SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 000-24811
SOUND FEDERAL BANCORP
(Exact name of registrant as specified in its charter)
Federal 13-4029393
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Mamaroneck Ave., Mamaroneck, New York 10543
(Address of principal executive offices)
(Zip Code)
(914) 698-6400
(Registrant's telephone number including area code)
N/A
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Shares
Outstanding at
Class August 9 , 1999
_____________ ________________
Common Stock, 5,212,218
par value, $0.10
<PAGE>
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements (Unaudited)
<S> <C>
Consolidated Balance Sheets at June 30, 1999 and March 31, 1999...................................... 1
Consolidated Statements of Income for the Quarters
ended June 30, 1999 and 1998.............................................................................2
Consolidated Statement of Changes in Stockholders' Equity for the Quarter
ended June 30, 1999......................................................................................3
Consolidated Statements of Cash Flows for the Quarters
ended June 30, 1999 and 1998.............................................................................4
Notes to Unaudited Consolidated Financial Statements.....................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................................13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................................14
Item 2. Changes in Securities and Use of Proceeds...............................................................14
Item 3. Defaults upon Senior Securities.........................................................................14
Item 4. Submission of Matters to a Vote of Security Holders.....................................................14
Item 5. Other Information.......................................................................................14
Item 6. Exhibits and Reports on Form 8-K........................................................................14
Signatures..............................................................................................15
</TABLE>
i
<PAGE>
Part 1. - Financial Information
Item 1. Financial Statements
Sound Federal Bancorp and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
( Dollars in thousands, except per share data) June 30, March 31,
1999 1999
-------------------- ------------
<S> <C> <C>
Assets
Cash and due from banks.............................................. $ 6,094 $ 5,082
Federal funds sold.......................................... 28,000 44,400
Certificates of deposit.............................................. 11,776 10,686
Securities:
Available-for-sale, at fair value................................. 49,776 39,402
Held-to-maturity, at amortized cost (fair value of
$41,483 and $45,087 at June 30 and March 31, 1999, 41,908 45,590
------------ ------------
respectively).............................................
Total securities............................................ 91,684 84,992
------------ ------------
Loans, net:
Mortgage loans................................................... 153,289 143,626
Consumer loans................................................... 940 1,004
Allowance for loan losses (Note 4)............................... (1,119) (1,094)
------------- -------------
Total loans, net............................................ 153,110 143,536
------------ ------------
Accrued interest receivable.......................................... 1,691 1,436
Federal Home Loan Bank stock......................................... 1,884 1,884
Premises and equipment, net.......................................... 2,290 1,935
Other assets......................................................... 1,580 1,360
----------- -----------
Total assets............................................... $ 298,109 $ 295,311
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits........................................................ $ 240,931 $ 237,279
Mortgagors' escrow funds....................................... 1,699 2,480
Accrued expenses and other liabilities.......................... 669 568
------------ -----------
Total liabilities............................................ 243,299 240,327
------------ -----------
Stockholders' equity:
Preferred stock ($0.10 par value; 10,000,000 shares
authorized; - -
none issued and outstanding..............................................
