<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from _________________ to ____________________
Commission File Number: 000-24811
SOUND FEDERAL BANCORP
_____________________________________________
(Exact Name of Registrant as Specified in its Charter)
United States 13-4029393
_______________________________ _______________________________
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
300 Mamaroneck Avenue 10543
________________________________ _______________________
(Address of Principal Executive Offices) (Zip Code)
(914) 698-6400
______________________________
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
____
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
______________________________________________
(Title of Class)
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
requirements for the past 90 days.
YES X NO
___ ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of June 21, 1999, there were issued and outstanding 5,212,218 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the Common Stock as of June 21, 1999 ($9.4375) was $18,386,260.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended March
31, 1999 (Parts II and IV).
2. Proxy Statement for the 1999 Annual Meeting of Stockholders (Parts I and
III).
<PAGE>
PART I
ITEM 1. BUSINESS
General
Sound Federal Bancorp. Sound Federal Bancorp (the "Company") is a federal
corporation which was organized in October 1998. The principal asset of the
Company is its investment in Sound Federal Savings and Loan Association (the
"Bank"). The Company is majority owned by Sound Federal, MHC, a federally-
chartered mutual holding company (the "Mutual Holding Company"). On October 8,
1998, the Company sold 2,401,708 shares of its common stock to the public,
issued 2,810,510 shares of common stock to the Mutual Holding Company, and
contributed 102,200 shares of common stock to the Sound Federal Savings and Loan
Association Charitable Foundation. At March 31, 1999, the Company had total
consolidated assets of $295.3 million, total deposits of $237.3 million, and
stockholders' equity of $55.0 million.
Sound Federal Savings and Loan Association. The Bank is a federally
chartered savings association headquartered in Mamaroneck, New York. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). The
Bank was organized as a New York chartered savings bank in 1891 and became a
federally chartered savings association in 1934. On October 8, 1998, the Bank
completed its reorganization into the mutual holding company structure.
The Bank is a community-oriented institution engaged primarily in the
business of accepting deposits from customers, most of whom live or work in
Westchester County, and investing these deposits together with funds generated
from operations, in one-to-four family residential mortgage loans and home
equity lines of credit, and, to a much lesser extent, in multi-family and
commercial mortgage, construction and consumer loans.
The Company's and the Bank's principal executive office is located at 300
Mamaroneck Avenue, Mamaroneck, New York 10543, and their telephone number at
that address is (914) 698-6400.
Market Area
The Bank is a community-oriented savings institution that offers a variety
of financial products and services from its main office and branch offices. The
Bank's primary lending area is concentrated in the neighborhoods surrounding the
Bank's office locations. Most of the Bank's deposit customers are residents of
Westchester County. To a lesser extent, the Bank obtains deposits from, and
originates loans to, persons in Rockland County, New York and Fairfield County,
Connecticut. The Bank's market area is characterized by middle income and upper
income communities. Significant employers headquartered in Westchester County
include IBM and Texaco. However, the local economy is not dependent upon any
single employer, but rather is affected by the general economy of the New York
City metropolitan area.
1
<PAGE>
Lending Activities
Historically, the Bank's principal lending activity has been the
origination of fixed-rate first mortgage loans for the purchase or refinancing
of one-to-four family residential real property. The Bank retains all loans
that it originates. One-to-four family residential mortgage loans represented
$119.0 million, or 82.1%, of the Bank's loan portfolio at March 31, 1999. Home
equity lines of credit represented $16.4 million, or 11.3%, of the Bank's loan
portfolio at March 31, 1999. The Bank also offers multi-family mortgage loans,
commercial mortgage loans and construction loans. Multi-family mortgage loans
totaled $396,000, or 0.3%, of the loan portfolio at March 31, 1999. Commercial
mortgage loans totaled approximately $5.9 million, or 4.1%, of the loan
portfolio at March 31, 1999. Construction loans totaled $2.2 million, or 1.5 %
of the loan portfolio at March 31, 1999. The Bank also makes consumer loans,
which primarily consist of automobile, passbook, home improvement and secured
personal loans. Consumer loans totaled $1.0 million, or 0.7%, of the loan
portfolio at March 31, 1999.
2
<PAGE>
Loan Portfolio Composition. The following table sets forth the composition
of the Bank's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996
--------------------- ------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage loans:
One- to four-family............. $119,015 82.1% $109,207 83.8% $103,595 83.6% $ 98,865 84.7%
Home equity lines of credit..... 16,441 11.3 13,138 10.1 9,487 7.7 7,131 6.1
Multi-family.................... 396 0.3 412 0.3 348 0.3 373 0.3
Commercial...................... 5,930 4.1 3,811 2.9 3,416 2.8 3,469 3.0
Construction.................... 2,160 1.5 1,800 1.4 5,539 4.5 5,193 4.5
-------- ----- -------- ----- -------- ----- -------- -----
Total mortgage loans........... 143,942 99.3 128,368 98.5 122,385 98.9 115,031 98.6
-------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Automobile loans................ 609 0.4 1,011 0.8 1,028 0.8 968 0.8
Other/ (1)/..................... 395 0.3 1,016 0.7 426 0.3 665 0.6
-------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans........... 1,004 0.7 2,027 1.5 1,454 1.1 1,633 1.4
-------- ----- -------- ----- -------- ----- -------- -----
Total loans.................... 144,946 100.0% 130,395 100.0% 123,839 100.0% 116,664 100.0%
===== ===== ===== =====
Construction loans in process.... (339) (573) (1,049) (2,023)
Allowance for loan losses........ (1,094) (984) (845) (725)
Deferred loan origination
costs (fees), net............... 23 (280) (328) (384)
-------- -------- -------- --------
Total loans, net............... $143,536 $128,558 $121,617 $113,532
======== ======== ======== ========
<CAPTION>
At March 31,
-------------------
1995
-------------------
Amount Percent
-------- ---------
<S> <C> <C>
(Dollars in Thousands)
Mortgage loans:
One- to four-family............. $ 98,675 89.5%
Home equity lines of credit..... 5,146 4.6
Multi-family.................... 395 0.4
Commercial...................... 3,188 2.9
Construction.................... 1,451 1.3
-------- -----
Total mortgage loans........... 108,855 98.7
-------- -----
Consumer loans:
Automobile loans................ 647 0.6
Other/ (1)/..................... 737 0.7
-------- -----
Total consumer loans........... 1,384 1.3
-------- -----
Total loans.................... 110,239 100.0%
=====
Construction loans in process.... (500)
Allowance for loan losses........ (652)
Deferred loan origination
costs (fees), net............... (503)
--------
Total loans, net............... $108,584
========
</TABLE>
- ----------
/(1)/ Primarily secured personal loans, loans secured by deposit accounts and
home improvement loans.
3
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio
by fixed and adjustable rates at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------- ------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
---------- -------- --------- -------- --------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans
Mortgage loans:
One- to four-family............. $116,113 80.1% $103,887 79.7% $ 96,801 78.2% $ 90,881 77.9%
Home equity lines of credit..... 15,590 10.7 12,094 9.3 8,145 6.6 5,528 4.7
Multi-family.................... 396 0.3 412 0.3 348 0.3 373 0.3
Commercial...................... 5,930 4.1 3,811 2.9 3,380 2.7 3,403 2.9
Construction.................... 2,160 1.5 1,800 1.4 5,539 4.5 5,193 4.5
-------- ----- -------- ----- -------- ----- -------- ------
Total mortgage loans........... 140,189 96.7 122,004 93.6 114,213 92.3 105,378 90.3
Consumer loans/ (1)/............. 1,004 0.7 2,027 1.5 1,454 1.1 1,633 1.4
-------- ----- -------- ----- -------- ----- -------- ------
Total fixed rate loans........... 141,193 97.4 124,031 95.1 115,667 93.4 107,011 91.7
-------- ----- -------- ----- -------- ----- -------- ------
Adjustable Rate Loans
Mortgage loans:
One- to four-family............. 2,902 2.0 $ 5,320 4.1 $ 6,794 5.5 $ 7,984 6.8
Home equity lines of credit..... 851 0.6 1,044 0.8 1,342 1.1 1,603 1.4
Commercial...................... -- -- -- -- 36 -- 66 0.1
-------- ----- -------- ----- -------- ----- -------- ------
Total adjustable rate loans.... 3,753 2.6 6,364 4.9 8,172 6.6 9 ,653 8.3
-------- ----- -------- ----- -------- ----- -------- ------
Total loans....................... 144,946 100.0% $130,395 100.0% $123,839 100.0% $116,664 100.0%
===== ===== ===== ======
Construction loans in process..... (339) (573) (1,049) (2,023)
Allowance for loan losses......... (1,094) (984) (845) (725)
Deferred loan origination costs
(fees), net...................... 23 (280) (328) (384)
-------- -------- -------- --------
Total loans, net.................. $143,536 $128,558 $121,617 $113,532
======== ======== ======== ========
<CAPTION>
At March 31,
-------------------
1995
-------------------
Amount Percent
--------- --------
(Dollars in Thousands)
<S> <C> <C>
Fixed Rate Loans
Mortgage loans:
One- to four-family............. $ 90,132 81.8%
Home equity lines of credit..... 2,826 2.5
Multi-family.................... 395 0.4
Commercial...................... 3,087 2.8
Construction.................... 1,451 1.3
-------- -----
Total mortgage loans........... 97,891 88.8
Consumer loans/ (1)/............. 1,384 1.3
-------- -----
Total fixed rate loans........... 99,275 90.1
-------- -----
Adjustable Rate Loans
Mortgage loans:
One- to four-family............. $ 8,543 7.8
Home equity lines of credit..... 2,320 2.1
Commercial...................... 101 --
-------- -----
Total adjustable rate loans.... 10,964 9.9
-------- -----
Total loans....................... $110,239 100.0%
=====
Construction loans in process..... (500)
Allowance for loan losses......... (652)
Deferred loan origination costs
(fees), net..................... (503)
-------- -----
Total loans, net.................. $108,584
========
</TABLE>
- ----------
/(1)/ Primarily secured personal loans, loans secured by deposit accounts and
home improvement loans.
4
<PAGE>
Loan Maturity Schedule. The following table summarizes the contractual
maturities of the Bank's loan portfolio at March 31, 1999. Loans with
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The table reflects the entire unpaid
principal balance of a loan in the maturity period that includes the final
payment date, and accordingly, does not reflect the effects of scheduled
payments, possible prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Multi-Family, Commercial,
One-to-Four Family/(1)/ Construction and Consumer Total
------------------------- -------------------------- ----------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------------------------- -------------------------- -------- ------ -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due During the Years Ending March 31,
2000/(2)/.............................. $ 1,449 8.04% $2,536 7.78% $ 3,985 7.87%
2001................................... 461 9.53 268 9.50 729 9.52
2002................................... 606 8.63 316 8.05 922 8.42
2003 to 2005........................... 5,305 7.81 2,056 8.63 7,361 8.04
2006 to 2009........................... 11,100 8.10 2,490 8.45 13,590 8.16
2010 to 2014........................... 30,543 7.35 1,101 10.19 31,644 7.45
2015 and following..................... 85,992 7.82 723 8.38 86,715 7.82
-------- ------ --------
Total................................. $135,456 7.75% $9,490 8.52% $144,946 7.80%
======== ====== ========
- ------------
</TABLE>
/(1) /Includes home equity lines of credit.
/(2) /Includes demand loans having no stated maturity.
The following table sets forth the dollar amount of all fixed rate and
adjustable rate loans at March 31, 1999 that are contractually due after March
31, 2000.
<TABLE>
<CAPTION>
Fixed Adjustable Total
-------- ---------- --------
(In Thousands)
<S> <C> <C> <C>
One- to four-family.................................. $130,254 $3,753 $134,007
Multi-family, commercial, construction and consumer.. 6,954 -- 6,954
-------- ------ --------
Total............................................... $137,208 $3,753 $140,961
======== ====== ========
</TABLE>
One-to-Four Family Residential Loans. The Bank's primary lending activity
is the origination of one-to-four family residential mortgage loans secured by
property located in the Bank's primary lending area. Generally, one-to-four
family residential mortgage loans are made in amounts up to 90% of the lesser of
the appraised value or purchase price of the property, with private mortgage
insurance required for loans with a loan-to-value ratio over 80%. Generally,
fixed-rate loans are originated for terms of up to 30 years. One-to-four family
loans are offered with a monthly or bi-weekly payment feature. The Bank does
not sell the loans that it originates.
The Bank originates fixed-rate loans; however, the Bank also offers
adjustable rate mortgage ("ARM") loans with one year adjustment periods. The
interest rate on ARM loans is indexed to the prime interest rate as published in
The Wall Street Journal. The Bank's ARM loans currently provide for maximum
rate adjustments of 1.75% per year and 6% over the term of the loan. The Bank
does not offer ARM loans with initial interest rates that are below market,
referred to as "teaser rates." Residential ARM loans amortize over terms of up
to 30 years. In the current low interest rate environment, borrowers have shown
a preference for fixed rate loans. At March 31, 1999, 97.6% of the Bank's one-
to-four family residential loans had adjustable interest rates.
5
<PAGE>
ARM loans decrease the risk associated with changes in market interest
rates by periodically repricing, but involve other risks because as interest
rates increase, the underlying payments by the borrower increase, thus
increasing the potential for default by the borrower. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. Upward adjustment of the contractual interest rate is also
limited by the maximum periodic and lifetime interest rate adjustment permitted
by the terms of the ARM loans, and, therefore, is potentially limited in
effectiveness during periods of rapidly rising interest rates. At March 31,
1999, 2.4% of the Bank's one-to-four family residential loans had adjustable
interest rates.
All one-to-four family residential mortgage loans originated by the Bank
include "due-on-sale" clauses, which give the Bank the right to declare a loan
immediately due and payable in the event that, among other things, the borrower
sells or otherwise disposes of the real property subject to the mortgage and the
loan is not repaid.
At March 31, 1999, approximately $119.0 million, or 82.1% of the Bank's
loan portfolio, consisted of one-to-four family residential loans. Approximately
$1.1 million of such loans (representing 12 loans) were included in
nonperforming loans as of that date. See "Nonperforming and Problem Assets."
Home Equity Lines of Credit. The Bank offers home equity lines of credit
that are secured by the borrower's primary residence. The borrower is permitted
to draw on the home equity line of credit during the first five years after it
is originated and may repay the outstanding balance over a term not to exceed 20
years from the date the line of credit is originated. Home equity lines of
credit are generally underwritten under the same criteria that the Bank uses to
underwrite one-to-four family fixed rate loans. Home equity lines of credit may
be underwritten with a loan to value ratio of 75% when combined with the
principal balance of the existing mortgage loan, if the Bank has the first
mortgage on the property securing the loan, and up to a 65% loan to value ratio
when combined with the principal balance of the existing mortgage loan if the
first mortgage is held by another financial institution; however, the maximum
principal amount of a home equity line of credit may not exceed $200,000 unless
approved by the Board of Directors. The Bank appraises the property securing
the loan at the time of the loan application (but not thereafter) in order to
determine the value of the property securing the home equity lines of credit.
At March 31, 1999, the outstanding balances of home equity line of credit
totaled $16.4 million, or 11.3% of the Bank's loan portfolio.
Commercial Mortgage Loans. At March 31, 1999, $5.9 million, or 4.1%, of the
total loan portfolio consisted of commercial mortgage loans. Commercial
mortgage loans are secured by office buildings, private schools, religious
facilities and other commercial properties. The Bank generally originates fixed-
rate and adjustable rate commercial mortgage loans with maximum terms of up to
10 years. The maximum loan-to-value ratio of commercial mortgage loans is 75%.
At March 31, 1999, the largest commercial mortgage loan had a principal balance
of $1.0 million and was secured by a commercial complex which includes retail
stores. As of March 31, 1999, there were no nonperforming commercial mortgage
loans.
In underwriting commercial mortgage loans, the Bank reviews a number of
factors, such as the expected net operating income generated by the real estate
to ensure that it is at least 125% of the amount of the monthly debt service;
the age and condition of the collateral; the financial resources and income
level of the borrower; and the borrower's business experience. Personal
guarantees are obtained when possible from commercial mortgage borrowers.
6
<PAGE>
Loans secured by commercial real estate generally are larger than one-to-
four family residential loans and involve a greater degree of risk. Commercial
mortgage loans often involve large loan balances to single borrowers or groups
of related borrowers. Payments on these loans depend to a large degree on the
results of operations and management of the properties or underlying businesses,
and may be affected to a greater extent by adverse conditions in the real estate
market or the economy in general. Accordingly, the nature of commercial real
estate loans makes them more difficult for Bank management to monitor and
evaluate.
Multi-Family Mortgage Loans. Loans secured by multi-family real estate
totaled approximately $396,000, or 0.3% of the total loan portfolio at March
31, 1999. Multi-family mortgage loans generally are secured by multi-family
rental properties (including mixed-use buildings and walk-up apartments).
Substantially all multi-family mortgage loans were secured by properties located
within the Bank's primary lending area. At March 31, 1999, the Bank had three
multi-family mortgage loans, the largest of which had a principal balance of
$255,000. Multi-family mortgage loans generally are offered with both fixed and
adjustable interest rates, although in the current interest rate environment the
Bank has not recently originated adjustable rate multi-family loans. Multi-
family loans are originated for terms of up to 30 years.
In underwriting multi-family mortgage loans, the Bank reviews a number of
factors, which include the expected net operating income generated by the real
estate to ensure that it is at least 125% of the amount of the monthly debt
service; the age and condition of the collateral; the financial resources and
income level of the borrower; and the borrower's experience in owning or
managing similar properties. Multi-family mortgage loans are originated in
amounts up to 75% of the appraised value of the property securing the loan.
Personal guarantees are always obtained from multi-family mortgage borrowers.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to-four family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family
real estate typically depends upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
Construction Lending. To a limited extent, the Bank originates residential
construction loans to local home builders, generally with whom it has an
established relationship, and to individuals who have a contract with a builder
for the construction of their residence. Construction loans are disbursed as
certain portions of the project are completed. The Bank's construction loans
are secured by property located in the Bank's market area. At March 31, 1999,
the Bank had construction loans totaling $2.2 million, or 1.5% of total loans.
The Bank's construction loans to home builders generally have fixed
interest rates, are for a term of 12 months and have a maximum loan to value
ratio of 80%. Loans to builders are made on either a pre-sold or speculative
(unsold) basis. Construction loans to individuals are generally originated
pursuant to the same policy guidelines regarding loan to value ratios and
interest rates that are used in connection with loans secured by one-to-four
family residential real estate. Construction loans to individuals who intend to
occupy the completed dwelling may be converted to permanent financing after the
construction phase is completed.
The Bank generally limits the number of outstanding loans on unsold homes
under construction to individual builders, with the amount dependent on the
financial strength, including existing borrowings, of
7
<PAGE>
the builder and prior sales of homes in the development. Prior to making a
commitment to fund a construction loan, the Bank requires an appraisal of the
property, and all appraisals are reviewed by management. Loan proceeds are
disbursed after an inspection of the property based on a percentage of
completion. Monthly payment of accrued interest is required.
Construction loans are generally considered to involve a higher degree of
risk than single-family permanent mortgage loans because of the inherent
difficulty in estimating both a property's value at completion of the project
and the estimated cost of the project. If the estimate of construction costs is
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion is inaccurate, the value of the property may be
insufficient to assure full repayment. Projects may also be jeopardized by
disagreements between borrowers and builders and by the failure of builders to
pay subcontractors. Loans to builders to construct homes for which no purchaser
has been identified carry more risk because the repayment of the loan depends on
the builder's ability to sell the property prior to the time that the
construction loan is due. The Bank has attempted to minimize the foregoing
risks by, among other things, limiting its construction lending primarily to
residential properties and generally requiring personal guarantees from the
principals of its corporate borrowers.
Consumer Lending. The Bank's consumer loans primarily consist of secured
personal loans, passbook loans and home improvement loans. At March 31, 1999,
consumer loans totaled $1.0 million, or 0.7% of the total loan portfolio.
Consumer loans generally have shorter terms and higher interest rates than
one-to-four family mortgage loans. While consumer loans expand the products and
services offered by the Bank, these loans generally involve greater credit risk
than residential mortgage loans because of the difference in the underlying
collateral. Repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance because
of the greater likelihood of damage to loss of or depreciation in the underlying
collateral. The remaining deficiency often does not warrant further substantial
collection efforts against the borrower beyond obtaining a deficiency judgment.
In addition, consumer loan collections depend on the borrower's personal
financial stability. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on such loans.
The Bank's underwriting procedures for consumer loans include an assessment
of the applicant's credit history and the ability to meet existing and proposed
debt obligations. Although the applicant's creditworthiness is the primary
consideration, the underwriting process also includes a comparison of the value
of the security, to the proposed loan amount. The Bank underwrites and
originates its consumer loans internally, which the Bank believes reduces its
exposure to credit risks.
