is included
in stockholders' equity, represents the unrealized loss on securities
available-for-sale of $1.5 million and $223,000 at September 30, 1999 and March
31, 1999, respectively, less related income taxes of $614,000 and $91,000,
respectively.
<PAGE>
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 System; 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, competition,
and uncertainties related to year 2000. 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.
Capability of the Company's Data Processing to Accommodate the Year 2000
Like most providers of financial services, the Company 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 developed a formal plan to resolve the Year 2000
issue and has been addressing this issue with the Company's data processing
service center (the "Data Center"). The Data Center has advised the Company that
the Year 2000 issue should not affect the Company's external data processing.
The Company has completed testing its computer applications and hardware to
ensure that they will be able to read the year 2000. All tests have now produced
satisfactory results.
The Company completed its contingency plan in May 1999. The plan
includes, among other things, various strategies to deal with loss of electrical
power, telecommunications, and Data Center failures. The Plan assigns
responsibilities to members of a recovery team and establishes time-frames to
provide for the Company to be able to service customers on January 3, 2000 (the
first business day of the year).
The Company has contacted each of its vendors to ensure that they will
be able to provide service in light of the Year 2000 issue. All mission-critical
vendors have represented to management that they have
<PAGE>
addressed the Year 2000 issue and expect to be able to provide the services for
which the Company has contracted. In addition, since over 99% of the Company's
loans are secured by real property (primarily residential property), the ability
of the Company's borrowers to be Year 2000 compliant is not a material concern.
Management will continue to monitor this issue and report to the Board of
Directors on a quarterly basis.
Costs related to the Year 2000 issue are expensed as incurred except
for the costs, if any, for new hardware and software that is purchased, which
are capitalized. At September 30, 1999, the cumulative costs incurred to address
the Year 2000 issue amounted to approximately $170,000. The Company estimates
that the total costs related to the Year 2000 issue will be approximately
$225,000, based on numerous assumptions concerning future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that this estimate will be
achieved, and actual results could differ materially. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of trained personnel, 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 Company's
systems rely will be timely converted, or that a failure to convert by another
company (or a conversion that is incompatible with the Company's systems), would
not have a material adverse effect on the Company.
Stock Repurchase Program
The Company announced on July 6, 1999 that it was commencing a stock
repurchase program to acquire up to 344,926 shares of its common stock, which
represents approximately 15% of the common stock held by persons other than the
Mutual Holding Company. As of September 30, 1999, the Company had acquired
135,000 shares of its common stock at a total cost of approximately $1.4
million, or an average of $10.32 per share.
Financial Condition
The Company's total assets were $312.1 million and $295.3 million at
September 30, 1999 and March 31, 1999, respectively. The $16.8 million increase
in assets was funded primarily by an $18.5 million increase in deposits. The
increase in total assets reflects a $19.1 million increase in net loans to
$162.6 million and a $9.2 million increase in total securities to $94.2 million.
The growth in the securities and loan portfolios was funded by the deposit
growth as well as a decrease of $17.9 million in Federal funds reflecting the
Company's ongoing strategy to redeploy short-term liquid assets into higher
yielding loans and securities. Total deposits amounted to $255.8 million at
September 30, 1999, as compared to total deposits of $237.3 million at March 31,
1999. Total equity decreased $1.5 million to $53.5 million at September 30, 1999
as compared to $55.0 million at March 31, 1999, primarily due to a $1.4 million
increase in treasury stock, a $754,000 increase in the after-tax net unrealized
loss on securities available for sale and the payment of cash dividends of
$706,000, partially offset by net income of $1.3 million for the six months
ended September 30, 1999.
Results of Operations
General. The Company reported net income of $627,000 for the quarter
ended September 30, 1999, as compared to net income of $666,000 for the quarter
ended September 30, 1998. The results for the current quarter reflect an
increase in non-interest expenses of $580,000, substantially offset by an
increase in net interest income of $389,000, a decrease of $45,000 in the
provision for loan losses and a $95,000 decrease in income tax expense. The
increase in non-interest expenses for the current quarter included $118,000 in
expenses related to the establishment of a real estate investment trust
("REIT").
<PAGE>
For the six months ended September 30, 1999, net income was $1.3
million as compared to $1.4 million for the same period in 1998. The results for
the current six month period reflect a $1.2 million increase in non-interest
expenses, substantially offset by a $686,000 increase in net interest income, a
$101,000 decrease in the provision for loan losses and a $188,000 decrease in
income tax expense. The increase in non-interest expenses for the current six
month period include $225,000 in expenses related to the establishment of the
REIT.