Common stock ($0.10 par value; 20,000,000 shares
authorized; 5,212,218 shares issued and outstanding at
June 30 and March 31, 1999)................................... 521 521
Additional paid-in capital....................................... 22,430 22,430
Common stock held by ESOP ....................................... (1,633) (1,681)
Retained earnings................................................ 34,142 33,846
Accumulated other comprehensive loss, net of taxes............... (650) (132)
-------------- -------------
Total stockholders' equity.................................. 54,810 54,984
------------ -----------
Total liabilities and stockholders' equity.................. $ 298,109 $ 295,311
============ ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
1
<PAGE>
Sound Federal Bancorp and Subsidiary
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
For the Quarter Ended
June 30,
1999 1998
---- -------
<S> <C> <C>
Interest and Dividend Income
Loans.................................................................... $ 2,871 $ 2,736
Securities............................................................. 1,341 1,098
Federal funds sold and certificates of deposit......................... 565 672
Other earning assets................................................... 45 38
--------- ---------
Total interest and dividend income..................................... 4,822 4,544
--------- ---------
Interest Expense
Deposits............................................................... 2,226 2,246
Other interest-bearing liabilities.................................... 11 10
--------- ---------
Total interest expense................................................. 2,237 2,256
---------- ---------
Net interest income.................................................... 2,585 2,288
Provision for loan losses (Note 4)..................................... 25 81
--------- ---------
Net interest income after provision for loan losses.................... 2,560 2,207
--------- ---------
Non-Interest Income
Service charges and fees.............................................. 49 50
Gain on sale of real estate owned..................................... 81 --
--------- ---------
Total non-interest income............................................. 130 50
--------- ---------
Non-Interest Expense
Compensation and benefits............................................. 735 542
Occupancy and equipment............................................... 193 57
Federal deposit insurance costs....................................... 41 34
Data processing service fees.......................................... 95 57
Advertising and promotion............................................. 76 37
Other................................................................. 465 267
--------- ---------
Total non-interest expense............................................ 1,605 994
--------- ---------
Income before income tax expense...................................... 1,085 1,263
Income tax expense..................................................... 424 517
--------- ---------
Net income............................................................. $ 661 $ 746
========= =========
Basic earnings per common share (Note 3)............................... $ 0.13
=========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Quarter Ended June 30, 1999
(Unaudited)
(Dollars in thousands)
Common Accumulated
Additional Stock Other Total
Common Paid-In Held By Retained Comprehensive Stockholders'
Stock Capital ESOP Earnings Loss Equity
--------- ---------- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1999............ $ 521 $ 22,430 $ (1,681) $ 33,846 $ (132) $ 54,984
Net income........................... -- -- -- 661 -- 661
Change in net unrealized loss on
securities available for sale, net
of tax effect.................... -- -- -- -- (518) (518)
----------
Total comprehensive income...... 143
Dividends declared................... -- -- -- (365) -- (365)
ESOP shares committed to be released
for allocation (4,803 shares)..... -- -- 48 -- -- 48
------- ----------- ------- -------- ---------- ---------
Balance at June 30, 1999............. $ 521 $ 22,430 $ (1,633) $ 34,142 $ (650) $ 54,810
======= ======== ======== ======== ========== ==========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
Sound Federal Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Quarter Ended
June 30,
1999 1998
------------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................ $ 661 $ 746
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses...................................... 25 81
Depreciation expense........................................... 49 36
ESOP expense................................................ 48 --
Deferred income tax benefit.................................... (10) (170)
Gain on sale of real estate owned.............................. (81) --
Other adjustments, net......................................... (141) (328)
------------ -------------
Net cash provided by operating activities................... 551 365
------------ ------------
INVESTING ACTIVITIES Purchases of securities:
Available-for-sale................................................ (12,430) --
Held-to-maturity.................................................. -- (5,578)
Proceed from principal payments, maturities and calls of
securities .................................................... 4,831 4,905
Disbursements for loan originations................................... (15,563) (10,113)
Principal collection on loans......................................... 5,971 8,102
Net increase in certificates of deposit............................... (1,090) (302)
Proceeds from sale of real estate owned............................... 240 --
Purchases of premises and equipment................................... (404) (23)
----------- -------------
Net cash used in investing activities....................... (18,445) (3,009)
----------- -------------
FINANCING ACTIVITIES
Net increase in deposits.............................................. 3,652 2,287
Net decrease in mortgage escrow deposits.............................. (781) (1,042)
Dividends paid........................................................ (365) --
------------- -----------
Net cash provided by financing activities................... 2,506 1,245
------------- -----------
Decrease in cash and cash equivalents................................. (15,388) (1,399)
Cash and cash equivalents at beginning of period...................... 49,482 42,111
------------ -----------
Cash and cash equivalents at end of period............................ $ 34,094 $ 40,712
============ ===========
SUPPLEMENTAL INFORMATION
Interest paid......................................................... $ 2,237 $ 2,256
Income taxes paid..................................................... 465 740
============ ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
Sound Federal Bancorp and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Reorganization and Stock Offering
On October 8, 1998, Sound Federal Bancorp issued shares of its common
stock in connection with a Plan of Reorganization ("the "Reorganization") and
related Subscription and Community Offering (the "Offering"). In the
Reorganization, Sound Federal Savings and Loan Association (the "Bank")
converted from a federally chartered mutual savings association to a
federally chartered stock savings association (the "Conversion"). The Bank
became the wholly-owned subsidiary of Sound Federal Bancorp, which became the
majority-owned subsidiary of Sound Federal, MHC (the "Mutual Holding
Company"). Collectively, Sound Federal Bancorp and the Bank are referred to
herein as "the Company".