Origination of Loans. Generally, the Bank originates mortgage loans
pursuant to underwriting standards that generally conform with the Fannie Mae
guidelines. The Bank will originate nonconforming loans with respect to loan
principal amount only. Loan origination activities are primarily concentrated
in Westchester, New York. New loans are generated primarily from customer
referrals, local real estate agents, local attorneys and other parties with whom
the Bank does business, and from the efforts of employees and advertising.
Historically, the Bank has not used mortgage brokers to obtain loans. Loan
applications are underwritten and processed at the Bank's main office.
8
<PAGE>
The loan approval process is intended to assess the borrower's ability to
repay the loan, the viability of the loan, and the adequacy of the value of the
property that will secure the loan. To assess the borrower's ability to repay,
the Bank reviews the employment and credit history and information on the
historical and projected income and expenses of borrowers. Loans of up to
$750,000 with loan-to-value ratios of 70% or less may be approved by the Bank's
President and Senior Lending Officer acting together. Loans up to $500,000 with
a loan-to-value ratio between 70% and 80% (or up to 90% with private mortgage
insurance) may be approved by the President and Senior Lending Officer acting
together. All loans in excess of $750,000 must be approved by the Board of
Directors. In addition, the Board of Directors ratifies all loan commitments.
The Bank will generally not originate a loan with a principal balance in excess
of $1.0 million.
The Bank requires appraisals of all real property securing loans.
Appraisals are performed by independent appraisers who are licensed by the
state, and who are approved by the Board of Directors annually. The Bank
requires fire and extended coverage insurance in amounts at least equal to the
principal amount of the loan. Where appropriate, flood insurance is also
required. In fiscal 1999, the Bank began offering one-to-four family loans with
loan-to-value ratios up to 90%. Private mortgage insurance is required for all
residential mortgage loans with loan-to-value ratios greater than 80%.
The following table sets forth the Bank's loan originations, principal
repayments and other portfolio activity for the periods indicated. The Bank did
not purchase or sell any loans during the periods indicated.
<TABLE>
<CAPTION>
Years Ended March 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Unpaid principal balances at beginning of year.. $130,395 $123,839 $116,664
-------- -------- --------
Loans originated by type:
Fixed rate:
Mortgage loans:
One-to-four family........................... 26,881 14,794 15,191
Advances under home equity lines of credit... 9,576 6,925 4,525
Multi-family................................. 58 257 --
Commercial................................... 1,060 660 --
Construction................................. 5,187 4,159 3,431
Consumer loans................................ 699 1,843 942
-------- -------- --------
Total fixed rate............................. 43,461 28,638 24,089
Adjustable rate mortgage loans:
One-to-four family............................ -- 225 46
Advances under home equity lines of credit.... 73 72 --
-------- -------- --------
Total loans originated....................... 43,534 28,935 24,135
-------- -------- --------
Principal repayments:
Mortgage loans................................. (26,675) (21,093) (15,445)
Consumer loans................................. (1,722) (1,270) (1,124)
-------- -------- --------
Total principal repayments.................... (28,397) (22,363) (16,569)
-------- -------- --------
Net charge-offs................................. (162) (16) (26)
Transfers to real estate owned.................. (424) -- (365)
-------- -------- --------
Unpaid principal balances at end of year........ 144,946 130,395 123,839
Construction loans in process................... (339) (573) (1,049)
Allowance for loan losses....................... (1,094) (984) (845)
Deferred loan origination costs (fees), net..... 23 (280) (328)
-------- -------- --------
Net loans at end of year........................ $143,536 $128,558 $121,617
======== ======== ========
</TABLE>
9
<PAGE>
Nonperforming and Problem Assets
After a mortgage loan becomes ten days past due, the Bank delivers a
computer generated delinquency notice to the borrower. A second delinquency
notice is sent once the loan becomes 15 days past due. When loans become 30
days past due, the Bank sends additional delinquency notices and attempts to
make personal contact by letter or telephone with the borrower to establish
acceptable repayment schedules. The Board of Directors is advised of all loans
delinquent 60 days or more. The Board will consider the borrower's willingness
to comply with the loan terms, the Bank's actions to date, and the value of the
loan collateral in determining what actions, if any, are to be taken.
Generally, when a mortgage loan is 90 days delinquent and no acceptable
resolution has been reached, the Bank will send the borrower a demand letter. If
the delinquency is not cured within 120 days, the Bank will generally refer the
matter to its attorney. Generally, management will begin foreclosure proceedings
on any loan after it is delinquent over 120 days unless management is engaged in
active discussions with the borrower.
Mortgage loans are reviewed on a regular basis and such loans are placed on
nonaccrual status when they become 90 days delinquent. When loans are placed
on nonaccrual status, unpaid accrued interest is fully reserved, and further
income is recognized only to the extent of interest payments received.
Nonperforming Assets. The table below sets forth the amounts and
categories of the Bank's nonperforming assets at the dates indicated. At each
date presented, the Bank had no troubled debt restructurings (which involve
forgiving a portion of interest or principal or making loans at rates
significantly less than current market rates).
<TABLE>
<CAPTION>
At March 31,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans:
Mortgage loans:
One-to-four family/(1)/.............. $1,077 $1,721 $1,832 $2,831 $2,246
Commercial........................... -- 236 432 236 --
Consumer loans........................ 14 1 -- 21 --
------ ------ ------ ------ ------
Total................................ 1,091 1,958 2,264 3,088 2,246
Real estate owned:
One-to-four family properties......... 288 129 129 55 261
------ ------ ------ ------ ------
Total nonperforming assets........... $1,379 $2,087 $2,393 $3,143 $2,507
====== ====== ====== ====== ======
Ratios:
Nonperforming loans to total loans.... 0.75% 1.50% 1.83% 2.65% 2.04%
Nonperforming assets to total assets.. 0.47% 0.82% 0.98% 1.37% 1.17%
- --------------
</TABLE>
/(1)/ Includes home equity lines of credit.
For the year ended March 31, 1999, gross interest income that would have
been recorded had the nonaccrual loans been current in accordance with their
original terms amounted to $76,000. Interest amounts on such loans that were
included in interest income totaled $31,000 for the year ended March 31, 1999.
10
<PAGE>
The following table sets forth certain information with respect to the
Bank's loan portfolio delinquencies at the dates indicated.
<TABLE>
<CAPTION>
Loans Delinquent For:
--------------------------------------------------------
60-89 Days 90 Days and Over Total
-------------- ---------------- -----------------------
Number Amount Number Amount Number Amount
------ ------ ------ ------ --------------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
At March 31, 1999
- ---------------------------
Mortgage loans:...........
One-to-four family....... 5 $673 12 $1,077 17 $1,750
Commercial............... -- -- -- -- -- --
Consumer loans............ -- -- 1 14 1 14
- ---- -- ------ -- ------
Total.................... 5 $673 13 $1,091 18 $1,764
= ==== == ====== == ======
At March 31, 1998
- ---------------------------
Mortgage loans:
One-to-four family....... 8 $526 13 $1,721 21 $2,247
Commercial............... -- -- 1 236 1 236
Consumer loans............ 1 4 1 1 2 5
- ---- -- ------ -- ------
Total.................... 9 $530 15 $1,958 24 $2,488
= ==== == ====== == ======
At March 31, 1997
- ---------------------------
Mortgage loans:
One-to-four family....... 5 $469 11 $1,832 16 $2,301
Commercial............... -- -- 3 432 3 432
Consumer loans............ 1 2 -- -- 1 2
- ---- -- ------ -- ------
Total.................... 6 $471 14 $2,264 20 $2,735
= ==== == ====== == ======
</TABLE>
Classified Assets. Federal regulations and the Bank's Asset Classification
Policy provide for the classification of loans and other assets, such as debt
and equity securities, considered by the Office of Thrift Supervision (the
"OTS") to be of lesser quality as "substandard," "doubtful" or "loss" assets. An
asset is considered "substandard" if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. "Substandard" assets include those characterized by the "distinct
possibility" that the institution will sustain "some loss" if the deficiencies
are not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets is not warranted.
An insured institution is required to establish general allowances for loan
losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
At March 31, 1999, the Bank's assets classified as substandard or doubtful
totaled $867,000 and $224,000, respectively, representing all loans delinquent
for 90 days or more. At March 31, 1999 the Bank had no assets classified as
loss. The loan portfolio is reviewed on a regular basis to determine whether
any loans require classification in accordance with applicable regulations.
11
<PAGE>
Allowance for Loan Losses
The Bank provides for loan losses on the allowance method. Accordingly,
all loan losses are charged to the allowance and all recoveries are credited to
it. Additions to the allowance for loan losses are provided by charges to
income based on various factors which, in management's judgment, deserve current
recognition in estimating probable loan losses. Management regularly reviews
the Bank's loan portfolio and makes provisions for loan losses in order to
maintain the adequacy of the allowance for loan losses. The allowance for loan
losses consists of amounts specifically allocated to nonperforming loans and
potential problem loans (if any) as well as allowances determined for each major
loan category. Loan categories, such as one-to-four family residential
mortgages and home equity lines of credit (which represent a combined 93.4% of
the Bank's total loans at March 31, 1999) are generally evaluated on an
aggregate or "pool" basis. In recent years, the Bank's allowance for loan
losses was predominately determined on a pool basis by applying loss factors to
the current balances of the various loan categories. The loss factors are
determined by management based on an evaluation of historical loss experience,
delinquency trends, volume and type of lending conducted, and the impact of
current economic conditions in the Bank's market area. The carrying values of
loans are periodically evaluated and the allowance is adjusted accordingly.
While management uses the best information available to make evaluations, future
adjustments to the allowance may be necessary if conditions differ substantially
from the assumptions used in making the evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
The following table sets forth activity in the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year....................... $ 984 $ 845 $ 725 $ 652 $ 568
------- ------ ------ ------ ------
Charge-offs:
One-to-four family mortgage loans................. (162) (16) (30) (26) --
Consumer loans.................................... -- -- (15) -- --
------- ------ ------ ------ ------
Total charge-offs................................ (162) (16) (45) (26) --
Recoveries:
One-to-four family mortgage loans................. -- -- -- 1 --
Consumer loans.................................... -- -- 19 -- 2
------- ------ ------ ------ ------
Net (charge-offs) recoveries....................... (162) (16) (26) (25) 2
Provision for loan losses.......................... 272 155 146 98 82
------- ------ ------ ------ ------
Balance at end of year............................. $ 1,094 $ 984 $ 845 $ 725 $ 652
======= ====== ====== ====== ======
Ratios:
Net charge-offs to average loans outstanding...... 0.12% 0.01% 0.02% 0.02% --%
Allowance for loan losses to nonperforming loans.. 100.27% 50.26% 37.32% 23.48% 29.03%
Allowance for loan losses to total loans.......... 0.75% 0.75% 0.68% 0.62% 0.59%
</TABLE>
12
<PAGE>
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of the allowance for loan losses at the dates
indicated. The allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does not restrict the
use of the allowance to absorb losses in other categories.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------- --------------------------------- ---------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Loan Each Loan Each Loan Each
Balances Category Balances Category Balances Category
Loan Loss by to Total Loan Loss by to Totals Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family/(1)/... $718 $135,456 93.4% $668 $122,345 93.9% $514 $113,082 91.3%
Multi-family.............. 26 396 0.3 27 412 0.3 10 348 0.3
Commercial................ 237 5,930 4.1 152 3,811 2.9 137 3,416 2.8
Construction.............. 43 2,160 1.5 36 1,800 1.4 111 5,539 4.5
Consumer.................. 70 1,004 0.7 101 2,027 1.5 73 1,454 1.1
------ -------- ----- ---- -------- ----- ---- -------- -----
Total $1,094 $144,946 100.0% $984 $130,395 100.0% $845 $123,839 100.0%
====== ======== ===== ==== ======== ===== ==== ======== =====
<CAPTION>
At March 31,
----------------------------------------------------------------------
1996 1995
------------------------------ -------------------------------------
Percent of Percent of
Loans in Loans in
Loan Each Loan Each
Balances Category Balances Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family/(1)/... $390 $105,996 90.8% $414 $103,821 94.1%
Multi-family.............. 11 373 0.3 12 395 0.4
Commercial................ 139 3,469 3.0 128 3,188 2.9
Construction.............. 103 5,193 4.5 29 1,451 1.3
Consumer.................. 82 1,633 1.4 69 1,384 1.3
---- -------- ----- ---- -------- -----
Total.................... $725 $116,664 100.0% $652 $110,239 100.0%
==== ======== ===== ==== ======== =====
</TABLE>
____________
/(1)/ Includes home equity lines of credit.
13
<PAGE>
Investment Activities
The Bank's investments include mortgage-backed securities, U.S. Government
and agency securities, federal funds sold, certificates of deposit at other
financial institutions, mutual funds and FHLB stock. Management has decided to
invest a significant portion of the Bank's assets in short-term investments and
adjustable rate mortgage-backed securities in order to increase the Bank's
ability to deploy assets should market interest rates begin to rise.
Historically, the Bank classified substantially all securities as held-to-
maturity. During fiscal year 1999, the Bank began classifying a larger portion
of security purchases as available-for-sale.
The Bank's mortgage-backed securities portfolio (including held-to-maturity
and available-for-sale) had a carrying value of $58.3 million, or 19.7% of total
assets at March 31, 1999. Of this amount, $51.6 million of mortgage-backed
securities had adjustable rates of interest and $6.7 million had fixed rates of
interest. Mortgage-backed securities are created by the pooling of mortgages and
the issuance of a security with an interest rate that is less than the interest
rate on the underlying the mortgages. The Bank's mortgage-backed securities are
insured or guaranteed by Fannie Mae, GNMA or Freddie Mac. Mortgage-backed
securities increase the liquidity and the quality of the Bank's assets by virtue
of their greater liquidity compared to individual mortgage loans and the
guarantees that back the securities themselves. The Bank has not invested in
collateralized mortgage obligations or privately issued mortgage-backed
securities.
A significant portion of the Bank's assets are invested in federal funds
sold and certificates of deposit at other financial institutions. At March 31,
1999, $55.1 million, or 18.7% of total assets, were invested in federal funds
sold and certificates of deposit at other financial institutions.
At March 31, 1999, the Bank's other investment securities included $18.7
million in U.S. Government and agency securities which consisted of fixed rate
Federal Home Loan Bank, Federal Farm Credit, Fannie Mae and FHLB issues with
maturities of twenty years or less, as well as adjustable rate Small Business
Administration participation certificates that are guaranteed by the U.S.
Government with contractual terms of up to 30 years. The Government and agency
securities typically have call dates of six months to three years. At March 31,
1999, the Bank had invested $8.0 million in three mutual funds that provide a
rate of return that adjusts daily. The first mutual fund, in which the Bank had
a $1.0 million investment, invests primarily in repurchase agreements secured by
U.S. Government and Agency securities and federal funds. The average maturities
of the underlying securities can be from one to seven days, but primarily are
overnight. The second mutual fund, in which the Bank had a $2.0 million
investment, is an adjustable rate mortgage fund that invests primarily in
securities backed by or representing an interest in mortgages on residential
properties meeting the definition of such assets for purposes of the qualified
thrift lender test under OTS regulations. The third mutual fund is an
institutional fund that invests in corporate notes, commercial paper, U.S.
Government and agency issues, and other short-term securities. The underlying
securities have a weighted average maturity of 43 days. The Bank had $5.0
million invested in this fund. These mutual fund investments are permissible
investments as set forth in the Bank's investment policy. The securities were
purchased, as part of the Bank's ongoing interest rate risk management process,
to provide interest earning liquid funds and an adjustable interest rate.
14
<PAGE>
The following table sets forth the composition of the Company's securities
classified as held to maturity at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Adjustable rate:
GNMA............................... $35,977 $35,614 $45,260 $45,411 $44,811 $44,741
Fannie Mae......................... 4,902 4,817 6,935 6,940 6,438 6,424
Fixed rate:
GNMA............................... 795 795 1,129 1,211 1,518 1,593
Freddie Mac........................ 65 64 97 99 134 134
------- ------- ------- ------- ------- -------
Total mortgage-backed securities.... 41,739 41,290 53,421 53,661 52,901 52,892
U.S. Government securities.......... -- -- 4,012 4,030 6,004 5,993
Federal agency obligations.......... 3,851 3,797 7,465 7,400 4,448 4,407
------- ------- ------- ------- ------- -------
Total securities held-to-maturity.. $45,590 $45,087 $64,898 $65,091 $63,353 $63,292
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth the composition of the Company's securities
classified as available for sale and other earning assets at the dates
indicated:
<TABLE>
<CAPTION>
At March 31,
-----------------------------------------------------------------
1999 1998 1997
------------------ --------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- ---------- --------- -------------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Adjustable rate:
GNMA................................................. $ 7,146 $ 7,176 $ -- $ -- $ -- $ --
Fannie Mae........................................... 1,202 1,196 -- -- -- --
Freddie Mac.......................................... 2,314 2,297 -- -- -- --
Fixed rate:
GNMA................................................. 1,017 1,005 -- -- -- --
Fannie Mae........................................... 1,922 1,909 -- -- -- --
Freddie Mac.......................................... 2,978 2,948 -- -- -- --
------- ------- ------ -------- ------------- ------
Total mortgage-backed securities...................... 16,579 16,531 -- -- -- --
U.S. Government agency securities..................... 15,000 14,841 -- -- -- --
Mutual fund investments............................... 8,046 8,030 3,000 2,994 2,000 1,995
------- ------- ------ -------- ------------- ------
Total securities available-for-sale.................. $39,625 $39,402 $3,000 $ 2,994 $ 2,000 $1,995
======= ======= ====== ======== ============= ======
Other earning assets:
Federal funds sold................................... $44,400 $36,400 $ 35,200
Certificates of deposit.............................. 10,686 11,483 11,986
FHLB stock........................................... 1,884 1,745 1,607
------- ------- --------
Total............................................... $56,970 $49,628 $ 48,793
======= ======= ========
</TABLE>
The following table sets forth the activity in the mortgage-backed securities
portfolios for the periods indicated.
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------
1999 1998 1997
------- ------ --------
(In Thousands)
<S> <C> <C> <C>
Amortized cost at beginning of year............................... $ 53,421 $ 52,901 $48,307
Purchases of adjustable rate pass-through securities.............. 24,823 12,237 13,276
Principal repayments.............................................. (19,379) (11,591) (8,493)
Premium amortization and discount accretion, net.................. (547) (126) (189)
--------- -------- ---------
Amortized cost at end of year..................................... $ 58,318 $ 53,421 $52,901
========= ======== =========
</TABLE>
15
<PAGE>
The composition and contractual maturities of mortgage-backed securities
and other debt securities at March 31, 1999 are indicated in the following
table. The table does not reflect the impact of prepayments or redemptions
which may occur.
<TABLE>
<CAPTION>
More than One Year More than Five Years
One Year or Less through Five Years through Ten Years More than Ten Years
-------------------- -------------------- -------------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- --------- --------- --------- ---------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
Mortgage-backed securities:
GNMA...................... $ -- --% $ 306 7.79% $ 162 6.42% $36,304 6.45%
Fannie Mae................ -- -- -- -- -- -- 4,902 6.85
Freddie Mac............... -- -- 44 7.22 21 6.00 -- --
--------- --------- ------ -------
Total mortgage-backed
securities.............. $ -- --% $ 350 7.72% $ 183 6.37% $41,206 6.50%
Other debt securities:
Federal agency obligations $ -- --% $ -- --% $1,000 6.44% $ 2,851 6.59%
--------- --------- ------ -------
Total securities
held-to-maturity........ $ -- --% $ 350 7.72% $1,183 6.43% $44,057 6.51%
========= ========= ====== =======
Available for sale:
Mortgage-backed securities:
GNMA...................... $-- --% $-- --% $ -- --% $ 8,163 6.76%
Fannie Mae................ -- -- -- -- 1,923 5.94 1,201 6.85
Freddie Mac............... -- -- -- -- 974 5.95 4,318 6.59
--------- --------- ------ -------
Total mortgage-backed
securities.............. $ -- --% $ -- --% $2,897 5.94% $13,682 6.71%
Other debt securities:
Federal agency obligations $ -- --% $5,498 5.81% $5,500 6.08% $ 4,002 6.58%
--------- --------- ------ -------
Total securities
available-for-sale...... $-- --% $5,498 5.81% $8,397 6.03% $17,684 6.68%
========= ========= ====== =======
<CAPTION>
Total Securities
----------------------------
Amortized Fair Average
Cost Value Yield
--------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Held to maturity:
Mortgage-backed securities:
GNMA...................... $36,772 $36,409 6.46%
Fannie Mae................ 4,902 4,817 6.85
Freddie Mac............... 65 64 6.83
------- -------
Total mortgage-backed
securities.............. $41,739 $41,290 6.51%
Other debt securities:
Federal agency obligations $ 3,851 $ 3,797 6.55%
------- -------
Total securities
held-to-maturity........ $45,590 $45,087 6.51%
======= =======
Available for sale:
Mortgage-backed securities:
GNMA...................... $ 8,163 $ 8,181 6.76%
Fannie Mae................ 3,124 3,105 6.29
Freddie Mac............... 5,292 5,245 6.47
------- -------
Total mortgage-backed
securities.............. $16,579 $16,531 6.58%
Other debt securities:
Federal agency obligations $15,000 $14,841 6.10%
------- -------
Total securities
available-for-sale...... $31,579 $31,372 6.36%
======= =======
</TABLE>
16
<PAGE>
Sources of Funds
General. Deposits have traditionally been the primary source of funds for
use in lending and investment activities. In addition to deposits, funds are
derived from a variety of sources including scheduled loan payments, investment
maturities, loan prepayments and income on earning assets. While scheduled loan
payments and income on earning assets are relatively stable sources of funds,
deposit inflows and outflows can vary widely and are influenced by prevailing
interest rates, market conditions and levels of competition. In addition,
borrowings from the FHLB of New York may be used in the short-term to compensate
for reductions in deposits and to fund growth, although the Bank has not had to
borrow funds in recent periods.