Net Interest Income. Net interest income for the quarter ended
September 30, 1999 amounted to $2.6 million, a $389,000 increase from the same
period in the prior year. The interest rate spread was 2.97% and 3.04% for the
quarters ended September 30, 1999 and 1998, respectively. The net interest
margin for those periods was 3.54% and 3.42%, respectively.
For the six months ended September 30, 1999, net interest income
increased $686,000 to $5.2 million as compared to the same period in the prior
year. The interest rate spread was 2.99% for the six months ended September 30,
1999 as compared to 3.16% for the same period in the prior year. For those same
periods, the net interest margin was 3.57% and 3.55%, respectively. The decrease
in the interest rate spread is a result of the general decrease in interest
rates on loans and securities, and the increase in time deposits which represent
57.3% of average interest-bearing liabilities for the six months ended September
30, 1999 as compared to 53.6% for the same period last year. The low interest
rates during the past year have caused many homeowners to refinance existing
home mortgages and has created demand for loans to purchase new homes. Most
customers have opted for a fixed rate loan which is the Bank's primary mortgage
product. This resulted in the overall growth of the loan portfolio but this
growth was at lower interest rates than the existing loan portfolio. In
addition, the low interest rates resulted in accelerated prepayments of
mortgage-backed securities. The cash flows from mortgage-backed securities were
also reinvested at lower rates than the existing securities portfolio.
Interest Income. Interest income totaled $4.9 million in the quarter
ended September 30, 1999 as compared to $4.6 million for the same period in the
prior year. This increase is due to a $35.3 million increase in average
interest-earning assets to $292.4 million during the quarter ended September 30,
1999 as compared to $257.1 million for the same quarter in the prior year,
partially offset by a 35 basis point decrease in the average yield on
interest-earning assets to 6.70%. The increase in the average balance of
interest-earning assets was due to investment of funds from deposit growth
during the past year and the Offering proceeds.
For the six months ended September 30, 1999, interest income increased
$650,000 or 7.1% to $9.8 million as compared to $9.1 million for the six months
ended September 30, 1998. Average interest-earning assets increased $37.0
million to $290.0 million from $253.0 million, for the comparative periods. The
increase in interest-earning assets was partially offset by a 47 basis point
decrease in the average yield earned on total interest-earning assets to 6.71%.
Loans. Interest income on loans increased $225,000 or 8.2% to $3.0
million for the current quarter as compared to $2.7 million for the same quarter
in 1998. This increase is due to a $23.4 million increase in the average balance
of loans to $157.6 million partially offset by a 64 basis point decrease in the
yield earned to 7.45%. The growth of the loan portfolio is a result of the low
interest rate environment during 1998 and the first half of 1999, which created
a strong demand for fixed rate loans (the Company's primary mortgage loan
product). The low interest rates also created a strong market for home purchases
and the refinancing of existing mortgage loans in the Company's market area. The
new loan production and the refinancing activity were also the primary reasons
for the decrease in the yield earned on mortgage loans since the rates on these
loans are lower than those of the existing portfolio. The recent increases in
interest rates have caused loan demand to decrease.
<PAGE>
Interest income on loans totaled $5.8 million during the six months
ended September 30, 1999 as compared to $5.5 million for the same period in
1998. The average balance of loans increased $20.5 million to $152.7 million and
the average yield earned decreased 64 basis points to 7.62%.
Mortgage-Backed Securities. Interest income on mortgage-backed
securities amounted to $792,000 for the quarter ended September 30, 1999 as
compared to $811,000 for the same quarter in 1998. The yield earned on
mortgage-backed securities decreased 54 basis points to 5.65% as compared to the
prior year. This decrease was partially offset by a $3.6 million increase in the
average balance of mortgage-backed securities to $55.6 million as compared to
$51.9 million for the same quarter in 1998. Many of these mortgage-backed
securities have rates that adjust annually, typically based on Treasury bill
rates. As a result, these securities repriced to lower rates as interest rates
remained low during 1998 and the first half of 1999. In addition, principal
prepayments resulted in the acceleration of the amortization of premiums on
these securities. This also reduced the yields earned on the mortgage-backed
securities portfolio.
For the six months ended September 30, 1999, interest income on
mortgage-backed securities amounted to $1.6 million as compared to $1.7 million
for the same period in the prior year. The yield earned decreased 58 basis
points to 5.79% as compared to 6.37% in 1998. The decrease in the yields earned
was partially offset by a $3.9 million increase in the average balance to $56.6
million.