Sound Federal Bancorp issued a total of 5,212,218 shares of its common
stock in the Reorganization and Offering, consisting of 2,810,510 shares (or
53.92%) issued to the Mutual Holding Company and 2,401,708 shares (or 46.08%)
issued to other stockholders. The shares issued to other stockholders consist of
192,129 shares purchased by the Company's Employee Stock Ownership Plan (the
"ESOP") using $1.9 million in proceeds from a loan made by Sound Federal
Bancorp; 102,200 shares contributed by the Company to establish the Sound
Federal Savings and Loan Association Charitable Foundation (the "Charitable
Foundation"); and 2,107,379 shares sold for cash of $21.1 million ($10.00 per
share) in the Offering. After deducting offering costs of $1.1 million, the net
cash proceeds from the Offering were $20.0 million.
Sound Federal Bancorp utilized net proceeds of approximately $9.0
million to purchase all of the Bank's common shares issued in the Conversion,
and retained the remaining $11.0 million which was invested initially in
interest-bearing deposits with the Bank.
The Charitable Foundation was established to provide funding to support
charitable and not-for-profit causes and community development activities in the
Company's market area. The fair value of the common shares contributed to the
Charitable Foundation ($1.0 million) was recognized as a charge to non-interest
expense at the contribution date (October 8, 1998).
2. Basis of Presentation
The consolidated financial statements included herein have been
prepared by the Company without audit. In the opinion of management, the
unaudited consolidated financial statements include all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position and results of operations for the periods presented. Certain
information and footnote disclosures normally included in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission. The
Company believes that the disclosures are adequate to make the information
presented not misleading; however, the results for the periods presented are not
necessarily indicative of results to be expected for the entire fiscal year
ending March 31, 2000.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, income and expense.
Actual results could differ significantly from these estimates. A material
estimate that is particularly susceptible to near-term change is the allowance
for loan losses, which is discussed in Note 4.
The unaudited interim consolidated financial statements presented
herein should be read in conjunction with the annual audited consolidated
financial statements of the Company for the fiscal year ended March 31, 1999,
included in the Company's 1999 Annual Report.
5
<PAGE>
3. Earnings Per Share
Weighted average common shares of 5,048,908 were used in calculating
basic earnings per share for the quarter ended June 30, 1999. In computing basic
EPS, outstanding shares include all shares issued to the Mutual Holding Company
and contributed to the Charitable Foundation, but exclude unallocated ESOP
shares that have not been committed to be released to participants. 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. The Company completed the Reorganization and
Offering on October 8, 1998. As a result, per share data has not been presented
for the quarter ended June 30, 1998.
4. Allowance for Loan Losses
The allowance for loan losses is increased by provisions for loan
losses charged to income and decreased by charge-offs (net of recoveries). Loans
are charged to the allowance when all or a portion of a loan is deemed to be
uncollectible. Recoveries of loans previously charged-off are credited to the
allowance for loan losses when realized. Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrowers' ability to repay, the estimated value of underlying collateral, and
current economic conditions. Management believes that the allowance for loan
losses is adequate to absorb probable losses in the existing loan portfolio.
Establishing the allowance for loan losses involves significant
management judgements utilizing the best information available at the time of
review. Those judgements are subject to further review by various sources,
including the Company's regulators. Adjustments to the allowance may be
necessary in the future based on changes in economic and real estate market
conditions, further information obtained regarding known problem loans, the
identification of additional problem loans and other factors, certain of which
are outside of management's control.