Deposits. Deposits are obtained primarily from customers who live or work
in the New York counties of Westchester and Rockland . The Bank offers a
selection of deposit instruments, including passbook and club accounts, money
market accounts, NOW accounts and fixed-term certificate of deposit accounts.
Deposits are not actively solicited outside of the Bank's market area. Deposit
account terms vary, with the principal differences being the minimum balance
required, the amount of time the funds must remain on deposit and the interest
rate. The Bank does not pay broker fees for any deposits.
Interest rates paid, maturity terms, service fees and withdrawal penalties
are established on a periodic basis. Deposit rates and terms are based primarily
on current operating strategies and market rates, liquidity requirements, rates
paid by competitors and growth goals. Personalized customer service and long-
standing relationships with customers are relied upon to attract and retain
deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money markets and other prevailing interest rates and
competition. The variety of deposit accounts offered allows the Bank to be
competitive in obtaining funds and responding to changes in consumer demand. In
recent years, the Bank has become more susceptible to short-term fluctuations in
deposit flows as customers have become more interest rate conscious. Deposits
are priced to reflect the Bank's interest rate risk management and profitability
objectives. Based on experience, management believes that passbook accounts and
money market accounts are relatively stable sources of deposits. However, the
ability to attract and maintain certificates of deposit, and the rates paid on
these deposits, have been and will continue to be significantly affected by
market conditions. At March 31, 1999, $136.6 million, or 57.6% of the Bank's
deposit accounts were certificates of deposit, of which $105.1 million have
maturities of one year or less.
17
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts by account type at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Amount Percent Rate Amount Percent Rate Amount Percent Rate
-------- --------- --------- -------- -------- ----- -------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts and savings deposits:
Passbook and club accounts................. $ 60,112 25.3% 2.25% $ 61,347 27.9% 2.54% $ 63,579 30.1% 2.54%
Money market accounts...................... 17,754 7.5 1.83 17,676 8.0 3.05 17,497 8.3 3.10
NOW and Super NOW accounts................. 22,828 9.6 1.52 21,261 9.7 2.04 19,885 9.4 2.04
-------- ----- -------- ----- -------- -----
Total..................................... 100,694 42.4 2.01 100,284 45.6 2.52 100,961 47.8 2.54
-------- ----- -------- ----- -------- -----
Certificates of deposit maturing:
Within one year............................ 105,111 44.3 5.03 108,902 49.5 5.60 101,169 47.9 5.39
After one but within three years........... 30,263 12.8 5.16 9,613 4.4 5.72 7,597 3.6 5.72
After three years.......................... 1,211 0.5 4.21 1,114 0.5 4.49 1,496 0.7 4.53
-------- ----- -------- ----- -------- -----
Total..................................... 136,585 57.6 5.05 119,629 54.4 5.60 110,262 52.2 5.40
-------- ----- -------- ----- -------- -----
Total deposits.............................. $237,279 100.0% 3.76% $219,913 100.0% 4.20% $211,223 100.0% 4.03%
======== ===== ======== ===== ======== =====
</TABLE>
The following table sets forth the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of year... $ 219,913 $ 211,223 $ 200,611
Deposits....................... 353,228 279,709 278,371
Withdrawals.................... (344,919) (279,719) (275,635)
Interest credited.............. 9,057 8,700 7,876
--------- --------- ---------
Balance at end of year......... $ 237,279 $ 219,913 $ 211,223
========= ========= =========
Net increase during the year:
Amount........................ $ 17,366 $ 8,690 $ 10,612
Percent....................... 7.9% 4.1% 5.3%
========= ========= =========
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposits by time remaining until maturity as of March 31, 1999.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or Less Months Months Months Total
-------- ----------- ------------ ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000........ $24,145 $41,749 $25,606 $27,984 $119,484
Certificates of deposit of $100,000 or more/(1)/.. 4,119 6,165 3,327 3,490 17,101
------- ------- ------- ------- --------
Total of certificates of deposit.................. $28,264 $47,914 $28,933 $31,474 $136,585
======= ======= ======= ======= ========
</TABLE>
- -----------------
/(1)/ The weighted average interest rates for these accounts, by maturity
period, are 4.68% for 3 months or less; 5.04% for 3 to 6 months; 4.91% for
6 to 12 months; and 4.99% for over 12 months. The overall weighted average
rate for accounts of $100,000 or more was 4.96%.
18
<PAGE>
Competition
The Bank has significant competition in originating loans from savings and
loan associations, savings banks, mortgage banking companies, insurance
companies and commercial banks, many of which have greater financial and
marketing resources than the Bank. The Bank also faces significant competition
in attracting deposits from savings and loan associations, savings banks,
commercial banks and credit unions. The Bank faces additional competition for
deposits from common stock mutual funds, money market funds and other corporate
and government securities funds, and from other financial service providers such
as brokerage firms and insurance companies.
The Bank attracts and retains deposits by offering personalized service,
convenient office locations and competitive interest rates. Loan originations
are obtained primarily through (i) direct contacts by employees with
individuals, businesses and attorneys in the Bank's community, (ii) personalized
service that the Bank provides borrowers and (iii) competitive pricing.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that management cannot readily predict.
Service Corporation Subsidiary
At March 31, 1999, the Bank did not have any subsidiary corporations.
However, OTS regulations permit federal savings associations to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2.0% of an association's assets, plus an
additional 1% of assets if the amount over 2.0% is used for specified community
or inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations.
In April 1999, Sound REIT, Inc. was incorporated as a special purpose real
estate investment trust under New York law. Sound REIT, Inc. was funded with
$74.2 million in mortgage loans and mortgage-related assets contributed by the
Bank.
Employees
As of March 31, 1999, the Bank employed 42 persons on a full-time basis and
8 persons on a part-time basis. None of the Bank's employees is represented by a
collective bargaining group and management considers employee relations to be
good.
Regulation
General. As a federally chartered, FDIC-insured savings association, the
Bank is subject to extensive regulation by the OTS and the FDIC. For example,
the Bank must obtain OTS approval before it may engage in certain activities and
must file reports with the OTS regarding its activities and financial condition.
The OTS periodically examines the Bank's books and records and, in conjunction
with the FDIC in certain situations, has examination and enforcement powers.
This supervision and regulation are intended primarily for the protection of
depositors and the FDIC insurance funds. The Bank's present semi-annual
assessment paid to the OTS, which is based upon a specified percentage of
assets, is approximately $32,000.
19
<PAGE>
The Bank's activities and operations are subject to a number of additional
detailed, complex and sometimes overlapping federal and state laws and
regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, the Fair Lending Act and antitrust laws.
The United States Congress is considering legislation that would require
all federal savings associations, such as the Bank, to either convert to a
national bank or a state-chartered bank by a specified date to be determined. In
addition, under the legislation, the Mutual Holding Company and the Company
likely would not be regulated as savings and loan holding companies but rather
as bank holding companies. This proposed legislation would abolish the OTS and
transfer its functions to other federal banking regulators. No assurance can be
given as to whether or in what form the legislation will be enacted or its
effect on the Company and the Bank.
Savings and Loan Holding Company Regulation. The Mutual Holding Company
and the Company are regulated as savings and loan holding companies under the
Home Owners' Loan Act (the "HOLA"). As such, the Mutual Holding Company and the
Company are registered with and are subject to OTS regulation and examination
and supervision as well as certain reporting requirements. The Company is
regulated in the same manner as a mutual holding company pursuant to Section
10(o) of the HOLA. As a federally-insured savings and loan association, the
Bank is subject to certain restrictions in dealing with the Mutual Holding
Company and with other persons affiliated with the Mutual Holding Company and
the Company, and is subject to examination and supervision by the OTS.
Pursuant to Section 10(o) of the HOLA, and OTS regulations and policy, a
mutual holding company and a federally chartered mid-tier holding company may
engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company, one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (x) above, and has a period of two years to
cease any non-conforming activities and divest of any non-conforming
investments.
HOLA prohibits a savings and loan holding company, including the Company
and the Mutual Holding Company, directly or indirectly, or through one or more
subsidiaries, from acquiring another savings
20
<PAGE>
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary savings institution, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.
OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies; and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
In addition, OTS regulations require the Mutual Holding Company to notify
the OTS of any proposed waiver of its right to receive dividends. The OTS
reviews dividend waiver notices on a case-by-case basis, and, in general, does
not object to a waiver if: (i) the mutual holding company's board of directors
determines that waiver is consistent with its fiduciary duties to the mutual
holding company's members; (ii) for as long as the savings association
subsidiary is controlled by the mutual holding company, the dollar amount of
dividends waived by the mutual holding company is considered as a restriction in
the retained earnings of the savings association, which restriction, if
material, is disclosed in the public financial statements of the savings
association as a note to the financial statements; (iii) the amount of any
dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company, and, in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 5, where the savings association
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; (iv) the
amount of any waived dividend is considered as having been paid by the savings
association in evaluating any proposed dividend under OTS capital distribution
regulations; and (v) in the event the mutual holding company converts to stock
form, the appraisal submitted to the OTS in connection with the conversion
application takes into account the aggregate amount of the dividends waived by
the mutual holding company.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of twelve regional FHLBs. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from funds deposited by savings associations and proceeds derived from the sale
of consolidated obligations of the FHLB system. It makes loans to members ("FHLB
advances") in accordance with policies and procedures established by the Board
of Directors of the FHLB. All FHLB advances must be fully secured by sufficient
collateral as determined by the FHLB. The Federal Housing Finance Board
("FHFB"), an independent agency, controls the FHLB System, including the FHLB of
New York.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. At March 31, 1999, the Bank's investment in stock of
the FHLB of New York was $1.9 million. The FHLB imposes various limitations on
advances such as limiting the amount of certain types of real estate-related
collateral to 30% of a member's capital and limiting total
21
<PAGE>
advances to a member. Interest rates charged for advances vary depending upon
maturity, the cost of funds to the FHLB of New York and the purpose of the
borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended March 31, 1999, dividends paid by the
FHLB of New York to the Bank were approximately $124,000 representing an annual
rate of 7.02%.
Deposit Insurance. The FDIC is an independent federal agency that insures
deposits of banks and thrift institutions up to certain specified limits and
regulates such institutions for safety and soundness. The FDIC administers two
separate insurance funds, the Bank Insurance Fund ("BIF") for commercial banks
and state savings banks, and the Savings Association Insurance Fund ("SAIF") for
savings associations such as the Bank and banks that have acquired deposits from
savings associations. The FDIC is required to maintain designated levels of
reserves in each fund.
Assessments. The FDIC is authorized to establish separate annual assessment
rates for deposit insurance for members of the BIF and members of the SAIF. The
FDIC may increase assessment rates for either fund if necessary to restore the
fund's ratio of reserves to insured deposits to the target level within a
reasonable time, and may decrease these rates if the target level has been met.
The FDIC has established a risk-based assessment system for both SAIF and BIF
members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital levels, and the FDIC's level of supervisory
concern about the institution.
Savings Association Regulatory Capital. Savings associations are subject
to three separate minimum capital-to-assets requirements: (i) a leverage ratio
requirement, (ii) a tangible capital requirement, and (iii) a risk-based capital
requirement. The leverage limit at March 31, 1999 requires that savings
associations maintain "core capital" of at least 3% of total assets (generally
4% effective April 1, 1999). Core capital is generally defined as common
shareholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, certain minority equity interests in
subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing
rights and purchased credit card relationships (subject to certain limits) less
nonqualifying intangibles. Under the tangible capital requirement, a savings
association must maintain tangible capital (core capital less all intangible
assets except a limited amount of purchased mortgage servicing rights and credit
card relationships) of at least 1.5% of total assets. Under the risk-based
capital requirements, a minimum amount of capital must be maintained by a
savings association to account for the relative risks inherent in the type and
amount of assets held by the savings association. The risk-based capital
requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt, less assets required to be deducted) equal to 8.0% of risk-
weighted assets. Assets are ranked as to risk in one of four risk-weight
categories (0%, 20%, 50% or 100%). A credit risk-free asset, such as cash,
requires no risk-based capital, while an asset with a potentially greater credit
risk, such as a commercial loan, requires a risk weight of 100%. Moreover, a
savings association must deduct from capital, for purposes of meeting the core
capital, tangible capital and risk-based capital ratio requirements, its entire
equity and debt investment in and loans to a subsidiary engaged in activities
not permissible for a national bank (other than exclusively agency activities
for its customers or mortgage banking subsidiaries). At March 31, 1999, the Bank
was in compliance with all capital requirements imposed by law.
22
<PAGE>
If an association is not in compliance with the capital requirements, the
OTS is required to prohibit asset growth and to impose a capital directive that
may restrict, among other things, the payment of dividends and officers
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations and
activities of the association, imposing a capital directive, cease and desist
order, or civil money penalties, or imposing harsher measures such as appointing
a receiver or conservator or forcing the association to merge into another
institution.
Prompt Corrective Regulatory Action. Federal law requires, among other
things, that federal bank regulatory authorities take "prompt corrective action"
with respect to institutions that do not meet minimum capital requirements. For
these purposes, federal law establishes five capital tiers: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized. At March 31, 1999, the Bank was categorized as
"well capitalized," meaning that the Bank's total risk-based capital ratio
exceeded 10%, Tier I risk-based capital ratio exceeded 6%, leverage capital
ratio exceeded 5%, and the Bank was not subject to a regulatory order, agreement
or directive to meet and maintain a specific capital level for any capital
measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Limitation on Capital Distributions. Under current OTS regulations, a
savings institution may make capital distributions provided it has filed a
notice with, or under certain circumstances made application to, the OTS
Subsidiaries of a savings and loan holding company must provide prior notice to
the OTS if its intention to declare a dividend. A savings association must make
application to the OTS if the total amount of all capital distributions
(including the proposed distribution) for the applicable calendar year exceeds
the savings association's net income for the year to date plus retained net
income for the prior two years. A savings institution may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. The OTS may
object to a capital distribution if it would constitute an unsafe or unsound
practice.
In addition, OTS regulations require the Mutual Holding Company to notify
the OTS of any proposed waiver of its right to receive dividends. It is the
OTS' recent practice to review dividend waiver notices on a case-by-case basis,
and, in general, not object to any such waiver if: (i) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS No. 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the savings association
(and the savings association's capital ratios adjusted
23
<PAGE>
accordingly) in evaluating any proposed dividend under OTS capital distribution
regulations; and (v) in the event the mutual holding company converts to stock
form, the appraisal submitted to the OTS in connection with the conversion
application takes into account the aggregate amount of the dividends waived by
the mutual holding company.
Limitations on Rates Paid for Deposits. FDIC regulations place limitations
on the ability of insured depository institutions to accept, renew or roll over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of charter in the institution's normal market
area. Under these regulations, "well-capitalized" depository institutions may
accept, renew or roll such deposits over without restriction; "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to the above restrictions on payments
of rates); and "undercapitalized" depository institutions may not accept, renew
or roll over such deposits. The regulations provide that the definitions of
"well capitalized," "adequately capitalized" and "undercapitalized" will be the
same as the definitions adopted by the agencies to implement the prompt
corrective action provisions of federal law. Management does not believe that
these regulations will have a materially adverse effect on the Bank's current
operations.
Safety and Soundness Standards. The federal banking agencies have also
adopted safety and soundness standards for all insured depository institutions.
The standards, which were issued in the form of guidelines rather than
regulations, relate to internal controls, information systems, internal audit
systems, loan underwriting and documentation, asset growth, compensation asset
quality, earnings, and interest rate exposure. In general, the standards are
designed to assist the federal banking agencies in identifying and addressing
problems at insured depository institutions before capital becomes impaired. If
an institution fails to meet these standards, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan may result in enforcement proceedings.
Loans to One Borrower. Under OTS regulations, a savings association may
not make a loan or extend credit to a single or related group of borrowers in
excess of 15% of unimpaired capital and surplus. Additional amounts may be lent,
not in excess of 10% of unimpaired capital and surplus, if such loans or
extensions of credit are fully secured by readily marketable collateral,
including certain debt and equity securities, but not including real estate. In
some cases, a savings association may lend up to 30% of unimpaired capital and
surplus to one borrower for purposes of developing domestic residential housing,
provided that the association meets its regulatory capital requirements and the
OTS authorizes the association to use this expanded lending authority. At March
31, 1999, the Bank had no loans to a single or related group of borrowers in
excess of its lending limits. Management does not believe that the loans-to-
one-borrower limits will have a significant impact on the Bank's business
operations or earnings following the Reorganization.
Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly basis in 9 out of every 12 months.
A savings association that fails the QTL test must either convert to a bank
charter or operate under certain restrictions. As of March 31, 1999, the Bank
maintained 84.8% of its portfolio assets in qualified thrift investments and,
therefore, met the QTL test.
24
<PAGE>
Acquisitions and Branching. The Bank Holding Company Act specifically
authorizes a bank holding company, upon receipt of appropriate regulatory
approvals, to acquire control of any savings association or holding company
thereof wherever located. Similarly, a non-diversified savings and loan holding
company may acquire control of a bank. Moreover, federal savings associations
may acquire or be acquired by any insured depository institution. Savings
associations acquired by bank holding companies may be converted to banks if
they continue to pay SAIF premiums, but as such they become subject to branching
and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered by the FDIC in
connection with a failed bank or savings association affiliate. Institutions are
commonly controlled if one is owned by another or if both are owned by the same
holding company. Such claims by the FDIC under this provision are subordinate to
claims of depositors, secured creditors, and holders of subordinated debt, other
than affiliates.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in
other states and, with state consent and subject to certain limitations, allows
banks to acquire out-of-state branches either through merger or de novo
expansion.
Transactions with Affiliates. The Bank is subject to Sections 22(h), 23A
and 23B of the Federal Reserve Act, which restrict financial transactions
between banks and affiliated companies. The statutes limit the amount of credit
and other transactions between a bank or savings association and its executive
officers and its affiliates, prescribes terms and conditions for bank affiliate
transactions deemed to be consistent with safe and sound banking practices, and
restricts the types of collateral security permitted in connection with a bank's
extension of credit to an affiliate.
Federal Securities Law. The shares of Common Stock of the Company have
been registered with the SEC under the Securities Exchange Act of 1934 (the
"1934 Act"). The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements the 1934 Act and the rules
of the SEC thereunder. After three years following the reorganization to stock
form, if the Company has fewer than 300 shareholders, it may deregister its
shares under the 1934 Act and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the Company
may not be resold without registration unless sold in accordance with the resale
restrictions of Rule 144 under the 1933 Act. If the Company meets the current
public information requirements under Rule 144, each affiliate of the Company
that complies with the other conditions of Rule 144 (including those that
require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Company or (ii) the average weekly volume of
trading in such shares during the preceding four calendar weeks.
25
<PAGE>
Community Reinvestment Act Matters. Federal law requires that ratings of
depository institutions under the Community Reinvestment Act of 1977 ("CRA") be
disclosed. The disclosure includes both a four-unit descriptive rating--
outstanding, satisfactory, needs to improve, and substantial noncompliance--and
a written evaluation of an institution's performance. Each FHLB is required to
establish standards of community investment or service that its members must
maintain for continued access to long-term advances from the FHLBs. The
standards take into account a member's performance under the CRA and its record
of lending to first time home buyers. The OTS has designated the Bank's record
of meeting community credit needs as "satisfactory."
Executive Officers of the Company
Listed below is information, as of March 31, 1999, concerning the Company's
executive officers. There are no arrangements or understandings between the
Company and any of persons named below with respect to which he or she was or is
to be selected as an officer.
<TABLE>
<CAPTION>
Name Age Position and Term
---- --- ----------------------------------------------------------
<S> <C> <C>
Bruno J. Gioffre 64 Chairman of the Board ; Director of the Bank since 1975.
Richard P. McStravick 50 President and Chief Executive Officer since 1996; Director
of the Bank since 1996.