Other Securities. Interest on other securities increased $397,000 to
$627,000 for the quarter ended September 30, 1999 as compared to $230,000 for
the same quarter in 1998. The average balance of other securities was $38.6
million for the quarter ended September 30, 1999 as compared to $14.4 million
for the same quarter in the prior year and the average yield earned increased 12
basis points to 6.45%. The increase in the average balance was due to the
investment of funds from deposit growth and the Offering.
Interest on other securities increased $660,000 to $1.1 million for the
six months ended September 30, 1999 as compared to $457,000 for the same period
in 1998. The average balance of other securities was $35.3 million for the six
months ended September 30, 1999 as compared to $14.7 million for the same period
in the prior year and the average yield earned increased 9 basis points to
6.30%.
Federal Funds. Interest on Federal funds decreased $216,000 to
$349,000, reflecting a $15.6 million decrease in the average balance to $26.4
million and a 9 basis point decrease in the average yield earned to 5.25%.
Interest on Federal funds decreased $303,000 to $756,000 during the six
months ended September 30, 1999 as compared to $1.1 million for the same period
in 1998. This decrease is due to an $8.3 million decrease in the average balance
of Federal funds to $30.6 million and a 50 basis point decrease in the average
yield earned to 4.92%. The decrease in the average balance of Federal funds
reflects the Company's ongoing strategy to redeploy short-term liquid assets
into higher yielding loans and securities.
Certificates of Deposit. Interest income on certificates of deposit at
other financial institutions amounted to $165,000 for the quarter ended
September 30, 1999 as compared to $174,000 for the same quarter in the prior
year. This decrease reflects a 34 basis point decrease in the average yield
earned to 5.64% partially offset by a $64,000 increase in the average balance to
$11.6 million for the 1999 quarter from $11.5 million for the same quarter in
1998.
For the six months ended September 30, 1999, interest income on
certificates of deposit at other financial institutions amounted to $322,000 as
compared to $351,000 for the same period in 1998. The decrease in interest
earned is due to a $78,000 decrease in the average balance to $11.5 million and
a 46 basis point decrease in the yield earned to 5.59%.
<PAGE>
Interest Expense. Interest expense for the quarter ended September 30,
1999 totaled $2.3 million, virtually unchanged from the quarter ended September
30, 1998. The average balance of interest-bearing liabilities increased $15.1
million to $247.9 million for the quarter ended September 30, 1999 from $232.8
million for the same quarter in the prior year and the average cost of these
liabilities decreased 27 basis points to 3.74%. The increase in the average
balance is due primarily to an $18.6 million increase in the average balance of
time deposits to $142.9 million from $124.3 million in the prior year. This
deposit growth reflects the opening of the Bank's New City supermarket branch in
December 1998 and the Greenwich branch in September 1999.
For the six months ended September 30, 1999, interest expense totaled
$4.6 million, virtually unchanged from the corresponding period in the prior
year. The average balance of interest-bearing liabilities for these same periods
increased $16.4 million and the average cost of these liabilities decreased 30
basis points to 3.73%.
Interest on time deposits totaled $1.8 million for the current quarter
as compared to $1.7 million for the same quarter in 1999. This increase is
primarily a result of an $18.6 million or 15.0% increase in the average balance
of time deposits to $142.9 million for the quarter ended September 30, 1999 as
compared to the same quarter in 1998. The increase in the average balance of
time deposits was substantially offset by a 45 basis point decrease in the
average cost to 4.91%. Total interest expense on other deposit accounts
(passbook, club, money market and NOW accounts) amounted to $555,000 for the
quarter ended September 30, 1999 as compared to $636,000 for the same quarter in
the prior year. The average balance of these accounts was $102.9 million for the
1999 quarter as compared to $102.5 million for the same quarter in 1998, and the
overall average rate was 2.14% and 2.46% for the respective periods.
For the six months ended September 30, 1999, interest on time deposits
totaled $3.5 million as compared to $3.3 million for the same quarter in 1998.
This increase is primarily a result of an $18.0 million increase in the average
balance of time deposits to $140.2 million as compared to $122.2 million for the
same period in 1998. The increase in the average balance of time deposits was
substantially offset by a 46 basis point decrease in the average cost to 4.92%.
Total interest expense on other deposit accounts (passbook, club, money market
and NOW accounts) amounted to $1.1 million for the six months ended September
30, 1999 as compared to $1.3 million for the same period in the prior year. The
average balance of these accounts was $102.5 million for the 1999 period as
compared to $101.9 million for the same period in 1998, and the overall average
rate was 2.13% and 2.48% for the respective periods.