Anthony J. Fabiano 38 Chief Financial Officer and Accounting Officer since 1998.
William H. Morel 66 Senior Vice President, Chief Lending Officer and Corporate
Secretary since 1969.
</TABLE>
26
<PAGE>
ITEM 2. PROPERTIES
Properties
The following table provides certain information with respect to the Bank's
offices which were operating at March 31, 1999. The Bank entered into a lease
agreement for a branch office in Greenwich, Connecticut. The lease has a ten-
year term that expires on November 30, 2008 with a ten-year option to renew the
lease. The branch is expected to open in July 1999.
<TABLE>
<CAPTION>
Leased or Owned, Net Book Value of Real
Location Lease Expiration Date Year Acquired Property
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Main Office Owned 1954 $ 582,000
300 Mamaroneck Avenue
Mamaroneck, New York 10543
Branch Office Owned 1961 $ 201,000
389 Halstead Avenue
Harrison, New York
10528
Branch Office Owned 1972 $ 487,000
115 South Ridge Street
Rye Brook, New York 10573
Branch Office Leased N/A $187,000/(2)/
180 South Main Street 12/31/03/(1)/
New City, New York 10956
</TABLE>
- ----------
/(1)/ The Company holds two five-year options to renew the lease until 12/31/13.
/(2)/ The Company's lease agreement is an operating lease. The net book value
at March 31, 1999 represents the amortized cost of leasehold improvements.
The total net book value of the Bank's premises, land and equipment was
approximately $1.9 million at March 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
Although the Company is involved, from time to time, in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which the Company presently is a party or to which any of its
property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Information relating to the market for the Company's common stock is set
forth in the Company's Annual Report to Stockholders which is incorporated
herein by reference.
27
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Consolidated Financial Information" section of the Company's
Annual Report to Stockholders which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders,
which is incorporated herein by reference, includes the information required by
this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements identified in Item 14(a)(1) hereof are
incorporated by reference hereunder.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors of the Company is incorporated herein by
reference from the Company's definitive Proxy Statement dated June 15, 1999 (the
"Proxy Statement"), specifically the section captioned "Proposal I--Election of
Directors." In addition, see "Executive Officers of the Company" in Item 1 for
information concerning the Company's executive officers.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's Proxy Statement, specifically the section captioned
"Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information concerning security ownership of certain owners and management
is incorporated herein by reference from the Company's Proxy Statement,
specifically the section captioned "Voting Securities and Principal Holder
Thereof."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning relationships and transactions is incorporated
herein by reference from the Company's Proxy Statement, specifically the section
captioned "Transactions with Certain Related Persons."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
(a)(1) Financial Statements
--------------------
. Independent Auditors' Report
. Consolidated Balance Sheets at March 31, 1999 and 1998
. Consolidated Statements of Income for the Years Ended
March 31, 1999, 1998 and 1997
. Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended March 31, 1999, 1998 and 1997
. Consolidated Statements of Cash Flows for the Years Ended
March 31, 1999, 1998 and 1997
. Notes to Consolidated Financial Statements.
29
<PAGE>
(a)(2) Financial Statement Schedules
-----------------------------
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated
financial statements or related notes.
(a)(3) Exhibits
--------
3.1 Federal Charter of Sound Federal Bancorp (Incorporated by
reference to the Company's Registration Statement on Form S-1
(file No. 333-57377) Exhibit 3.1 filed on June 22, 1998)
3.2 Bylaws of Sound Federal Bancorp (Incorporated by reference to
the Company's Registration Statement on Form S-1 (file No.
333-57377) Exhibit 3.2 filed on June 22, 1998)
13 1999 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
27 Financial Data Schedule (submitted only with filing in
electronic format)
(b) Reports on Form 8-K
-------------------
None
(c) The exhibits listed under (a)(3) above are filed herewith.
(d) Not applicable.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: June 23, 1999 By: /s/Richard P. McStravick
------------------------
Richard P. McStravick
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
By:/s/Richard P. McStravick By: /s/Bruno J. Gioffre
--------------------------------------- ------------------------------------------------
Richard P. McStravick, President, Chief Bruno J. Gioffre, Chairman of the Board
Executive Officer and Director
(Principal Executive Officer)
Date: June 23, 1999 Date: June 23, 1999
By:/s/Joseph Dinolfo By: /s/Donald H. Heithaus
--------------------------------------- ------------------------------------------------
Joseph Dinolfo, Director Donald H. Heithaus, Director
Date: June 23, 1999 Date: June 23, 1999
By:/s/Robert P. Joyce By: /s/Joseph A. Lanza
--------------------------------------- ------------------------------------------------
Robert P. Joyce, Director Joseph A. Lanza, Director
Date: June 23, 1999 Date: June 23, 1999
By:/s/Arthur C. Phillips, Jr. By: /s/James Staudt
--------------------------------------- ------------------------------------------------
Arthur C. Phillips, Jr., Director James Staudt, Director
Date: June 23, 1999 Date: June 23, 1999
</TABLE>
31
<PAGE>
By:/s/Anthony J. Fabiano
---------------------------------------------
Anthony J. Fabiano, Chief Financial Officer and Accounting Officer
Date: June 23, 1999
32
<PAGE>
[LOGO]Sound Federal Bancorp
1999
Annual Report
<PAGE>
REPORT TO STOCKHOLDERS
We are pleased to present to you Sound Federal Bancorp's (the "Company")
first Annual Report.
It has been said that "We are what we repeatedly do. Excellence, then, is
not an act, but a habit". The habit of excellence has been practiced by Sound
Federal Savings and Loan Association throughout its 107 years of existence as
a mutual savings association.
We began our journey as a public company with the completion of the
reorganization and common stock offering on October 8, 1998. As part of the
reorganization, Sound Federal Savings and Loan Association converted from a
federally chartered mutual savings association to a federally chartered stock
association and became a wholly-owned subsidiary of the Company. The Company
became the majority-owned subsidiary of Sound Federal MHC, a federal mutual
holding company.
Notwithstanding these changes in the structure of our organization, we
steadfastly persist in the continuation of our habit of excellence.
It has been quite an exciting year for the Company. Once the stock offering
was completed, we established the Sound Federal Savings and Loan Association
Charitable Foundation with a contribution of 102,200 shares of the Company's
common stock. This was our way of sharing the success of the Bank with the
people and communities who, since 1891, helped us to get to where we are
today. With heartfelt thanks and gratitude, we would like to express our
appreciation for their continued support.
Since the completion of the stock offering, we have opened a new office in
New City, New York. This is a full-service, state-of-the-art supermarket
branch that will serve as our model for future in-store branches. We also
expect to open, in the immediate future, a free-standing branch in Greenwich,
Connecticut. That community borders our existing market areas in Rye Brook and
Harrison, New York and is a natural extension of the geographical area served
by our Bank.
We have also been growing the lending operations of the Bank. During fiscal
1999, we originated $44.2 million of loans, primarily loans on one-to-four
family homes. This is a new record for Sound Federal! Total loans grew by
11.6% to $144.6 million at March 31, 1999 from $129.5 million a year earlier.
We are also very pleased to report that our deposits increased $17.4 million
in fiscal 1999 to $237.3 million!
As a result of the above accomplishments, total assets were $295.3 million
at March 31, 1999 as compared to $254.7 million at March 31, 1998, an increase
of 15.9%. Stockholders' equity totaled $55.0 million at March 31, 1999 as
compared to $31.9 million at March 31, 1998.
For the fiscal year ended March 31, 1999, the Company's net income was $1.9
million, after deducting the charge of $1.0 million (or approximately $600,000
after taxes) for the contribution to the Charitable Foundation. Earnings per
share for the six-month period following the stock offering amounted to $0.10
($0.22 excluding the after-tax contribution to the Charitable Foundation).
The Board of Directors, Management and Employees of Sound Federal Bancorp
are committed to growing stockholder value. To that end, we will continue to
grow the Bank's business as we have for the last 108 years. We also know that
we can accomplish this in many innovative, creative and profitable ways. We
expect to introduce telephone banking to our customers this summer. We
constantly evaluate the needs of our marketplace in an effort to determine how
we can best meet them. This does not mean we should be all things to all
people--but we recognize that there are services that a thrift our size and
with our abilities can profitably deliver.
Shortly after the close of the fiscal year, we established a tax-advantaged
subsidiary as a real estate investment trust to hold a portion of our mortgage
assets. This strategy is expected to produce substantial tax savings and a
lower effective tax rate for the Company in fiscal year 2000 and beyond.
As you know, the Company declared its first dividend on April 9, 1999
payable to stockholders of record on April 30, 1999. Again, it is our goal to
bring value to the Company's stockholders.
<PAGE>
While we express disappointment with the price performance of our stock, we
recognize that many small cap stocks are currently trading at relatively low
levels and we remain committed to our business plan. We believe that the
Company's business plan will increase stockholder value. In this regard, we
would like to thank our stockholders for their patience and support, and we
want them to know that we are working hard for them. We are stockholders too!
Finally, it is with deep regret that we remember the passing of Stephen P.
Milliot. Steve was the Bank's Treasurer and Chief Financial Officer since 1996
and was with Sound Federal for 29 years. We will continue to miss Steve, and
our prayers and thoughts are with him and his family.
/s/ Bruno J. Gioffre /s/ Richard P. McStravick
Bruno J. Gioffre Richard P. McStravick
Chairman of the Board President and
Chief Executive Officer
June 15, 1999
2
<PAGE>
Selected Consolidated Financial Information
<TABLE>
<CAPTION>
At or for the Year Ended March 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands, except per share
data)
<S> <C> <C> <C> <C> <C>
Results of Operations:
Net interest income.......... $ 9,312 $ 8,875 $ 8,720 $ 7,884 $ 8,439
Provision for loan losses.... 272 155 146 98 82
Non-interest income.......... 171 186 301 208 201
Contribution of common stock
to Charitable Foundation
(1)......................... 1,022 -- -- -- --
SAIF special assessment (2).. -- -- 1,232 -- --
Other non-interest expense... 4,898 3,956 4,028 3,865 3,526
-------- -------- -------- -------- --------
Income before income tax
expense..................... 3,291 4,950 3,615 4,129 5,032
Income tax expense........... 1,350 2,065 1,325 1,732 2,290
-------- -------- -------- -------- --------
Net income................... $ 1,941 $ 2,885 $ 2,290 $ 2,397 $ 2,742
======== ======== ======== ======== ========
Financial Condition:
Total assets................. $295,311 $254,749 $242,983 $230,026 $214,225
Loans, net................... 143,536 128,558 121,617 113,532 108,584
Mortgage-backed securities:
Held to maturity............ 41,739 53,421 52,901 48,307 40,046
Available for sale.......... 16,531 -- -- -- --
Other securities:
Held to maturity............ 3,851 11,477 10,452 11,184 13,005
Available for sale.......... 22,871 2,994 1,995 1,994 1,986
Deposits..................... 237,279 219,913 211,223 200,611 186,951
Equity....................... 54,984 31,901 29,017 26,726 24,325
======== ======== ======== ======== ========
<CAPTION>
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets..... 0.70% 1.16% 0.97% 1.09% 1.33%
Return on average equity..... 4.53 9.47 8.17 9.35 11.89
Average interest rate spread
(3)......................... 3.01 3.29 3.42 3.31 3.91
Net interest margin (4)...... 3.51 3.69 3.78 3.68 4.23
Efficiency ratio (5)......... 51.65 43.66 44.65 47.76 40.81
Per Common Share Data:
Earnings per share (6)....... $ 0.10 -- -- -- --
Book value per share (7)..... 10.55 -- -- -- --
Capital Ratios:
Equity to total assets
(consolidated).............. 18.62% 12.52% 11.94% 11.62% 11.35%
Tier 1 leverage capital (Bank
only)....................... 14.76 12.52 11.94 11.62 11.35
Asset Quality Data:
Total non-performing loans... $1,091 $1,958 $2,264 $3,088 $2,246
Total non-performing assets.. 1,379 2,087 2,393 3,143 2,507
</TABLE>
- --------
(1) Represents the expense recognized for the fair value of common shares
contributed to establish the Sound Federal Savings and Loan Association
Charitable Foundation.
(2) Represents the Bank's share of a special assessment imposed on all
financial institutions with deposits insured by the Savings Association
Insurance Fund.
(3) Represents the difference between the weighted-average yield on interest-
earning assets and the weighted-average cost of interest-bearing
liabilities.
(4) Represents net interest income as a percent of average interest-earning
assets.
(5) Computed by dividing non-interest expense (other than the special charges
described in (1) and (2) above) by the sum of net interest income and
non-interest income.
(6) Computed for the six-month period following the stock offering based on
net income of $529,000 for that period and 5,041,690 average common
shares. Excluding the after-tax impact of the contribution to the
Charitable Foundation, earnings per common share would have been $0.22
for the six-month period.
(7) Computed based on total common shares issued and outstanding.
3
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
On October 8, 1998, Sound Federal Bancorp completed the issuance of
5,212,218 shares of common stock (the "Offering") 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. 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"), a federal mutual holding company. The Bank was
organized as a New York-chartered savings bank in 1891 and became a federally-
chartered savings association in 1934. The Bank is a community-oriented
savings institution, providing banking services to individuals, families and
small businesses from its main office in Mamaroneck and branch offices in
Harrison, Rye Brook and New City, New York. Historically, the Bank has
emphasized residential mortgage lending. Collectively, Sound Federal Bancorp
and the Bank are referred to herein as "the Company."
The Mutual Holding Company owns 53.92% (or 2,810,510 shares) of Sound
Federal Bancorp's outstanding common stock, with the remaining 46.08% (or
2,401,708 shares) owned by other stockholders including the Sound Federal
Savings and Loan Association Charitable Foundation (the "Charitable
Foundation") and the Employee Stock Ownership Plan ("ESOP"). A total of
102,200 common shares, or approximately 1.96% of the total shares issued in
the Reorganization and Offering, was contributed to establish the Charitable
Foundation. This contribution resulted in a charge to expense equal to the
fair value of those shares (approximately $1.0 million before taxes) in the
year ended March 31, 1999. The ESOP purchased 192,129 common shares in the
Offering using $1.9 million in proceeds from a loan made by Sound Federal
Bancorp. A total of 2,107,379 common shares were sold to other stockholders in
the Offering for cash of $21.1 million ($20.0 million after deducting offering
costs). Sound Federal Bancorp utilized net proceeds of approximately $9.0
million to purchase all of the Bank's common shares and retained the remaining
$11.0 million.
Sound Federal Bancorp has no significant assets other than its investment in
the common stock of the Bank and the portion of net proceeds it retained. 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 income earned on interest-earning
assets, such as loans and securities, and the interest expense paid on
deposits. The Company's operations are affected to a much lesser degree by
non-interest income, such as banking service charges and fees. Net income is
also affected by, among other things, provisions for loan losses and non-
interest expenses. The Company's principal operating expenses, aside from
interest expense, consist of compensation and benefits, occupancy and
equipment, deposit insurance costs and other expenses such as ATM expenses,
professional fees and insurance premiums. The Company's results of operations
also are affected significantly 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 Annual Report, 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
4
<PAGE>
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 is in the process of testing its computer applications and hardware to
ensure that they will be able to read the year 2000. The Data Center completed
the first phase of testing, and identified certain problem areas and failed
tests. These exceptions were addressed, and the second phase of testing was
completed in March 1999. The Data Center and the Company then began the final
phase of testing which was completed in April 1999. All tests have now been
completed with satisfactory results and only minor exceptions remain to be
resolved. These are expected to be remedied by June 30, 1999.
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 other 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 Company has
contracted. In addition, since over 99% of the Company's loans are secured by
real 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 until full
compliance is obtained from all vendors.
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 March 31, 1999, the cumulative costs incurred to address the
Year 2000 issue amounted to approximately $130,000. The Company anticipates
that the total costs for this project will be approximately $400,000. 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 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.
Operating Strategy
In guiding the Company's operations, management has implemented various
strategies designed to continue the institution's profitability consistent
with safety and soundness. These strategies include: (i) operating a
community-oriented financial institution that provides quality service by
monitoring the needs of its customers
5
<PAGE>
and offering customers personalized service; (ii) emphasizing one-to-four
family residential real estate lending; (iii) maintaining high levels of
liquidity; and (iv) following conservative underwriting standards to minimize
non-performing loans.
Community-Oriented Institution
The Bank was established in Mamaroneck, New York in 1891 and has been
operating continuously since that time. Throughout its history, the Bank has
been committed to meeting the financial needs of the communities in which it
operates and is dedicated to providing quality service to its customers.
Management believes that the Bank can be more effective than many of its
competitors in serving its customers because of its ability to promptly and
effectively provide senior management's response to customer needs and
inquiries. Management and the Board of Directors intend to use the mutual
holding company structure to maintain the Bank as a community-oriented,
independent savings institution. The Charitable Foundation was established as
a means of furthering the Bank's commitment to the communities in which it
conducts business.
Emphasis on Residential Real Estate Lending
Historically, the Bank has emphasized the origination of one-to-four family
residential loans within Westchester County. As of March 31, 1999,
approximately 93.4% of the loan portfolio consisted of one-to-four family
residential mortgage loans (including home equity lines of credit) and 99.3%
of the loan portfolio consisted of mortgage loans secured by real estate.
During the fiscal year ended March 31, 1999, the Company originated $36.9
million of one-to-four family mortgage loans, substantially all of which had
fixed rates of interest.
Maintaining High Levels of Liquid Investments
The Company primarily originates fixed rate mortgage loans with terms up to
30 years. At March 31, 1999, $141.2 million, or 97.4% of the loan portfolio
consisted of fixed rate loans. In the current low interest rate environment,
management believes that the origination of fixed rate loans provides greater
income than would be available if the Company chose to emphasize adjustable
rate loans which frequently have to be offered with initial below-market
interest rates. In addition, the Company's customers have shown a preference
for fixed rate loans in the current low interest rate environment. However, in
order to position the Company to be able to redeploy assets profitably in a
rising interest rate environment, management has determined to invest a
significant portion of the Company's assets in short term liquid investments.
The Company maintains a significant portion of its assets in short term U.S.
Government and agency securities and other interest-earning assets (which
consist of federal funds sold and certificates of deposit at other financial
institutions). At March 31, 1999, U.S. Government and agency securities due in
five years or less totaled $5.5 million, and federal funds and certificates of
deposit totaled $55.1 million or 18.7% of the Company's assets. In addition,
at March 31, 1999, $51.5 million or 17.5% of the Company's assets were
invested in adjustable rate mortgage-backed securities guaranteed by
government or government-sponsored agencies.
Maintaining Asset Quality
The Company's high asset quality is a result of its conservative
underwriting standards, the diligence of its loan collection personnel and the
stability of the local economy. In addition, the Company also invests in
mortgage-backed securities issued by Ginnie Mae, Freddie Mac and Fannie Mae
and in other investment securities, primarily U.S. Government securities and
federal agency obligations. At March 31, 1999, the Company's ratio of
nonperforming assets to total assets was 0.47% compared to 0.82% and 0.98% at
March 31, 1998 and 1997, respectively.
Management of Interest Rate Risk
The Company's most significant form of market risk is interest rate risk, as
the majority of its assets and liabilities are sensitive to changes in
interest rates. The mortgage loan portfolio, consisting primarily of loans
6
<PAGE>
secured by residential real property located in Westchester County, is subject
to risks associated with the local economy. The Company does not own any
trading assets and has not engaged in hedging transactions such as interest
rate swaps and caps. The Company's interest rate risk management program
focuses primarily on evaluating and managing the composition of 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. The Company's assets
consist primarily of fixed rate mortgage loans which have longer maturities
than its liabilities which consist primarily of deposits.
A principal part of the Company's business strategy is to manage interest
rate risk and to minimize the exposure of earnings to changes in market
interest rates. In recent years, the Company has followed the following
strategies to manage interest rate risk: (i) purchasing adjustable rate
mortgage-backed securities guaranteed by Fannie Mae or Ginnie Mae; (ii)
investing in short-term U.S. Government securities and federal agency
obligations; and (iii) maintaining a high level of liquid interest-earning
assets such as short-term federal funds sold and certificates of deposit. By
investing in short-term, liquid securities, the Company believes it is better
positioned to react to increases in market interest rates. However,
investments in shorter term securities generally bear lower yields than longer
term investments. Thus, these strategies may result in lower levels of
interest income than would be obtained by investing in longer term fixed rate
loans. Management believes that maintaining a significant portion of the
Company's assets in short-term investments reduces the exposure of earnings to
interest rate fluctuations and enhances long-term profitability.
Management monitors interest rate sensitivity through the use of a model
which estimates the change in the Bank's net portfolio value ("NPV") in
response to a range of assumed changes in market interest rates. NPV is the
present value of expected cash flows from assets, liabilities, and off-balance
sheet items. Management is not aware of any known trends that would
significantly affect the timing or amount of the expected cash flows utilized
in the NPV model. The model estimates the effect on NPV of instantaneous and
permanent 100 to 300 basis point increases and decreases in market interest
rates with no effect given to any steps that management might take to counter
the effect of interest rate movements.
The table below sets forth, as of March 31, 1999, the estimated changes in
the Bank's NPV which would result from the designated instantaneous changes in
interest rates.
<TABLE>
<CAPTION>
Changes in Estimated Increase
Interest Rates (Decrease) in NPV(1)
(basis points) Estimated -------------------------------------
NPV Amount Percent
-------------- --------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C>
+300 $42,472 $(8,366) (16)%
+200 46,009 (4,829) (9)
+100 48,898 (1,940) (4)
0 50,838 -- --
-100 52,697 1,859 4
-200 54,479 3,641 7
-300 57,515 6,677 13
</TABLE>
- --------
(1) Represents the increase (decrease) in the estimated NPV at the indicated
change in interest rates compared to the NPV assuming no change in
interest rates.
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not reflect any
actions management may undertake in response to changes in interest rates.
The table set forth above indicates that at March 31, 1999, in the event of
a 200 basis point decrease in interest rates, the Bank would be expected to
experience a 7% increase in NPV. In the event of a 200 basis point increase in
interest rates, the Bank would be expected to experience a 9% decrease in NPV.
Since March 31,
7
<PAGE>
1999, there have been no significant changes in the Bank's interest rate risk
exposures or how those exposures would be managed.
Certain shortcomings are inherent in the NPV methodology. Modeling changes
in NPV requires that certain assumptions be made which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV table presented assumes that the
composition of the interest sensitive assets and liabilities existing at the
beginning of a period remain constant over the period being measured and
assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration or repricing of specific
assets and liabilities. Accordingly, although the NPV table provides an
indication of interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Company's net interest
income, and will differ from actual results. Additionally, the guidelines
established by the Board of Directors are not strict limitations. While a goal
of the Asset/Liability Management Committee and the Board of Directors is to
limit projected NPV changes within the Board's guidelines, the Company will
not necessarily limit projected changes in NPV if the required action would
present disproportionate risk to continued profitability.
Comparison of Financial Condition at March 31, 1999 and 1998
The Company's total assets were $295.3 million and $254.7 million at March
31, 1999 and 1998, respectively. The $40.6 million increase was due primarily
to net offering proceeds of $20.0 million and a $17.4 million increase in
deposits. Federal funds totaled $44.4 million at March 31, 1999 as compared to
$36.4 million at March 31, 1998. The increase in total assets also reflects a
$15.0 million increase in net loans to $143.5 million at March 31, 1999 and a
$17.1 million increase in total securities to $85.0 million. Total deposits
amounted to $237.3 million at March 31, 1999, as compared to $219.9 million at
March 31, 1998. The deposit growth was primarily attributable to deposits
obtained at the New City branch which opened in December 1998. Total equity
increased $23.1 million to $55.0 million at March 31, 1999 as compared to
$31.9 million at March 31, 1998, primarily due to the net proceeds from the
stock offering.
8
<PAGE>
Average Balance Sheets
The following table sets forth actual and average balance sheets, average
yields and costs, and certain other information at March 31, 1999 and for the
years ended March 31, 1999, 1998 and 1997. The table reflects the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities (derived by dividing interest income or expense by the monthly
average balance of interest-earning assets or interest-bearing liabilities,
respectively), as well as the net yield on interest-earning assets. Management
believes that the use of monthly average balances rather than daily average
balances did not have a material effect on the data presented. No tax-
equivalent adjustments were made, as the effect thereof was not material.
Nonaccrual loans were included in the computation of average balances, but
have been included in the table as loans having a zero yield. The yields set
forth below include the effect of deferred fees, discounts and premiums which
are included in interest income.
<TABLE>
<CAPTION>
For the Years Ended March 31,
------------------------------------------------------------------------------------
At March 31, 1999 1999 1998 1997
------------------- ------------------------------- ------------------------------- --------------------
Average Average Average
Actual Average Outstanding Average Outstanding Average Outstanding
Balance Yield/Rate Balance Interest Yield/Rate Balance Interest Yield/Rate Balance Interest
-------- ---------- ----------- -------- ---------- ----------- -------- ---------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Loans(1).......... $143,536 7.76% $135,938 $11,040 8.12% $124,646 $10,456 8.39% $118,986 $9,987
Mortgage-backed
securities(2)..... 58,270 6.40 54,070 3,277 6.06 53,475 3,515 6.57 50,930 3,244
Other
securities(2)..... 26,722 5.83 17,704 973 5.50 13,789 826 5.99 12,956 768
Federal funds
sold.............. 44,400 4.92 43,877 2,302 5.25 34,292 1,929 5.63 33,523 1,793
Certificates of
deposit........... 10,686 5.63 10,850 658 6.06 12,002 738 6.15 11,765 700
Other interest-
earning assets.... 3,993 5.38 3,005 193 6.42 2,512 154 6.13 2,360 145
-------- -------- ------- -------- ------- -------- ------
Total interest-
earning assets.. 287,607 6.74 265,444 18,443 6.95 240,716 17,618 7.32 230,520 16,637
-------- ---- -------- ------- ---- -------- ------- ---- -------- ------
Noninterest earning
assets............. 7,704 10,735 7,100 6,606
-------- -------- -------- --------
Total assets.... $295,311 $276,179 $247,816 $237,126
======== ======== ======== ========
Interest-bearing
liabilities:
Passbook and club
accounts.......... $ 60,112 2.25% $ 60,573 $ 1,493 2.46% $ 62,197 $ 1,573 2.53% $ 64,537 $1,640
Money market
accounts.......... 17,754 1.83 19,810 541 2.73 18,556 550 2.96 17,845 525
NOW and Super NOW
accounts.......... 22,828 1.52 22,333 428 1.92 20,269 412 2.03 19,454 393
Certificates of
deposit........... 136,585 5.05 125,615 6,595 5.25 114,015 6,165 5.41 104,991 5,318
Other interest-
bearing
liabilities....... 2,571 2.45 3,644 74 2.03 1,870 43 2.30 1,771 41
-------- -------- ------- -------- ------- -------- ------
Total interest-
bearing
liabilities..... 239,850 3.74 231,975 9,131 3.94 216,907 8,743 4.03 208,598 7,917
-------- ---- -------- ------- ---- -------- ------- ---- -------- ------
Noninterest bearing
liabilities........ 477 1,355 448 508
-------- -------- -------- --------
Total
liabilities..... 240,327 233,330 217,355 209,106
Equity............. 54,984 42,849 30,461 28,020
-------- -------- -------- --------
Total
liabilities and
equity.......... $295,311 $276,179 $247,816 $237,126
======== ======== ======== ========
Net interest
income............. $ 9,312 $ 8,875 $8,720
======= ======= ======
Net interest rate
spread(3).......... 3.00% 3.01% 3.29%
Net earning
assets(4).......... $ 47,757 $ 33,469 $ 23,809 $ 21,922
======== ======== ======== ========
Net interest
margin(5).......... 3.51% 3.69%
Ratio of interest-
earning assets to
interest-bearing
liabilities........ 1.20x 1.14x 1.11x 1.11x
<CAPTION>
Average
Yield/Rate
----------
<S> <C>
Interest-earning
assets:
Loans(1).......... 8.39%
Mortgage-backed
securities(2)..... 6.37
Other
securities(2)..... 5.93
Federal funds
sold.............. 5.35
Certificates of
deposit........... 5.95
Other interest-
earning assets.... 6.14
Total interest-
earning assets.. 7.22
----------
Noninterest earning
assets.............
Total assets....
Interest-bearing
liabilities:
Passbook and club
accounts.......... 2.54%
Money market
accounts.......... 2.94
NOW and Super NOW
accounts.......... 2.02
Certificates of
deposit........... 5.07
Other interest-
bearing
liabilities....... 2.32
Total interest-
bearing
liabilities..... 3. 80
----------
Noninterest bearing
liabilities........
Total
liabilities.....
Equity.............
Total
liabilities and
equity..........
Net interest
income.............
Net interest rate
spread(3).......... 3.42%
Net earning
assets(4)..........
Net interest
margin(5).......... 3.78%
Ratio of interest-
earning assets to
interest-bearing
liabilities........
</TABLE>
- ----
(1) Balances are net of deferred loan fees, construction loans in process and
the allowance for loan losses.
(2) Average outstanding balances are based on amortized cost.
(3) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net earning assets represent total interest-earning assets less total
interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
total interest-earning assets.
9
<PAGE>
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income
and interest expense for the major categories of interest-earning assets and
interest-bearing liabilities. Information is provided for each category of
interest-earning assets and interest-bearing liabilities, with respect to (i)
changes attributable to changes in volume (i.e., changes in balances
multiplied by the prior-period rate) and (ii) changes attributable to rate
(i.e., changes in rate multiplied by prior-period balances). For purposes of
this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume
and the change due to rate.
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
--------------------------------- ----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
--------------------- Increase ---------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------- --------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................. $ 928 $ (344) $ 584 $ 475 $ (6) $469
Mortgage-backed
securities............ 39 (277) (238) 163 108 271
Other securities....... 219 (72) 147 50 8 58
Federal funds sold..... 510 (137) 373 41 95 136
Certificates of
deposit............... (69) (11) (80) 14 24 38
Other.................. 32 7 39 9 -- 9
---------- --------- ----- --------- ---------- ----
Total interest-
earning assets...... $ 1,659 $ (834) $ 825 $ 752 $ 229 $981
========== ========= ===== ========= ========== ====
Interest-bearing
liabilities:
Passbook and club
accounts.............. $ (39) $ (41) $ (80) $ (59) $ (8) $(67)
Money market
accounts.............. 36 (45) (9) 21 (36) (15)
NOW and Super NOW
accounts.............. 39 (23) 16 16 43 59
Certificates of
deposit............... 616 (186) 430 464 383 847
Other.................. 37 (6) 31 2 -- 2
---------- --------- ----- --------- ---------- ----
Total interest-
bearing
liabilities......... $ 689 $ (301) $ 388 $ 444 $ 382 $826
========== ========= ===== ========= ========== ====
Net interest income..... $ 970 $ (533) $ 437 $ 308 $ (153) $155
========== ========= ===== ========= ========== ====
</TABLE>
Comparison of Results of Operations for the Years Ended March 31, 1999 and
1998
Net Income
Net income decreased by $944,000, or 32.7%, to $1.9 million for the year
ended March 31, 1999 from $2.9 million for the prior year. The results for the
year ended March 31, 1999 included a $1.0 million pre-tax charge related to
the contribution of 102,200 shares of common stock to the Charitable
Foundation in connection with the Reorganization and Offering. The lower net
income was also attributable to an additional $942,000 increase in non-
interest expense. Partially offsetting these items was a $437,000 increase in
net interest income and a $715,000 decrease in income tax expense.
Interest and Dividend Income
For the year ended March 31, 1999, interest and dividend income increased
$825,000 or 4.7% to $18.4 million as compared to $17.6 million for the year
ended March 31, 1998. For those same periods, average interest-earning assets
increased $24.7 million or 10.3% to $265.4 million from $240.7 million. The
increase in average interest-earning assets was partially offset by a 37 basis
point decrease in the average yield earned on total interest-earning assets to
6.95%.
Interest income on loans totaled $11.0 million for fiscal 1999 as compared
to $10.5 million for the prior year. This $584,000 increase was due to an
$11.3 million increase in the average balance of loans to $135.9
10
<PAGE>
million as compared to $124.6 million in the prior year. This increase was
partially offset by a 27 basis point decrease in the average yield earned to
8.12%. The Company is primarily a fixed rate residential lender. During fiscal
1999, market rates for mortgage loans remained low and, as a result, the
demand for fixed rate loans increased. The Company originated $36.9 million of
fixed rate residential mortgage loans for the year ended March 31, 1999 as
compared to $28.9 million in the prior year.
Interest income on mortgage-backed securities decreased $238,000 or 6.8% to
$3.3 million for the year ended March 31, 1999 as compared to $3.5 million for
the prior year. This decrease was due to a 51 basis point decrease in the
yield earned to 6.06% partially offset by a $595,000 increase in the average
balance of mortgage-backed securities to $54.1 million. At March 31, 1999,
mortgage-backed securities totaled $58.3 million and included $51.5 million of
adjustable rate securities. The decrease in the yield earned on mortgage-
backed securities is a result of the repricing of the underlying mortgages, as
well as an increase in the prepayment of the underlying mortgages as borrowers
refinanced to fixed rate loans.
Interest and dividend income earned on other securities increased $147,000
or 17.8% to $973,000 for the year ended March 31, 1999 as compared to $826,000
for the prior year. This increase was due to a $3.9 million increase in the
average balance of other securities to $17.7 million, partially offset by a 49
basis point decrease in the average yield earned to 5.50%.
Interest income on federal funds amounted to $2.3 million for the year ended
March 31, 1999 as compared to $1.9 million for the prior year. This increase
was due to a $9.6 million increase in the average balance of federal funds to
$43.9 million, partially offset by a 38 basis point decrease in the average
yield earned to 5.25%. The increase in the average balance of federal funds
was a result of the cash received from the Offering and from the increase in
deposits. These cash flows were initially invested in federal funds and are
being deployed into securities and loans as the rates that can be earned on
these instruments justify.
Interest Expense
Interest expense increased $388,000 to $9.1 million as compared to $8.7
million for the prior year. The average balance of interest-bearing
liabilities for these same periods increased $15.1 million to $232.0 million
and the average cost of these liabilities decreased 9 basis points to 3.94%.
The increase in the average balance of interest-bearing liabilities is due
primarily to time deposits at the New City branch that was opened in December
1998. Interest expense on time deposits increased $430,000 or 7.0% to $6.6
million for the year ended March 31, 1999 as compared to $6.2 million for the
prior year. This increase was due to an $11.6 million increase in the average
balance of time deposits to $125.6 million, partially offset by a 16 basis
point decrease in the average rate paid to 5.25%. Interest expense on savings
accounts totaled $1.5 million for the year ended March 31, 1999 as compared to
$1.6 million for the prior year. This $80,000 decrease is a result of a $1.6
million decrease in the average balance of savings accounts to $60.6 million
and a 7 basis point decrease in the average rate paid to 2.46%.
Net Interest Income
For the year ended March 31, 1999, net interest income increased $437,000 to
$9.3 million as compared to $8.9 million for the prior year. The Company's
interest rate spread was 3.01% for the year ended March 31, 1999 as compared
to 3.29% for the prior year. For those same periods, the net interest margin
was 3.51% and 3.69%, respectively. The decreases in the interest rate spread
and net interest margin are a result of the general decrease in interest rates
on loans and mortgage-backed securities.
Provision for Loan Losses
The provision for loan losses is a charge to income which is made in order
to maintain the allowance for loan losses at an adequate level to cover
probable losses inherent in the existing loan portfolio. Management regularly
reviews the Company's loan portfolio and makes provisions for loan losses in
order to maintain the
11
<PAGE>
adequacy of the allowance for loan losses. The allowance for loan losses
consists of amounts specifically allocated to nonperforming loans and
potential problem loans (if any), as well as allowances determined for each
major loan category. Loan categories, such as single-family residential
mortgages and consumer loans (which represent 93.4% and 0.7%, respectively, of
total loans at March 31, 1999) are generally evaluated on an aggregate or
"pool" basis. In recent years, the Company's allowance for loan losses was
predominately determined on a pool basis by applying loss factors to the
current balances of the various loan categories. The loss factors are
determined by management based on an evaluation of historical loss experience,
delinquency trends, volume and type of lending conducted, and the impact of
current economic conditions in the Company's market area.
The provision for loan losses was $272,000 and $155,000 for the years ended
March 31, 1999 and 1998, respectively. The higher provision in fiscal 1999
reflects an increase in charge-offs, as well as a higher portfolio growth rate
compared to the prior year. Charge-offs were $162,000 for the year ended March
31, 1999 and $16,000 for the year ended March 31, 1998. The allowance for loan
losses amounted to $1.1 million at March 31, 1999 and $984,000 at March 31,
1998, or approximately 0.75% of total loans at each date. Non-performing loans
amounted to $1.1 million or 0.75% of total loans at March 31, 1999 as compared
to $2.0 million or 1.50% of total loans at March 31, 1998.
Non-Interest Income
For the years ended March 31, 1999 and 1998, non-interest income totaled
$171,000 and $186,000, 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, including the contribution to the Charitable
Foundation, increased by approximately 50% to $5.9 million for the year ended
March 31, 1999 as compared to $4.0 million for the prior year. In addition to
the contribution to the Charitable Foundation, this increase reflects a
$607,000 increase in compensation and benefits to $2.8 million, a $108,000
increase in data processing service fees to $339,000, and a $142,000 increase
in other non-interest expenses to $1.0 million. The increase in compensation
and benefits is primarily due to ESOP expense of $231,000 (the ESOP did not
exist in fiscal 1998), a $96,000 increase in the Director Emeritus Plan
expense, increased compensation costs associated with the new branch office
and normal salary increases. The ESOP expense in fiscal 1999 consists of
$185,000 attributable to the allocation of 10% of total plan shares to
participants for the initial plan year ended December 31, 1998 and $46,000
attributable to shares committed to be released in the quarter ended March 31,
1999. The increase in data processing service fees is due primarily to
upgrades being made by the Company and the service bureau in preparation for
the Year 2000, as well as increased charges based on volume attributable to
growth including the new branch office.
Income Taxes
Income tax expense amounted to $1.4 million for the year ended March 31,
1999 as compared to $2.1 million for the prior year. The effective tax rates
were 41.0% and 41.7%, respectively.
Comparison of Results of Operations for the Years Ended March 31, 1998 and
1997
Net Income
Net income increased by $595,000, or 26.0%, to $2.9 million for the year
ended March 31, 1998 from $2.3 million for the prior year. The increase was
primarily attributable to a $1.3 million decrease in non-interest expense
(primarily due to the absence in fiscal 1998 of a $1.2 million special
assessment incurred in fiscal 1997 to recapitalize the Savings Association
Insurance Fund) and a $155,000 increase in net interest income. Partially
offsetting these items was a $740,000 increase in income tax expense and a
$115,000 decrease in noninterest income. Tax expense for fiscal 1997 was
reduced by a tax benefit of $250,000 due to a change in New York
12
<PAGE>
State tax law. Excluding the after-tax effect of the special assessment and
the State tax benefit, net income for the year ended March 31, 1997 would have
been approximately $2.8 million.
Interest and Dividend Income
Interest and dividend income increased by $981,000, or 5.9%, to $17.6
million for the year ended March 31, 1998 from $16.6 million for the year
ended March 31, 1997. This increase was primarily attributable to a $10.2
million increase in the average balance of interest-earning assets to $240.7
million for the year ended March 31, 1998 from $230.5 million for the prior
year, and an increase in the average yield on interest-earning assets to 7.32%
from 7.22%. The increase in the average yield was primarily attributable to
increases in the average yield on mortgage-backed securities, federal funds
and certificates of deposit.
Interest income on loans increased by $469,000, or 4.7%, for the year ended
March 31, 1998 compared to the prior year, primarily reflecting a $5.6 million
increase in average loan balances to $124.6 million from $119.0 million. The
Company originated new loans of $28.9 million (including one-to-four family
fixed rate mortgage loans and home equity lines of credit which totaled $21.7
million) and collected principal repayments of $22.4 million during fiscal
1998. The growth in the loan portfolio was due to the low interest rate
environment which created strong demand for fixed rate loans (the Company's
primary mortgage product). The low interest rate environment has also created
a strong market for home purchases and the refinancing of existing mortgage
loans.
Interest income on mortgage-backed securities increased $271,000, or 8.4%,
for the year ended March 31, 1998 compared to the prior year, reflecting an
increase in the average balance of mortgage-backed securities to $53.5 million
from $50.9 million and an increase in the average yield to 6.57% from 6.37%.
Interest and dividend income on other securities increased $58,000, or 7.6%,
for the year ended March 31, 1998 compared to the prior year, primarily due to
an increase in the average yield to 5.99% from 5.93%.
Interest income on federal funds increased by $136,000, or 7.6%, for the
year ended March 31, 1998 compared to the prior year, reflecting an increase
in the average balance of federal funds to $34.3 million from $33.5 million
and an increase in the average yield to 5.63% from 5.35%. Interest income on
certificates of deposit increased $38,000, or 5.4%, for the year ended March
31, 1998 compared to the prior year, due to an increase in the average balance
of certificates of deposit to $12.0 million from $11.8 million and an increase
in the average yield to 6.15% from 5.95%.