Provision for Loan Losses. The provision for loan losses was $25,000
for the quarter ended September 30, 1999 as compared to $70,000 for the quarter
ended September 30, 1998. For the six months ended September 30, 1999 and 1998,
the provision for loan losses amounted to $50,000 and $151,000, respectively.
The reduced provision for loan losses is deemed appropriate in light of the
Company's improved asset quality compared to prior periods. Non-performing loans
amounted to $759,000 or 0.46% of total loans at September 30, 1999, as compared
to $1.1 million or 0.75% of total loans at March 31, 1999 and $1.0 million or
0.76% of total loans at September 30, 1998. The allowance for loan losses
amounted to $1.1 million at both September 30, 1999 and March 31, 1999. The
Company had no charge-offs or recoveries for the quarter and six months ended
September 30, 1999, as compared to charge-offs of $73,000 for both the quarter
and six months ended September 30, 1998.
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 consists principally of
service charges on deposit accounts, late charges on loans and various other
service fees. Non-interest income totaled $51,000 and $39,000 for the quarters
ended September 30, 1999 and 1998, respectively. For the six months ended
September 30, 1999 and 1998, non-interest income totaled $181,000 and $89,000,
respectively. Income for the 1999 six month period included an $81,000 gain on
the sale of real estate owned.
Non-Interest Expense. Non-interest expense totaled $1.7 million for the
quarter ended September 30, 1999 as compared to $1.1 million for the quarter
ended September 30, 1998. This increase is due primarily to an increase of
$58,000 in compensation and benefits to $796,000 for the quarter ended September
30, 1999 as compared to $738,000 for the quarter ended September 30, 1998; a
$144,000 increase in occupancy costs to $235,000; a $90,000 increase in
advertising and promotion; and a $291,000 increase in other non-interest
expenses. The increase in compensation and benefits is due primarily to $49,000
in expense recognized in the current quarter for the Company's ESOP, while no
expense was recognized in the same quarter of the prior year. The increases in
occupancy and equipment and advertising and promotion are primarily a result of
the new branches in Greenwich, Connecticut and New City, New York. The Greenwich
branch was opened in September 1999 and the New City branch was opened in
December 1998. Other non-interest expenses for the current quarter include
$118,000 for professional fees related to the establishment of the REIT. The
increase in other non-interest expenses was also due to additional costs related
to operations as a public company and costs incurred in establishing the new
branches.
For the six months ended September 30, 1999, non-interest expense
totaled $3.3 million as compared to $2.1 million for the same period last year.
This increase was due primarily to a $251,000 increase in compensation and
benefits to $1.5 million; a $280,000 increase in occupancy and equipment; a
$128,000 increase in advertising and promotion; and a $497,000 increase in other
non-interest expenses. The increases in compensation and benefits are primarily
due to $97,000 in ESOP expense for the current six month period, increased costs
following the Reorganization and Offering, staff additions and normal salary
increases. The increases in occupancy and equipment and advertising and
promotion are primarily due to the new branches. Other non-interest expenses for
the 1999 six month period include $225,000 for professional fees related to the
establishment of the REIT.
Income Taxes. Income tax expense amounted to $291,000 and $386,000 for
the quarters ended September 30, 1999 and 1998, respectively. The effective tax
rates for those periods were 31.7% and 36.7%, respectively. For the six months
ended September 30, 1999 and 1998, income tax expense amounted to $715,000 and
$903,000, respectively, and the effective tax rates were 35.7% and 39.0%,
respectively. The lower effective tax rates in the current year reflect the
implementation of the REIT.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, the proceeds from
principal and interest payments on loans and mortgage-backed securities, and the
proceeds from maturities of investments. While maturities and scheduled
amortization of loans and securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The Bank is required to maintain an average daily balance of liquid
assets as a percentage of net withdrawable deposit accounts plus short-term
borrowings as defined by the regulations of the Office of Thrift Supervision
("OTS"). The minimum required liquidity ratio is currently 5%. At September 30,
1999, the Bank's liquidity ratio under OTS regulations was approximately 32%.
The primary investing activities of the Company are the origination of
loans and the purchase of securities. For the quarter and six months ended
September 30, 1999 and for the year ended March 31, 1999,
<PAGE>
the Company originated loans totaling $14.4 million, $29.9 million and $44.2
million, respectively. The Company purchased securities, including
mortgage-backed securities, totaling $6.8 million and $19.2 million for the
quarter and six months ended September 30, 1999, respectively and $47.3 million
for the year ended March 31, 1999.