Interest Expense
Interest expense increased $826,000, or 10.4%, to $8.7 million for the year
ended March 31, 1998 from $7.9 million for the prior year. The increase in
interest expense was attributable to an increase in the average balance of
interest-bearing liabilities (consisting primarily of deposits) to $216.9
million from $208.6 million and an increase in the average cost of interest-
bearing liabilities to 4.03% from 3.80%. The increase in the cost of interest-
bearing liabilities reflected the continued change in the mix of deposit
accounts from lower-cost passbook and club accounts to higher-cost certificate
accounts. Certificates of deposit comprised 52.6% of total average interest-
bearing liabilities in fiscal 1998 compared to 50.3% in the prior year,
reflecting growth in certificate accounts attributable to marketing efforts.
Interest expense on certificate accounts increased $847,000, or 15.9%, for the
year ended March 31, 1998 compared to the prior year, as the average balance
of certificate accounts increased to $114.0 million from $105.0 million and
the average rate increased to 5.41% from 5.07%. Total interest expense on
other deposit accounts (passbook, club accounts, money market and NOW
accounts) was relatively unchanged at approximately $2.5 million in both
fiscal 1998 and 1997. The average balances of these accounts totaled $101.0
million in fiscal 1998 compared to $101.8 million in fiscal 1997, and the
overall average rate was 2.51% in both years.
Net Interest Income
For the years ended March 31, 1998 and 1997, net interest income was $8.9
million and $8.7 million, respectively. The $155,000 increase in net interest
income in fiscal 1998 was primarily attributable to the positive
13
<PAGE>
effect of a $1.9 million increase in net earning assets (interest-earning
assets less interest-bearing liabilities), partially offset by a 13 basis
point decrease in the interest rate spread to 3.29% from 3.42%. The ratio of
interest-earning assets to interest-bearing liabilities remained stable at
approximately 111% for the years ended March 31, 1998 and 1997, respectively.
The net interest margin decreased to 3.69% in fiscal 1998 from 3.78% in the
prior year.
Provision for Loan Losses
The provision for loan losses was $155,000 and $146,000 for the years ended
March 31, 1998 and 1997, respectively. At March 31, 1998 and 1997, non-
performing loans totaled $2.0 million and $2.3 million, respectively, and the
allowance for loan losses was $984,000 and $845,000, respectively. The
provision and allowance for loan losses were increased in fiscal 1998 and 1997
in light of changes in the levels of inherent losses due to changes in the
size of the loan portfolio. The loan portfolio increased to $128.6 million at
March 31, 1998 from $121.6 million at March 31, 1997 and $113.5 million at
March 31, 1996. At March 31, 1998 and 1997, the allowance for loan losses as a
percentage of total loans was 0.75% and 0.68%, respectively. The allowance for
loan losses as a percentage of total non-performing loans was 50.26% at March
31, 1998 and 37.32% at March 31, 1997.
Non-Interest Income
Non-interest income totaled $186,000 and $301,000 for the years ended March
31, 1998 and 1997, respectively. The $115,000 decrease in noninterest income
was attributable to the absence in fiscal 1998 of gains on sale of real estate
owned which amounted to $134,000 in fiscal 1997, partially offset by a $19,000
increase in banking service charges and fees.
Non-Interest Expense
Non-interest expense decreased by $1.3 million, or 24.5%, to $4.0 million
for the year ended March 31, 1998 from $5.3 million for the year ended March
31, 1997. The decrease in noninterest expense was primarily attributable to
the absence in fiscal 1998 of a special one-time assessment of $1.2 million
incurred in fiscal 1997 to recapitalize the Savings Association Insurance
Fund. In addition, other deposit insurance costs decreased by $213,000 in
fiscal 1998 compared to the prior year (reflecting lower costs subsequent to
the recapitalization) and other noninterest expenses decreased by $73,000
(primarily reflecting lower net costs of real estate owned). Partially
offsetting these decreases was a $148,000 increase in compensation and
benefits to $2.1 million from $2.0 million reflecting normal salary increases
and an increase in directors' fees.
Income Taxes
Income tax expense was $2.1 million for the year ended March 31, 1998,
compared to $1.3 million for the year ended March 31, 1997, and the effective
tax rates were 41.7% and 36.7%, respectively. The change in income tax expense
in fiscal 1998 resulted from higher pre-tax income, as well as a tax benefit
of $250,000 in fiscal 1997 due to a decrease in deferred tax liabilities
caused by an amendment to the New York State tax law enacted in July 1996. The
amendment changed the base-year for tax bad debt reserves and eliminated the
need for a deferred tax liability previously recognized for reserves in excess
of the base-year amount. See Note 9 of the Notes to Consolidated Financial
Statements.
Capital Resources and Liquidity
The objective of the Company's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Company's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
14
<PAGE>
The Company's primary investing activities are the origination of mortgage
loans, and the purchase of short-term investments and adjustable rate
mortgage-backed securities. These activities are funded primarily by deposit
growth and principal repayments on loans, mortgage-backed securities and other
investment securities. During fiscal 1999, the Company originated loans of
$44.2 million and purchased securities of $47.3 million. These disbursements
were funded by $29.4 million in principal payments, maturities and calls of
securities, $28.4 million in loan principal repayments, a $17.4 million
increase in deposits, and $20.0 million in net proceeds from the sale of
common stock in the Offering.
At March 31, 1999, the Company had outstanding $23.2 million in loan
origination commitments and unused lines of credit extended to customers. If
the Company requires funds beyond its internal funding capabilities, advances
from the Federal Home Loan Bank (the "FHLB") of New York are available. At
March 31, 1999, approximately $105.1 million in certificates of deposit were
scheduled to mature within a year. The Company's experience has been that a
substantial portion of its maturing certificate of deposit accounts are
renewed.
Regulations of the Office of Thrift Supervision (the "OTS") require savings
associations to maintain specified levels of "liquid" investments in
qualifying types of U.S. Government, federal agency and other investments
having maturities of five years or less. Currently, a savings association must
maintain liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet applicable liquidity
requirements. At March 31, 1999, the Bank's liquidity, as measured for
regulatory purposes, was 32.6%, or $69.2 million in excess of the minimum OTS
requirement.
OTS regulations also require savings associations, such as the Bank, 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% (4.0% as of April 1, 1999) 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 Bank satisfied
these minimum capital standards at March 31, 1999 with tangible and leverage
capital ratios of 14.8% and a total risk-based capital ratio of 39.2%. In
determining the amount of risk-weighted assets for purposes of the risk-based
capital requirement, a savings association multiplies its assets and credit
equivalent amounts for 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 assets such as consumer and commercial loans, as
assigned by the OTS capital regulations. These capital requirements, which are
applicable to the Bank only, do not consider additional capital retained by
Sound Federal Bancorp.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and related Notes have been prepared
in conformity with generally accepted accounting principles, which generally
require the measurement of financial position and operating results in terms
of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
financial. As a result, the Company's net income is directly impacted by
changes in interest rates, which are influenced by inflationary expectations.
The Company's ability to match the interest sensitivity of its financial
assets to the interest sensitivity of its financial liabilities as part of its
interest rate risk management program may reduce the effect which changes in
interest rates have on net income. Changes in interest rates do not
necessarily move to the same extent as changes in prices of goods and
services. In the current interest rate environment, liquidity and the maturity
structure of the Company's assets and liabilities are critical to the
maintenance of acceptable levels of net income. Management has concluded that
by maintaining a significant portion of the Company's assets in short-term
investments and adjustable rate mortgage-backed securities, the Company will
be able to redeploy its assets in a rising interest rate environment.
15
<PAGE>
Recent Accounting Standard
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, requires entities to recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. If certain conditions are met, a derivative may be specifically
designated as a fair value hedge, a cash flow hedge, or a foreign currency
hedge. A specific accounting treatment applies to each type of hedge. Entities
may reclassify securities from the held-to-maturity category to the available-
for-sale category at the time of adopting SFAS No. 133. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999, although a proposal has been issued to delay the effective date by one
year. The Company has not yet selected an adoption date or decided whether it
will reclassify securities between categories. The Company has not engaged in
derivatives and hedging activities covered by the new standard, and does not
expect to do so in the foreseeable future. Accordingly, SFAS No. 133 is not
expected to have a material impact on the Company's consolidated financial
statements.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Sound Federal Bancorp:
We have audited the accompanying consolidated balance sheets of Sound
Federal Bancorp and subsidiary (the "Company") as of March 31, 1999 and 1998,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
March 31, 1999. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sound
Federal Bancorp and subsidiary as of March 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-
year period ended March 31, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Stamford, Connecticut
April 26, 1999
17
<PAGE>
Sound Federal Bancorp and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
At March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Assets
Cash and due from banks.................................... $ 5,082 $ 5,711
Federal funds sold......................................... 44,400 36,400
Certificates of deposit.................................... 10,686 11,483
Securities:
Held to maturity, at amortized cost (fair value of
$45,087 and $65,091 at
March 31, 1999 and 1998, respectively) (Note 3)......... 45,590 64,898
Available for sale, at fair value (Note 4)............... 39,402 2,994
-------- --------
Total securities....................................... 84,992 67,892
-------- --------
Loans, net (Note 5):
Mortgage loans........................................... 143,626 127,515
Consumer loans........................................... 1,004 2,027
Allowance for loan losses................................ (1,094) (984)
-------- --------
Total loans, net....................................... 143,536 128,558
-------- --------
Accrued interest receivable................................ 1,436 888
Federal Home Loan Bank stock............................... 1,884 1,745
Premises and equipment, net (Note 6)....................... 1,935 1,552
Other assets (Notes 5 and 8)............................... 1,360 520
-------- --------
Total assets........................................... $295,311 $254,749
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (Note 7)........................................ $237,279 $219,913
Mortgage escrow funds.................................... 2,480 2,364
Accrued expenses and other liabilities (Note 8).......... 568 571
-------- --------
Total liabilities...................................... 240,327 222,848
-------- --------
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 1 and 12):
Preferred stock ($0.10 par value; 10,000,000 shares
authorized;
none issued and outstanding)............................ -- --
Common stock ($0.10 par value; 20,000,000 shares
authorized;
5,212,218 shares issued and outstanding at March 31,
1999)................................................... 521 --
Additional paid-in capital............................... 22,430 --
Common stock held by employee stock ownership
plan ("ESOP") (Note 10)................................. (1,681) --
Retained earnings........................................ 33,846 31,905
Accumulated other comprehensive loss, net of taxes (Note
13)..................................................... (132) (4)
-------- --------
Total stockholders' equity............................. 54,984 31,901
-------- --------
Total liabilities and stockholders' equity............. $295,311 $254,749
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
Sound Federal Bancorp and Subsidiary
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest and Dividend Income
Loans................................................ $11,040 $10,456 $ 9,987
Securities........................................... 4,250 4,341 4,012
Federal funds sold and certificates of deposit....... 2,960 2,667 2,493
Other earning assets................................. 193 154 145
------- ------- -------
Total interest and dividend income................. 18,443 17,618 16,637
------- ------- -------
Interest Expense
Deposits (Note 7).................................... 9,057 8,700 7,876
Other interest-bearing liabilities................... 74 43 41
------- ------- -------
Total interest expense............................. 9,131 8,743 7,917
------- ------- -------
Net interest income.................................... 9,312 8,875 8,720
Provision for loan losses (Note 5)..................... 272 155 146
------- ------- -------
Net interest income after provision for loan losses.... 9,040 8,720 8,574
------- ------- -------
Non-Interest Income
Service charges and fees............................. 171 186 167
Gains on sales of real estate owned.................. -- -- 134
------- ------- -------
Total non-interest income.......................... 171 186 301
------- ------- -------
Non-Interest Expense
Compensation and benefits (Note 10).................. 2,754 2,147 1,999
Occupancy and equipment.............................. 477 390 376
Data processing service fees......................... 339 231 212
Federal deposit insurance costs, including a special
assessment of $1,232 in 1997 (Note 7)............... 136 139 1,584
Advertising and promotion............................ 171 170 137
Contribution of common stock to Charitable Foundation
(Note 1)............................................ 1,022 -- --
Other................................................ 1,021 879 952
------- ------- -------
Total non-interest expense......................... 5,920 3,956 5,260
------- ------- -------
Income before income tax expense....................... 3,291 4,950 3,615
Income tax expense (Note 9)............................ 1,350 2,065 1,325
------- ------- -------
Net income............................................. $ 1,941 $ 2,885 $ 2,290
======= ======= =======
Basic earnings per common share, from date of stock
offering (October 8, 1998) (Note 2)................... $ 0.10
=======
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
Sound Federal Bancorp and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended March 31, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Accumulated
Additional Stock Other Total
Common Paid-in Held Retained Comprehensive Stockholders'
Stock Capital by ESOP Earnings Loss Equity
------- ---------- ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1996................... $ -- $ -- $ -- $26,730 $ (4) $26,726
Net income.............. -- -- -- 2,290 -- 2,290
Other comprehensive
income (Note 13)....... -- -- -- -- 1 1
-------
Total comprehensive
income............... 2,291
------- ------- ------- ------- ------- -------
Balance at March 31,
1997................... -- -- -- 29,020 (3) 29,017
Net income.............. -- -- -- 2,885 -- 2,885
Other comprehensive loss
(Note 13).............. -- -- -- -- (1) (1)
-------
Total comprehensive
income...............
2,884
------- ------- ------- ------- ------- -------
Balance at March 31,
1998................... -- -- -- 31,905 (4) 31,901
Net income.............. -- -- -- 1,941 -- 1,941
Other comprehensive loss
(Note 13).............. -- -- -- -- (128) (128)
-------
Total comprehensive
income............... 1,813
Issuance of 5,212,218
common shares (Note
1)..................... 521 22,439 -- -- -- 22,960
Common shares purchased
by ESOP (192,129
shares)................ -- -- (1,921) -- -- (1,921)
ESOP shares allocated or
committed
to be released for
allocation
(24,016 shares)........ -- (9) 240 -- -- 231
------- ------- ------- ------- ------- -------
Balance at March 31,
1999................... $ 521 $22,430 $(1,681) $33,846 $ (132) $54,984
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
Sound Federal Bancorp and Subsidiary
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net income..................................... $ 1,941 $ 2,885 $ 2,290
Adjustments to reconcile net income to net cash
provided by operating activities:
Contribution of common stock to Charitable
Foundation.................................. 1,022 -- --
Provision for loan losses.................... 272 155 146
Depreciation expense......................... 158 115 106
ESOP expense................................. 231 -- --
Deferred income tax benefit.................. (200) (170) (337)
Other adjustments, net....................... (239) 494 88
-------- -------- --------
Net cash provided by operating activities.. 3,185 3,479 2,293
-------- -------- --------
Investing Activities
Purchases of securities:
Held to maturity............................. (9,634) (21,445) (22,772)
Available for sale........................... (37,616) (1,000) --
Proceed from payments, maturities and calls of
securities:
Held to maturity............................. 28,376 19,778 18,723
Available for sale........................... 987 -- --
Disbursements for loan originations............ (44,177) (29,391) (25,088)
Principal collections on loans................. 28,397 22,363 16,569
Net decrease in certificates of deposit........ 797 503 (392)
Purchases of Federal Home Loan Bank stock...... (139) (138) (94)
Purchases of premises and equipment............ (541) (296) (140)
Proceeds from sales of real estate owned....... 237 -- 400
-------- -------- --------
Net cash used in investing activities...... (33,313) (9,626) (12,794)
-------- -------- --------
Financing Activities
Net increase in deposits....................... 17,366 8,690 10,612
Net decrease in mortgage escrow funds.......... 116 16 237
Net proceeds from common stock offering........ 20,017 -- --
-------- -------- --------
Net cash provided by financing activities.. 37,499 8,706 10,849
-------- -------- --------
Increase in cash and cash equivalents............ 7,371 2,559 348
Cash and cash equivalents at beginning of year... 42,111 39,552 39,204
-------- -------- --------
Cash and cash equivalents at end of year......... $ 49,482 $ 42,111 $ 39,552
======== ======== ========
Supplemental Information
Interest paid.................................. $ 9,111 $ 8,736 $ 7,910
Income taxes paid.............................. 1,623 1,876 1,650
Loans transferred to real estate owned......... 586 -- 365
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements
March 31, 1999, 1998 and 1997
(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.
The following is a reconciliation of the net cash proceeds to the total
increase in common stock and additional paid-in capital from the issuance of
common shares (in thousands):
<TABLE>
<S> <C>
Net cash proceeds................................................ $20,017
Shares purchased by the ESOP..................................... 1,921
Shares contributed to the Charitable Foundation.................. 1,022
-------
Total increase in common stock and additional paid-in capital.... $22,960
=======
</TABLE>
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.
(2) Summary of Significant Accounting Policies
The Bank is a community-oriented savings institution whose business
primarily consists of accepting deposits from customers within its market area
and investing those funds in mortgage loans secured by one-to-four family
residences and in mortgage-backed and other securities. To a significantly
lesser extent, funds are invested in commercial mortgage, construction and
consumer loans. The Bank's primary market area is Westchester County, New York
where it operates three full-service banking offices. An in-store branch is
operated in Rockland County, New York.
Deposits are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation. As a
federally-chartered savings association, the Bank's primary regulator is the
Office of Thrift Supervision ("OTS"). Sound Federal Bancorp and the Mutual
Holding Company are also subject to supervision and regulation by the OTS.
22
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
Basis of Presentation
The consolidated financial statements include the accounts of Sound Federal
Bancorp and the Bank. All significant intercompany accounts and transactions
have been eliminated in consolidation. Prior to the Reorganization and
Offering, Sound Federal Bancorp had no operations other than those of an
organizational nature.
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 below.
For purposes of reporting cash flows, cash equivalents represent federal
funds sold for one-day periods.
Securities
The Company classifies and accounts for its securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Securities classified as
held to maturity under SFAS No. 115 are limited to debt securities for which
the entity has the positive intent and ability to hold to maturity. Trading
securities are debt and equity securities that are bought principally for the
purpose of selling them in the near term. All other debt and equity securities
are classified as available for sale.
Management determines the appropriate classification of securities at the
purchase date. Securities classified as held to maturity are carried at
amortized cost. Securities available for sale are carried at fair value, with
unrealized gains and losses excluded from earnings and reported on a net-of-
tax basis as a separate component of stockholders' equity (accumulated other
comprehensive income or loss). The Company has no trading securities.
Premiums and discounts on debt securities are amortized to interest income
on a level-yield basis over the terms of the securities. Realized gains and
losses on sales of securities are determined based on the amortized cost of
the specific securities sold. Unrealized losses on securities are charged to
earnings when the decline in fair value of a security is judged to be other
than temporary.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions for losses charged
to income. Losses are charged to the allowance when all or a portion of a loan
is deemed to be uncollectible. Recoveries of loans previously charged-off are
credited to the allowance for loan losses when realized. Management's periodic
evaluation of the adequacy of the allowance for loan losses is based on the
Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect a borrower's ability to repay,
estimated value of underlying collateral, and current economic conditions. In
management's judgment, 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
judgments utilizing the best information available at the time of review.
Those judgments 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.
23
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," a loan is considered to be impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all principal and interest contractually due. SFAS No. 114 applies to
loans that are individually evaluated for collectibility in accordance with
the Company's normal loan review procedures (principally loans in the multi-
family, commercial mortgage and construction loan portfolios). The standard
does not generally apply to smaller-balance homogeneous loans that are
collectively evaluated for impairment, such as residential mortgage and
consumer loans. Under SFAS No. 114, creditors are permitted to measure
impaired loans based on (i) the present value of expected future cash flows
discounted at the loan's effective interest rate, (ii) the loan's observable
market price or (iii) the fair value of the collateral if the loan is
collateral dependent. If the measure of an impaired loan is less than its
recorded investment, an impairment loss is recognized as part of the allowance
for loan losses.
Interest and Fees on Loans
Interest is accrued monthly based on outstanding principal balances unless
management considers the collection of interest to be doubtful (generally,
when loans are contractually past due ninety days or more). When loans are
placed on nonaccrual status, unpaid interest is reversed by charging interest
income and crediting an allowance for uncollected interest. Interest payments
received on nonaccrual loans (including impaired loans) are recognized as
income unless future collections are doubtful. Loans are returned to accrual
status when collectibility is no longer considered doubtful (generally, when
all payments have been brought current).
Loan origination fees and certain direct loan origination costs are deferred
and the net fee or cost is amortized to interest income, using the level-yield
method, over the contractual term of the related loan. Unamortized fees and
costs applicable to prepaid loans are recognized in interest income at the
time of prepayment.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank ("FHLB") of New York, the Bank is
required to hold a certain amount of FHLB stock. This stock is considered to
be a non-marketable equity security under SFAS No. 115 and, accordingly, is
carried at cost.
Real Estate Owned
Real estate properties acquired through foreclosure are recorded initially
at fair value less estimated sales costs, with the resulting writedown charged
to the allowance for loan losses. Thereafter, an allowance for losses on real
estate owned is established by a charge to expense to reflect any subsequent
declines in fair value. Fair value estimates are based on recent appraisals
and other available information. Costs incurred to develop or improve
properties are capitalized, while holding costs are charged to expense.
Premises and Equipment
Premises and equipment are comprised of land (carried at cost) and
buildings, improvements, furniture, fixtures and equipment (carried at cost
less accumulated depreciation). Depreciation expense is recognized on a
straight-line basis over the estimated useful lives of the related assets
which range from 5 to 50 years. Costs incurred to improve or extend the life
of existing assets are capitalized. Repairs and maintenance, as well as
renewals and replacements of a routine nature, are charged to expense.
24
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
Income Taxes
Income taxes are accounted for under the asset and liability method.
Accordingly, deferred taxes are recognized for the estimated future tax
effects attributable to "temporary differences" between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of an enacted change in tax laws or rates
is recognized in income tax expense in the period that includes the enactment
date of the change.
Deferred tax liabilities are recognized for all temporary differences that
will result in future taxable income. Deferred tax assets are recognized for
all temporary differences and tax carryforwards that will result in future tax
deductions, subject to reduction of the assets by a valuation allowance in
certain circumstances. This valuation allowance is recognized if, based on an
analysis of available evidence, management determines that it is more likely
than not that a portion or all of the deferred tax assets will not be
realized. The valuation allowance is subject to adjustment based on changes in
circumstances that affect management's judgment about the realizability of the
deferred tax assets. Adjustments to increase or decrease the valuation
allowance are charged or credited, respectively, to income tax expense.
Employee Stock Ownership Plan
Compensation expense is recognized for the Company's ESOP equal to the fair
value of shares committed to be released for allocation to participant
accounts. Any difference between the fair value at that time and the ESOP's
original acquisition cost is charged or credited to stockholders' equity
(additional paid-in capital). The cost of ESOP shares that have not yet been
committed to be released is deducted from stockholders' equity.
Earnings Per Share
In accordance with SFAS No. 128, Earnings Per Share, basic earnings per
share excludes dilution and is computed by dividing net income applicable to
common stock by the weighted average number of common shares outstanding for
the period. Basic earnings per share presented in the fiscal 1999 consolidated
statement of income is for the six-month period following the Offering, based
on net income of $529,000 for that period and 5,041,690 average common shares.
For purposes of computing earnings per share, 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. The Company has 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.
Segment Information
During fiscal 1999, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 requires
public companies to report certain financial information about significant
revenue-producing segments of the business for which such information is
available and utilized by the chief operating decision maker. Specific
information to be reported for individual operating segments includes a
measure of profit and loss, certain revenue and expense items, and total
assets. As a community-oriented financial institution, substantially all of
the Company's operations involve the delivery of loan and deposit products to
customers. Management makes operating decisions and assesses performance based
on an ongoing review of these community banking operations, which constitute
the Company's only operating segment for financial reporting purposes under
SFAS No. 131.
25
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
(3) Securities Held to Maturity
The following is a summary of securities held to maturity at March 31, 1999
and 1998:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ----------------- Fair
Cost Gains Losses Value
--------- ------- -------- -------
(In thousands)
<S> <C> <C> <C> <C>
March 31, 1999
Mortgage-backed securities guaranteed
by:
Ginnie Mae......................... $36,772 $ 32 $ (395) $36,409
Fannie Mae......................... 4,902 2 (87) 4,817
Freddie Mac........................ 65 -- (1) 64
------- ------- -------- -------
41,739 34 (483) 41,290
U.S. Government and agency
securities.......................... 3,851 -- (54) 3,797
------- ------- -------- -------
Total............................ $45,590 $ 34 $ (537) $45,087
======= ======= ======== =======
March 31, 1998
Mortgage-backed securities guaranteed
by:
Ginnie Mae......................... $46,389 $ 389 $ (156) $46,622
Fannie Mae......................... 6,935 54 (49) 6,940
Freddie Mac........................ 97 2 -- 99
------- ------- -------- -------
53,421 445 (205) 53,661
U.S. Government and agency
securities.......................... 11,477 21 (68) 11,430
------- ------- -------- -------
Total............................ $64,898 $ 466 $ (273) $65,091
======= ======= ======== =======
</TABLE>
The amortized cost of the portfolio at March 31, 1999 consisted of
adjustable rate securities of $43.7 million and fixed rate securities of $1.9
million, with weighted average yields of 6.48% and 7.44%, respectively.
Adjustable rate and fixed rate securities at March 31, 1998 totaled $55.7
million and $9.2 million, respectively, with weighted average yields of 6.85%
and 6.37%, respectively.
There were no sales or transfers of securities held to maturity during the
years ended March 31, 1999, 1998 and 1997.
The following is a summary of the amortized cost and fair value of
securities held to maturity at March 31, 1999, by remaining term to
contractual maturity. Actual maturities may differ from these amounts because
certain issuers have the right to call or redeem their obligations prior to
contractual maturity.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -------
(In thousands)
<S> <C> <C>
Mortgage-backed securities.............................. $41,739 $41,290
U.S. Government and agency securities due:
Over five to ten years................................ 1,000 1,000
Over ten years........................................ 2,851 2,797
------- -------
Total............................................... $45,590 $45,087
======= =======
</TABLE>
26
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
(4) Securities Available for Sale
The following is a summary of securities available for sale at March 31,
1999 and 1998:
<TABLE>
<CAPTION>
Gross
Unrealized
------------
Amortized Fair
Cost Gains Losses Value
--------- ----- ------ -------
(In thousands)
<S> <C> <C> <C> <C>
March 31, 1999
Mortgage-backed securities guaranteed by:
Ginnie Mae................................... $ 8,163 $33 $ (15) $ 8,181
Fannie Mae................................... 3,124 -- (19) 3,105
Freddie Mac.................................. 5,292 -- (47) 5,245
------- --- ----- -------
16,579 33 (81) 16,531
U.S. Government and agency securities.......... 15,000 3 (162) 14,841
Mutual fund shares............................. 8,046 -- (16) 8,030
------- --- ----- -------
Total...................................... $39,625 $36 $(259) $39,402
======= === ===== =======
March 31, 1998
Mutual fund shares............................. $ 3,000 $-- $ (6) $ 2,994
======= === ===== =======
</TABLE>
Debt securities available for sale at March 31, 1999 consisted of adjustable
rate securities and fixed rate securities with amortized costs of $10.7
million and $20.9 million, respectively, and weighted average yields of 6.30%
and 6.00%, respectively.
There were no sales or transfers of securities available for sale during the
years ended March 31, 1999, 1998 and 1997.
The following is a summary of the amortized cost and fair value of debt
securities available for sale at March 31, 1999, by remaining term to
contractual maturity. Actual maturities may differ from these amounts because
certain issuers have the right to call or redeem their obligations prior to
contractual maturity.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -------
(In thousands)
<S> <C> <C>
Mortgage-backed securities.............................. $16,579 $16,531
U.S. Government and agency securities due:
Over one to five years................................ 5,498 5,474
Over five to ten years................................ 5,500 5,461
Over ten years........................................ 4,002 3,906
------- -------
Total............................................... $31,579 $31,372
======= =======
</TABLE>
27
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
(5) Loans
A summary of loans at March 31 follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Mortgage loans:
Residential properties:
One-to-four family................................ $119,015 $109,207
Home equity lines of credit....................... 16,441 13,138
Multi-family...................................... 396 412
Commercial properties............................... 5,930 3,811
Construction loans.................................. 2,160 1,800
Construction loans in process....................... (339) (573)
Deferred loan origination costs (fees), net......... 23 (280)
-------- --------
143,626 127,515
-------- --------
Consumer loans:
Automobile loans.................................... 609 1,011
Secured personal loans.............................. 395 707
Other............................................... -- 309
-------- --------
1,004 2,027
-------- --------
Total loans....................................... 144,630 129,542
Allowance for loan losses............................. (1,094) (984)
-------- --------
Total loans, net.................................. $143,536 $128,558
======== ========
</TABLE>
Gross loans at March 31, 1999 consisted of fixed rate loans of $141.2
million and adjustable rate loans of $3.8 million, with weighted average
yields of 7.74% and 8.21%, respectively. Fixed rate and adjustable rate loans
at March 31, 1998 totaled $124.0 million and $6.4 million, respectively, with
weighted average yields of 8.18% and 8.64%, respectively.
The Company primarily originates mortgage loans secured by existing single-
family residential properties. The Company also originates multi-family and
commercial mortgage loans, construction loans and consumer loans.
Substantially all of the mortgage loan portfolio is secured by real estate
properties located in Westchester County, New York. The ability of the
Company's borrowers to make principal and interest payments is dependent upon,
among other things, the level of overall economic activity and the real estate
market conditions prevailing within the Company's concentrated lending area.
Activity in the allowance for loan losses is summarized as follows for the
years ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
------ ---- ----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year........................... $ 984 $845 $725
Provision for loan losses.............................. 272 155 146
Charge-offs............................................ (162) (16) (45)
Recoveries............................................. -- -- 19
------ ---- ----
Balance at end of year................................. $1,094 $984 $845
====== ==== ====
</TABLE>
28
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
The principal balances of nonaccrual loans past due ninety days or more at
March 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One-to-four family................................. $ 769 $1,721 $1,832
Home equity lines of credit........................ 308 -- --
Commercial......................................... -- 236 432
Consumer loans....................................... 14 1 --
------ ------ ------
Total nonaccrual loans........................... $1,091 $1,958 $2,264
====== ====== ======
</TABLE>
Gross interest income that would have been recorded if the foregoing
nonaccrual loans had remained current in accordance with their contractual
terms totaled $76,000, $205,000 and $231,000 for the years ended March 31,
1999, 1998 and 1997, respectively, compared to interest income actually
recognized of $31,000, $55,000 and $52,000, respectively.
The Company did not have any impaired loans at March 31, 1999 within the
scope of SFAS No. 114 (multi-family, commercial mortgage and construction
loans). Impaired loans at March 31, 1998 consisted of a nonaccrual commercial
mortgage loan with a recorded investment of $236,000. The Company determines
the need for an allowance for loan impairment under SFAS No. 114 on a loan-by-
loan basis. At March 31, 1998, such an allowance was not required due to the
sufficiency of the related collateral values. The average recorded investment
in impaired loans was approximately $192,000, $330,000 and $299,000 for the
years ended March 31, 1999, 1998 and 1997, respectively. Interest collections
and income recognized on impaired loans (while such loans were considered
impaired) were insignificant during each of these years.
Other assets at March 31, 1999 and 1998 include real estate owned properties
with net carrying values of $288,000 and $129,000, respectively. Provisions
for losses and other activity in the allowance for losses on real estate owned
were insignificant during the years ended March 31, 1999, 1998 and 1997.
(6) Premises and Equipment
A summary of premises and equipment at March 31 follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Land....................................................... $ 537 $ 537
Buildings and improvements................................. 1,557 1,501
Furniture, fixtures and equipment.......................... 1,535 1,325
------- -------
3,629 3,363
Less accumulated depreciation.............................. (1,694) (1,811)
------- -------
Premises and equipment, net.............................. $ 1,935 $ 1,552
======= =======
</TABLE>
29
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
(7) Deposits
The following is a summary of deposit balances and weighted average stated
interest rates at March 31:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
Rate Amount Rate Amount
---- -------- ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Passbook and club accounts................... 2.25% $ 60,112 2.54% $ 61,347
Money market accounts........................ 1.83 17,754 3.05 17,676
NOW and Super NOW accounts................... 1.52 22,828 2.04 21,261
-------- --------
Total.................................... 2.01 100,694 2.52 100,284
-------- --------
Certificates of deposit by remaining term to
contractual maturity:
Within one year.......................... 5.03 105,111 5.60 108,902
After one but within three years......... 5.16 30,263 5.72 9,613
After three years........................ 4.21 1,211 4.49 1,114
-------- --------
Total.................................... 5.05 136,585 5.60 119,629
-------- --------
Total deposits........................... 3.76% $237,279 4.20% $219,913
======== ========
</TABLE>
Certificates of deposit with denominations of $100,000 or more totaled $17.1
million and $14.1 million at March 31, 1999 and 1998, respectively. The
Federal Deposit Insurance Corporation generally insures deposit accounts up to
$100,000, as defined in the applicable regulations.
The following is a summary of interest expense on deposits for the years
ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Passbook and club accounts........................... $1,493 $1,573 $1,640
Money market, NOW and Super NOW accounts............. 969 962 918
Certificates of deposit.............................. 6,595 6,165 5,318
------ ------ ------
Total.............................................. $9,057 $8,700 $7,876
====== ====== ======
</TABLE>
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted into
law on September 30, 1996. Among other things, the Funds Act required
depository institutions to pay a one-time special assessment of 65.7 basis
points on their SAIF-assessable deposits held on March 31, 1995, in order to
recapitalize the SAIF to the level required by law. The Bank's special
assessment of $1.2 million was paid in November 1996 and is reflected in non-
interest expense for the year ended March 31, 1997.
(8) Federal Home Loan Bank Borrowings
The Company may have outstanding borrowings from the FHLB of up to 25% of
total assets, or approximately $73.7 million at March 31, 1999, in a
combination of term advances and overnight funds. Borrowings are secured by
the Company's investment in FHLB stock and by a blanket security agreement.
This agreement requires the Company to maintain as collateral certain
qualifying assets (such as securities and single-family residential mortgage
loans) with a fair value, as defined, at least equal to 115% of any
outstanding advances.
At March 31, 1999 and 1998, an outstanding FHLB advance of $87,000 is
included in other liabilities in the consolidated balance sheets. This advance
bears interest at a fixed rate of 8.29% and matures in 2002.
30
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
(9) Income Taxes
Income tax expense consists of the following components for the years ended
March 31:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Federal:
Current........................................ $1,207 $1,679 $1,173
Deferred....................................... (177) (135) 121
------ ------ ------
1,030 1,544 1,294
------ ------ ------
New York State:
Current........................................ 343 556 489
Deferred....................................... (23) (35) (458)
------ ------ ------
320 521 31
------ ------ ------
Total:
Current........................................ 1,550 2,235 1,662
Deferred....................................... (200) (170) (337)
------ ------ ------
$1,350 $2,065 $1,325
====== ====== ======
</TABLE>
The following is a reconciliation of expected income taxes (computed at the
applicable Federal statutory tax rate of 34%) to the Company's actual income
tax expense for the years ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(Dollars in
thousands)
<S> <C> <C> <C>
Taxes at Federal statutory rate.................... $1,119 $1,683 $1,229
State tax expense, net of Federal tax benefit...... 211 344 20
Other reconciling items, net....................... 20 38 76
------ ------ ------
Actual income tax expense.......................... $1,350 $2,065 $1,325
====== ====== ======
Effective income tax rate.......................... 41.0% 41.7% 36.7%
====== ====== ======
</TABLE>
The tax effects of temporary differences and carryforwards that give rise to
the Company's deferred tax assets and liabilities at March 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
------ ----
(In
thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................... $ 449 $403
Deferred compensation....................................... 236 191
Charitable contributions carried forward for tax purposes... 157 --
Other deductible temporary differences...................... 160 195
------ ----
Total deferred tax assets................................. 1,002 789
------ ----
Deferred tax liabilities:
Tax bad debt reserves in excess of base-year reserves....... 431 522
Other taxable temporary differences......................... 15 --
------ ----
Total deferred tax liabilities............................ 446 522
------ ----
Net deferred tax asset (included in other assets)............. $ 556 $267
====== ====
</TABLE>
31
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
In assessing the realizability of the Company's total deferred tax assets,
management considers whether it is more likely than not that some portion or
all of those assets will not be realized. Based upon management's
consideration of historical and anticipated future pre-tax income, as well as
the reversal period for the items giving rise to the deferred tax assets and
liabilities, a valuation allowance for deferred tax assets was not considered
necessary at March 31, 1999 and 1998.
A corporation's annual tax deduction for charitable contributions is subject
to a limitation based on a percentage of taxable income. Contributions in
excess of this limitation are carried forward and may be deducted in one or
more of the succeeding five tax years. As a result of the contribution of
shares to the Charitable Foundation, at March 31, 1999 the Company had an
unused charitable contribution carryforward of approximately $400,000 which is
available for deduction through December 31, 2003.
As a thrift institution, the Bank is subject to special provisions in the
Federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions historically
were determined using methods based on loss experience or a percentage of
taxable income. Tax bad debt reserves represent the excess of allowable
deductions over actual bad debt losses and other reserve reductions. These
reserves consist of a defined base-year amount, plus additional amounts
("excess reserves") accumulated after the base year. SFAS No. 109 requires
recognition of deferred tax liabilities with respect to such excess reserves,
as well as any portion of the base-year amount which is expected to become
taxable (or "recaptured") in the foreseeable future.
Certain amendments to the Federal and New York State tax laws regarding bad
debt deductions were enacted in 1996. The Federal amendments eliminated the
percentage-of-taxable-income method for tax years beginning after December 31,
1995 and imposed a requirement to recapture into taxable income (over a six-
year period) the reserves in excess of the base-year amounts. The Company
previously established, and continues to maintain, a deferred tax liability
with respect to such excess Federal reserves. The New York State amendments
redesignated the State bad debt reserve as the base-year amount and permit
future additions to the base-year reserve using the percentage-of-taxable-
income method. These changes effectively eliminated the excess New York State
reserves for which a deferred tax liability had been recognized and,
accordingly, the Company reduced its deferred tax liability by $250,000 (with
a corresponding reduction in income tax expense) during the year ended March
31, 1997.
At March 31, 1999, the Bank's base-year tax bad debt reserves totaled $5.2
million for Federal tax purposes and $8.8 million for State tax purposes. In
accordance with SFAS No. 109, deferred tax liabilities have not been
recognized with respect to these reserves, since the Company does not expect
that these amounts will become taxable in the foreseeable future. Under the
tax laws as amended, events that would result in taxation of these reserves
include (i) redemptions of the Bank's stock or certain excess distributions by
the Bank to Sound Federal Bancorp, and (ii) failure of the Bank to maintain a
specified qualifying assets ratio and meet other thrift definition tests for
New York State tax purposes. At March 31, 1999, the unrecognized deferred tax
liabilities with respect to the Bank's Federal and State tax bad debt reserves
totaled approximately $2.4 million.
(10) Employee Benefit Plans
Pension Plan
The Company maintains a non-contributory defined benefit pension plan which
covers substantially all full-time employees who meet certain age and service
requirements. Benefits are based on the employee's years of accredited service
and average compensation for the three consecutive years that produce the
highest average. The Company's funding policy is to contribute the amounts
required by applicable regulations, although additional amounts may be
contributed from time to time.
32
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
The following is a summary of the changes in the plan's projected benefit
obligation and the fair value of plan assets, together with a reconciliation
of the plan's funded status to the accrued pension costs recognized in the
consolidated balance sheets:
<TABLE>
<CAPTION>
1999 1998
------ ------
(In
thousands)
<S> <C> <C>
Change in benefit obligations:
Beginning of year...................................... $4,815 $4,262
Service cost........................................... 73 64
Interest cost.......................................... 325 318
Actuarial loss......................................... 233 292
Benefits paid.......................................... (145) (121)
------ ------
End of year............................................ 5,301 4,815
------ ------
Change in fair value of plan assets:
Beginning of year...................................... 4,108 3,815
Actual return on plan assets........................... 358 304
Employer contributions................................. 91 110
Benefits paid.......................................... (145) (121)
------ ------
End of year............................................ 4,412 4,108
------ ------
Funded status at end of year............................. (889) (707)
Unrecognized net actuarial loss.......................... 758 526
Unrecognized prior service cost.......................... 54 100
Unrecognized net transition obligation................... 26 54
------ ------
Accrued pension cost..................................... $ (51) $ (27)
====== ======
</TABLE>
A discount rate of 6.50% and a rate of increase in future compensation
levels of 4.50% were used in determining the actuarial present value of the
projected benefit obligations at March 31, 1999 (6.75% and 4.50%,
respectively, at March 31, 1998). The expected long-term rate of return on
plan assets was 9.00% for 1999, 1998 and 1997.
The components of the net periodic pension expense were as follows for the
years ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Service cost........................................ $ 73 $ 64 $ 74
Interest cost....................................... 325 318 283
Expected return on plan assets...................... (367) (343) (295)
Recognized net actuarial loss....................... 9 -- 5
Amortization of prior service cost and net
transition obligation.............................. 53 53 53
----- ----- -----
Net periodic pension expense...................... $ 93 $ 92 $ 120
===== ===== =====
</TABLE>
Director Emeritus Plan
The Company maintains a non-qualified, unfunded Director Emeritus Plan. The
plan provides for lifetime payments to directors who reach emeritus status, in
annual amounts equal to the compensation earned as a director at the time of
retirement. Directors qualify for emeritus status upon attaining age 70 with
at least 15
33
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
years of board service (5 years if directorship ceases as a result of a
merger, consolidation or similar transaction). At March 31, 1999, the plan's
projected benefit obligation and unrecognized prior service cost were $852,000
and $712,000, respectively. Compensation and benefits expense for fiscal 1999
includes $143,000 with respect to this plan.