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, 1999, the Company had outstanding loan commitments of
$23.2 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, 1999, totaled $107.3 million.
Management believes that a significant portion of such deposits will remain with
the Company.
The Bank is subject to certain minimum leverage, tangible and
risk-based capital requirements established by regulations of the OTS. These
regulations require savings associations to meet three minimum capital
standards: a tangible capital ratio requirement of 1.5% of total assets as
adjusted under the OTS regulations; a leverage ratio requirement of 4.0% of core
capital to such adjusted total assets; and a risk-based capital ratio
requirement of 8.0% of core and supplementary capital to total risk-based
assets. The OTS prompt corrective action regulations impose a 4.0% core capital
requirement for categorization as an "adequately capitalized" thrift and a 5.0%
core capital requirement for categorization as a "well capitalized" thrift. 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, 1999, the Bank exceeded all of
the OTS minimum regulatory capital requirements, and was classified as a
well-capitalized institution for regulatory purposes.
The following table sets forth the capital position of the Bank as
calculated at September 30, 1999. The Bank's capital level reflects the receipt
of $9.0 million from Sound Federal Bancorp for the Bank's issuance of common
stock, equal to approximately 50% of the net proceeds received in the Offering.
Accordingly, the actual capital amounts and ratios set forth below do not
include additional capital retained by Sound Federal Bancorp.
<TABLE>
<CAPTION>
OTS Requirements
------------------------------------------
Minimum Capital Classification as
Bank Actual Adequacy Well Capitalized
-------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
September 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Tangible capital.................... $ 44,774 14.3% $ 4,688 1.5%
Tier I (core) capital............... 44,774 14.3 12,501 4.0 $ 15,626 5.0%
Risk-based capital:
Tier I........................... 44,774 36.3 7,410 6.0
Total............................ 45,850 37.1 9,880 8.0 12,350 10.0
Tangible capital.................... $ 43,551 14.8% $ 4,439 1.5%
Tier I (core) capital............... 43,551 14.8 8,878 3.0 $ 14,796 5.0%
Risk-based capital:
Tier I........................... 43,551 38.3 6,820 6.0
Total............................ 44,577 39.2 9,094 8.0 11,367 10.0
</TABLE>
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's most significant form of market risk is interest rate
risk, as the majority of the Company's assets and liabilities are sensitive to
changes in interest rates. The Company's assets consist primarily of fixed rate
mortgage loans, which have longer maturities than the Company's liabilities
which consist primarily of deposits. The Company's mortgage loan portfolio,
consisting primarily of loans secured by residential real property located in
Westchester County, is also subject to risks associated with the local economy.
The Company does not own any trading assets. At September 30, 1999, 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, 1999, there were no significant
changes in the Company's assessment of market risk.
<PAGE>
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 July 14, 1999.
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, 2000. The results of the votes were as
follows:
Proposal 1 - Election of Directors
For Withheld
-------------- ----------------
Bruno J. Gioffre 4,744,725 70,221
Richard P. McStravick 4,750,025 64,921
James Staudt 4,747,125 67,821
Proposal 2 - Ratification of Appointment of KPMG LLP
For Against Abstain
------------- ----------- ------------
4,795,040 7,181 12,725
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.
<PAGE>
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 10, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,976
<INT-BEARING-DEPOSITS> 12,078
<FED-FUNDS-SOLD> 26,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54,929
<INVESTMENTS-CARRYING> 39,250
<INVESTMENTS-MARKET> 38,456
<LOANS> 163,731
<ALLOWANCE> 1,144
<TOTAL-ASSETS> 312,103
<DEPOSITS> 255,805
<SHORT-TERM> 86
<LIABILITIES-OTHER> 1,158
<LONG-TERM> 0
0
0
<COMMON> 521
<OTHER-SE> 52,995
<TOTAL-LIABILITIES-AND-EQUITY> 312,103
<INTEREST-LOAN> 5,832
<INTEREST-INVEST> 2,760
<INTEREST-OTHER> 1,170
<INTEREST-TOTAL> 9,762
<INTEREST-DEPOSIT> 4,548
<INTEREST-EXPENSE> 4,572
<INTEREST-INCOME-NET> 5,190
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,318
<INCOME-PRETAX> 2,003
<INCOME-PRE-EXTRAORDINARY> 2,003
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,288
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.26
<YIELD-ACTUAL> 3.57
<LOANS-NON> 759
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,094
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,144
<ALLOWANCE-DOMESTIC> 1,144
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