Savings Plan
The Company maintains an employee savings plan under Section 401(k) of the
Internal Revenue Code. Eligible employees are able to make contributions to
the plan of up to 10% of their compensation. Prior to February 1, 1999, the
Company made matching contributions equal to 50% of the participant's
contributions to the plan. The Company ceased its matching contributions
effective February 1, 1999. Participants vest immediately in both their own
contributions and Company contributions. Savings plan expense was $49,000,
$41,000 and $21,000 for the years ended March 31, 1999, 1998 and 1997,
respectively.
Employee Stock Ownership Plan
In connection with the Reorganization and Offering, the Company established
an ESOP for eligible employees who meet certain age and service requirements.
The ESOP borrowed approximately $1.9 million from Sound Federal Bancorp and
used the funds to purchase 192,129 shares of common stock sold in the
Offering. The Bank makes periodic contributions to the ESOP sufficient to
satisfy the debt service requirements of the loan which has a ten-year term
and bears interest at the prime rate. The ESOP uses these contributions and
any dividends received by the ESOP on unallocated shares to make principal and
interest payments on the loan.
Shares purchased by the ESOP are held in a suspense account by the plan
trustee until allocated to participant accounts. Shares released from the
suspense account are allocated to participants on the basis of their relative
compensation in the year of allocation. Participants become vested in the
allocated shares over a period not to exceed five years. Any forfeited shares
are allocated to other participants in the same proportion as contributions.
Total ESOP expense of $231,000 was recognized in fiscal 1999, consisting of
(i) $185,000 attributable to the allocation of 19,213 shares to participants
for the initial plan year ended December 31, 1998 and (ii) $46,000
attributable to 4,803 shares committed to be released to participants in the
quarter ended March 31, 1999 with respect to the plan year ending December 31,
1999. The cost of the 168,113 ESOP shares that have not yet been allocated or
committed to be released to participants is deducted from stockholders' equity
($1.7 million at March 31, 1999). The fair value of these shares was
approximately $1.5 million at that date.
(11) Commitments and Contingencies
Off-Balance Sheet Financial Instruments
The Company's off-balance sheet financial instruments at March 31, 1999 and
1998 were limited to loan origination commitments of $11.6 million and $6.4
million, respectively, and unused lines of credit (principally home equity
lines) extended to customers of $11.6 million and $7.0 million, respectively.
Substantially all of these commitments and lines of credit carry fixed
interest rates and have been provided to customers within the Company's
primary lending area described in Note 5. Fixed rate loan origination
commitments at March 31, 1999 provide for interest rates ranging from 6.25% to
8.25%.
Loan origination commitments and lines of credit are contractual agreements
to lend to customers within specified time periods at interest rates and on
other terms specified in the agreements. These financial instruments
34
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
involve elements of credit risk and interest rate risk in addition to the
amounts for funded loans recognized in the consolidated balance sheets. The
contractual amounts of commitments and lines of credit represent the Company's
maximum potential exposure to credit loss (assuming that the agreements are
fully funded and any collateral proves to be worthless), but do not
necessarily represent future cash requirements since certain agreements may
expire without being fully funded. Loan commitments generally have fixed
expiration dates (ranging up to 3 months) or other termination clauses and may
require the payment of a fee by the customer. Commitments and lines of credit
are subject to the same credit approval process applied in the Company's
general lending activities, including a case-by-case evaluation of the
customer's creditworthiness and related collateral requirements.
Lease Commitments
The Company is obligated under non-cancelable operating leases for one
existing and one planned branch office. Rent expense under these leases was
$75,000 in fiscal 1999. At March 31, 1999, the future minimum rental payments
under these lease agreements for the fiscal years ending March 31 total
$175,000 in 2000, $175,000 in 2001, $175,000 in 2002, $170,000 in 2003,
$155,000 in 2004 and a total of $552,000 for 2005-2008.
Legal Proceedings
In the normal course of business, the Company is involved in various
outstanding legal proceedings. In the opinion of management, after
consultation with legal counsel, the outcome of such legal proceedings should
not have a material effect on the Company's financial condition, results of
operations or liquidity.
(12) Regulatory Matters
Regulatory Capital Requirements
OTS regulations require savings institutions to maintain a minimum ratio of
tangible capital to total adjusted assets of 1.5%; a minimum ratio of Tier I
(core) capital to total adjusted assets of 3.0%; and a minimum ratio of Tier I
(core and supplementary) capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to take
certain supervisory actions with respect to an undercapitalized institution.
Such actions could have a direct material effect on the institution's
financial statements. The regulations establish a framework for the
classification of depository institutions into five categories: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Generally, an institution
is considered well capitalized if it has a Tier I (core) capital ratio of at
least 5.0%; a Tier I risk-based capital ratio of at least 6.0%; and a total
risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS about
capital components, risk weightings and other factors. These capital
requirements apply only to the Bank, and do not consider additional capital
retained by Sound Federal Bancorp.
Management believes that, as of March 31, 1999 and 1998, the Bank met all
capital adequacy requirements to which it was subject. Further, the most
recent OTS notification categorized the Bank as a well-capitalized institution
under the prompt corrective action regulations. There have been no conditions
or events since that notification that management believes have changed the
Bank's capital classification.
35
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
The following is a summary of the Bank's actual capital amounts and ratios
as of March 31, 1999 and 1998, compared to the OTS requirements for minimum
capital adequacy and for classification as a well-capitalized institution:
<TABLE>
<CAPTION>
OTS Requirements
----------------------------------
Classification
Minimum Capital as Well
Bank Actual Adequacy Capitalized
------------- ----------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- --------- ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
March 31, 1999
Tangible capital............ $43,551 14.8% $ 4,439 1.5%
Tier I (core) capital (1)... 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
March 31, 1998
Tangible capital............ $31,901 12.5% $ 3,821 1.5%
Tier I (core) capital....... 31,901 12.5 7,642 3.0 $ 12,737 5.0%
Risk-based capital:
Tier I.................... 31,901 33.9 5,645 6.0
Total..................... 32,885 34.9 7,527 8.0 9,409 10.0
</TABLE>
- --------
(1) The OTS percentage requirement for minimum capital adequacy was changed to
4.0% effective April 1, 1999. Based on this new percentage, the Bank's
required capital at March 31, 1999 was $11.8 million.
Dividend Limitations
Under OTS regulations which became effective April 1, 1999, savings
associations such as the Bank generally may declare annual cash dividends up
to an amount equal to net income for the current year plus retained net income
for the two preceding years. Dividends in excess of such amount require OTS
approval. Unlike the Bank, Sound Federal Bancorp is not subject to OTS
regulatory limitations on the payment of dividends to its shareholders. On
April 9, 1999, Sound Federal Bancorp declared an initial cash dividend of
$0.07 per common share. The Mutual Holding Company accepted payment of this
dividend with respect to all of its shares.
Liquidation Rights
All depositors who had liquidation rights with respect to the Bank as of the
effective date of the Reorganization continue to have such rights solely with
respect to the Mutual Holding Company, as long as they continue to hold
deposit accounts with the Bank. In addition, all persons who become depositors
of the Bank subsequent to the Reorganization will have such liquidation rights
with respect to the Mutual Holding Company.
(13) Comprehensive Income
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for the reporting and display of comprehensive income
(and its components) in financial statements. Comprehensive income represents
the sum of net income and items of "other comprehensive income" which are
reported directly in stockholders' equity, such as the change during the
period in the after-tax net unrealized gain or loss on securities available
for sale. In accordance with SFAS No. 130, the Company has reported its
comprehensive income for fiscal 1999, 1998 and 1997 in the consolidated
statements of changes in stockholders' equity.
36
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
The Company's other comprehensive income or loss, which is attributable to
gains and losses on securities available for sale, is summarized as follows
for the years ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
(In thousands)
<S> <C> <C> <C>
Net unrealized holding loss (gain) arising during the
year................................................... $(217) $(1) $ 1
Related income tax effect............................... 89 -- --
----- --- ---
Other comprehensive (loss) income....................... $(128) $(1) $ 1
===== === ===
</TABLE>
The Company's accumulated other comprehensive loss, which is included in
stockholders' equity, represents the net unrealized loss on securities
available for sale of $132,000 and $4,000 at March 31, 1999 and 1998,
respectively, after deducting related taxes of $91,000 and $2,000,
respectively.
(14) Fair Values of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosures for financial instruments for which it is practicable to
estimate fair value. The definition of a financial instrument includes many of
the assets and liabilities recognized in the Company's consolidated balance
sheets, as well as certain off-balance sheet items. Fair value is defined in
SFAS No. 107 as the amount at which a financial instrument could be exchanged
in a current transaction between willing parties, other than in a forced sale
or liquidation.
Quoted market prices are used to estimate fair values when those prices are
available. However, active markets do not exist for many types of financial
instruments. Consequently, fair values for these instruments must be estimated
by management using techniques such as discounted cash flow analysis and
comparison to similar instruments. Estimates developed using these methods are
highly subjective and require judgments regarding significant matters such as
the amount and timing of future cash flows and the selection of discount rates
that appropriately reflect market and credit risks. Changes in these judgments
often have a material effect on the fair value estimates. Since these
estimates are made as of a specific point in time, they are susceptible to
material near-term changes. Fair values disclosed in accordance with SFAS No.
107 do not reflect any premium or discount that could result from the sale of
a large volume of a particular financial instrument, nor do they reflect
possible tax ramifications or estimated transaction costs.
37
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
The following is a summary of the carrying amounts and estimated fair values
of the Company's financial assets and liabilities (none of which were held for
trading purposes) at March 31:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(In millions)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks................. $ 5.1 $ 5.1 $ 5.7 $ 5.7
Federal funds sold...................... 44.4 44.4 36.4 36.4
Certificates of deposit................. 10.7 10.7 11.5 11.5
Securities.............................. 85.0 84.5 67.9 68.1
Loans................................... 143.5 147.5 128.6 130.3
Accrued interest receivable............. 1.4 1.4 0.9 0.9
FHLB stock.............................. 1.9 1.9 1.7 1.7
Financial liabilities:
Savings certificate accounts............ 136.6 136.6 119.6 119.6
Other deposit accounts.................. 100.7 100.7 100.3 100.3
Mortgage escrow funds................... 2.5 2.5 2.4 2.4
FHLB advance............................ 0.1 0.1 0.1 0.1
====== ====== ====== ======
</TABLE>
The following is a description of the valuation methods used by the Company
to estimate the fair values of its financial instruments:
Securities
The fair values of securities were based on market prices or dealer quotes.
Loans
For valuation purposes, the loan portfolio was segregated into its
significant categories, such as residential mortgage loans and consumer loans.
These categories were further analyzed, where appropriate, into components
based on significant financial characteristics such as type of interest rate
(fixed or adjustable). Generally, management estimated fair values by
discounting the anticipated cash flows at current market rates for loans with
similar terms to borrowers of similar credit quality.
Deposit Liabilities
The fair values of savings certificate accounts represent contractual cash
flows discounted using interest rates currently offered on certificates with
similar characteristics and remaining maturities. In accordance with SFAS No.
107, the fair values of other deposit accounts (those with no stated maturity
such as passbook and money market accounts) are equal to the carrying amounts
payable on demand. These fair values do not include the value of core deposit
relationships that comprise a significant portion of the Company's deposit
base. Management believes that these core deposit relationships provide a
relatively stable, low-cost funding source which has a substantial
unrecognized value separate from the deposit balances.
Other Financial Instruments
The other financial assets and liabilities listed in the preceding table
have fair values that approximate the respective carrying amounts in the
consolidated balance sheets because the instruments are payable on demand
38
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
or have short-term maturities and present relatively low credit risk and
interest rate risk. Fair values of the loan origination commitments and unused
lines of credit described in Note 11 were estimated based on an analysis of
the interest rates and fees currently charged to enter into similar
transactions, considering the remaining terms of the instruments and the
creditworthiness of the potential borrowers. At March 31, 1999 and 1998, the
fair values of these instruments approximated the related carrying amounts
which were not significant.
(15) Condensed Parent Company Financial Statements
Set forth below is the condensed balance sheet of Sound Federal Bancorp at
March 31, 1999, together with the related condensed statements of income and
cash flows for the period from October 8, 1998 through March 31, 1999.
<TABLE>
<CAPTION>
March 31, 1999
Condensed Balance Sheet --------------
(In thousands)
<S> <C>
Assets
Interest-bearing deposit at subsidiary bank................. $11,038
Loan receivable from ESOP................................... 1,729
Investment in subsidiary bank............................... 43,384
Other assets................................................ 568
-------
Total assets.............................................. $56,719
=======
Liabilities................................................. $ 1,735
Stockholders' Equity........................................ 54,984
-------
Total liabilities and stockholders' equity................ $56,719
=======
</TABLE>
Condensed Statement of Income
<TABLE>
<CAPTION>
Period Ended
March 31,
1999
--------------
(In thousands)
<S> <C>
Interest income........................................... $ 143
Contribution of common stock to Charitable Foundation..... (1,022)
Other expenses............................................ (52)
-------
Loss before income tax benefit and equity in undistributed
earnings of subsidiary................................... (931)
Income tax benefit........................................ 314
-------
Loss before equity in undistributed earnings of
subsidiary............................................... (617)
Equity in undistributed earnings of subsidiary............ 1,146
-------
Net income................................................ $ 529
=======
</TABLE>
39
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Period Ended
March 31,
1999
--------------
(In thousands)
<S> <C>
Operating Activities
Net income................................................ $ 529
Adjustments to reconcile net income to net cash used in
operating activities:
Equity in undistributed earnings of subsidiary.......... (1,146)
Contribution of common stock to the Charitable
Foundation............................................. 1,022
Increase in other assets................................ (568)
Other................................................... 40
--------
Net cash used in operating activities................... (123)
--------
Investing Activities
Purchase of subsidiary's common stock..................... (9,048)
Funding of ESOP loan receivable, net of principal
repayments............................................... (1,729)
--------
Net cash used in investing activities..................... (10,777)
--------
Financing Activities
Net proceeds from common stock offering, inclusive of ESOP
shares................................................... 21,938
--------
Net increase in cash and cash equivalents................. 11,038
Cash and cash equivalents at beginning of period.......... --
--------
Cash and cash equivalents at end of period................ $ 11,038
========
</TABLE>
40
<PAGE>
Sound Federal Bancorp and Subsidiary
Notes To Consolidated Financial Statements--(Continued)
(16) Quarterly Results of Operations (Unaudited)
The following is a condensed summary of quarterly results of operations for
the years ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended March 31, First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
-------------------- ------- ------- ------- -------
(In thousands, except per share
data)
<S> <C> <C> <C> <C>
Interest and dividend
income................. $4,544 $4,568 $4,693 $4,638
Interest expense........ 2,256 2,352 2,292 2,231
------ ------ ------ ------
Net interest income..... 2,288 2,216 2,401 2,407
Provision for loan
losses................. 81 70 71 50
Non-interest income..... 50 39 44 38
Contribution to the
Charitable Foundation.. -- -- 1,022 --
Other non-interest
expense................ 994 1,133 1,389 1,382
------ ------ ------ ------
Income (loss) before
income tax expense..... 1,263 1,052 (37) 1,013
Income tax expense...... 517 386 57 390
------ ------ ------ ------
Net income (loss)....... $ 746 $ 666 $ (94) $ 623
====== ====== ====== ======
Basic earnings (loss)
per common share....... $(0.02) $ 0.12
====== ======
<CAPTION>
Year Ended March 31,
1998
--------------------
<S> <C> <C> <C> <C>
Interest and dividend
income................. $4,346 $4,446 $4,385 $4,441
Interest expense........ 2,125 2,199 2,202 2,217
------ ------ ------ ------
Net interest income..... 2,221 2,247 2,183 2,224
Provision for loan
losses................. 37 39 7 72
Non-interest income..... 56 43 42 45
Non-interest expense.... 931 998 1,022 1,005
------ ------ ------ ------
Income before income tax
expense................ 1,309 1,253 1,196 1,192
Income tax expense...... 545 522 499 499
------ ------ ------ ------
Net income.............. $ 764 $ 731 $ 697 $ 693
====== ====== ====== ======
</TABLE>
41
<PAGE>
Corporate Information
Headquarters Special Counsel
300 Mamaroneck Avenue Luse Lehman Gorman Pomerenk & Schick
Mamaroneck, New York 10543 5335 Wisconsin Avenue, N.W.
914-698-6400 Suite 400
Washington, DC 20015
Transfer Agent Independent Auditors
Registrar and Transfer Company KPMG LLP
10 Commerce Drive 3001 Summer Street
Cranford, New Jersey 07016 Stamford, Connecticut 06905
1-800-866-1340
Annual Meeting Investor Relations
July 14, 1999, 11:00 a.m. Anthony J. Fabiano
Doral Arrowwood Conference Center Vice-President & Chief Financial
Anderson Hill Road Officer
Rye Brook, New York 10573 Sound Federal Bancorp
300 Mamaroneck Avenue
Mamaroneck, New York 10543
Common Stock Information 914-670-0123
The Company's common stock is traded Annual Report on Form 10-K
on the Nasdaq National Market under
the symbol "SFFS". The common stock
has been traded since October 8, A copy of the Company's Form 10-K, as
1998. Market prices for the fiscal filed with the Securities and
year ended March 31, 1999 were as Exchange Commission, is available
follows: without charge by written request to
Investor Relations at the address set
forth above under "Headquarters"
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ------- ------
<S> <C> <C>
December 31, 1998........ $10.125 $7.875
March 31, 1999........... 9.969 8.875
</TABLE>
Directors of the Company and the Bank Officers of the Company and the Bank
Bruno J. Gioffre, Chairman of the Richard P. McStravick, President
Board andChief Executive Officer
Richard P. McStravick, President William H. Morel, Senior Vice-
and Chief Executive Officer President and Corporate Secretary
Joseph Dinolfo Anthony J. Fabiano, Vice-President
Donald H. Heithaus and Chief Financial Officer
Robert P. Joyce
Joseph A. Lanza
Arthur C. Phillips, Jr.
James Staudt, General Counsel
42
<PAGE>
Branch Locations
Officers of the Bank
Main Office Accounting
300 Mamaroneck Avenue Michael J. Ceruzzi, Treasurer
Mamaroneck, New York 10543 Ray Bennett, Assistant Treasurer
914-698-6400
Harrison Branches
389 Halstead Avenue Robert V. Galante, Assistant Vice-
Harrison, New York 10528 President
914-835-0500
Henry Benvenuto, Assistant Treasurer
Rye Brook Michael Bulgia, Assistant Treasurer
115 South Ridge Street
Rye Brook, New York 10573
914-939-0100 Branch Operations
Judy Malinowski, Assistant Treasurer
Sheila V. Torpey, Assistant Treasurer
New City
180 South Main Street
New City, New York 10956 Human Resources
914-639-3400 Mary Ellen Morel, Assistant Secretary
Lending
Gilda M. Salamone, Assistant Vice-
President
Mary K. Harrison, Assistant Treasurer
Mary A. Maida, Assistant Secretary
43
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
Sound Federal Savings and Loan Association,
wholly-owned by the Registrant and incorporated under federal law
Sound REIT,
wholly-owned by Sound Federal Savings and Loan Association and incorporated in
New York State
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
Sound Federal Bancorp:
We consent to incorporation by reference in the Registration Statement (No.
333-61887) on Form S-8 of Sound Federal Bancorp of our report dated April 26,
1999, relating to the consolidated balance sheets of Sound Federal Bancorp and
subsidiary as of March 31, 1999 and 1998, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended March 31, 1999, which report appears
in the March 31, 1999 annual report on Form 10-K of Sound Federal Bancorp.
/s/KPMG LLP
Stamford, Connecticut
June 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 5082
<INT-BEARING-DEPOSITS> 10686
<FED-FUNDS-SOLD> 44400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39402
<INVESTMENTS-CARRYING> 45590
<INVESTMENTS-MARKET> 45087
<LOANS> 144630
<ALLOWANCE> 1094
<TOTAL-ASSETS> 295311
<DEPOSITS> 237279
<SHORT-TERM> 87
<LIABILITIES-OTHER> 481
<LONG-TERM> 0
0
0
<COMMON> 521
<OTHER-SE> 54463
<TOTAL-LIABILITIES-AND-EQUITY> 295311
<INTEREST-LOAN> 11040
<INTEREST-INVEST> 4250
<INTEREST-OTHER> 3153
<INTEREST-TOTAL> 18443
<INTEREST-DEPOSIT> 9057
<INTEREST-EXPENSE> 9131
<INTEREST-INCOME-NET> 9312
<LOAN-LOSSES> 272
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5920
<INCOME-PRETAX> 3291
<INCOME-PRE-EXTRAORDINARY> 3291
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1941
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
<YIELD-ACTUAL> 3.51
<LOANS-NON> 1091
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 984
<CHARGE-OFFS> 162
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1094
<ALLOWANCE-DOMESTIC> 1094
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