Activity in the allowance for loan losses for the periods indicated is
summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended Year Ended
June 30, March 31,
1999 1998 1999
------------- ------------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period.... $ 1,094 $ 984 $ 984
Provision for loan losses......... 25 81 272
Mortgage loans charged off........ -- -- (162)
Recoveries........................ -- -- --
--------- --------- ---------
Balance at end of period.......... $ 1,119 $ 1,065 $ 1,094
========= ========== =========
Ratio of net charge-offs to average
net loans outstanding (annualized) --% --% 0.12%
========= ========== =========
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The financial condition and results of operations of the Company are
primarily dependent upon those of the Bank. The Bank's principal business has
historically consisted of offering savings and other deposits to the general
public and using the funds from such deposits to make loans secured by
residential real estate. The Company's results of operations depend primarily
upon its net interest income, which is the difference between the interest
income earned on its loan and securities portfolios and its cost of funds,
consisting primarily of the interest paid on its deposits. Net income is also
affected by, among other things, provisions for loan losses and non-interest
expense. The Company's principal operating expenses, other than interest
expense, consist of compensation and benefits, occupancy and equipment, federal
deposit insurance costs and other general and administrative expenses. Operating
results are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates; government
legislation and policies affecting fiscal affairs, housing and financial
institutions; monetary policies of the Federal Reserve System; and the actions
of bank regulatory authorities.
When used in this report on Form 10-Q, the words or phrases "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results and those presently anticipated or projected. Among others,
these risks and uncertainties include changes in economic conditions in the
Company's market area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area, competition,
and uncertainties related to year 2000. The Company wishes to caution readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made. The Company wishes to advise readers that the factors
listed above could affect the Company's financial performance and could cause
the Company's actual results for future periods to differ materially from its
forward-looking statements. The Company does not undertake, and specifically
declines any obligation, to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Capability of the Company's Data Processing to Accommodate the Year 2000
Like most providers of financial services, the Company relies upon
computers for the daily conduct of its business and for data processing
generally. There is a concern that on January 1, 2000 computers will be unable
to "read" the new year and, as a consequence, there may be widespread computer
malfunctions. Management has developed a formal plan to resolve the Year 2000
issue and has been addressing this issue with the Company's data processing
service center (the "Data Center"). The Data Center has advised the Company that
the Year 2000 issue should not affect the Company's external data processing.
The Company 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.
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).
7
<PAGE>
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. Substantially
all 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 (primarily residential property), the ability of the Company's
borrowers to be Year 2000 compliant is not a material concern. Management will
continue to monitor this issue and report to the Board of Directors on a
quarterly basis 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 June 30, 1999, the cumulative costs incurred to address the
Year 2000 issue amounted to approximately $163,000. 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.
Stock Repurchase Program
The Company announced on July 6, 1999 that it is commencing a stock
repurchase program to acquire up to 344,926 shares of its common stock, which
represents approximately 15% of the common stock held by persons other than the
Mutual Holding Company.
The repurchases are generally effected through open market purchases,
although the Company may consider unsolicited negotiated transactions or other
types of repurchases. No shares will be repurchased from directors or officers
of the Company. The price to be paid for the shares purchased on the open market
will not exceed the greater of the highest independent bid or independent sales
price of the Company's common stock on the Nasdaq Market. The number of shares
to be purchased in the open market during any day generally is not to exceed 25%
of the average daily trading volume of the common stock, except for block
purchases. As of August 9, 1999, the Company repurchased a total of 45,000
shares of common stock at a cost of $464,375.
Financial Condition
The Company's total assets were $298.1 million and $295.3 million at
June 30 and March 31, 1999, respectively. The asset growth of $2.8 million was
funded primarily by a $3.6 million increase in deposits. The increase in total
assets reflects a $9.6 million increase in net loans to $153.1 million and a
$6.7 million increase in total securities to $91.7 million at June 30, 1999. The
growth in the loan and securities portfolios was funded by the deposit growth,
as well as a decrease of $16.4 million in Federal funds reflecting the Company's
ongoing strategy to redeploy short-term liquid assets into higher yielding loans
and securities. Total deposits amounted to $240.9 million at June 30, 1999, as
compared to $237.3 million at March 31, 1999. Total stockholders' equity
amounted to $54.8 million at June 30, 1999 as compared to $55.0 million at March
31, 1999. The slight decrease in stockholders' equity reflects an increase in
accumulated other comprehensive loss, net of taxes, to $650,000 at June 30, 1999
from $132,000 at March 31, 1999.
8
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Results of Operations
General. The Company reported net income of $661,000 for the quarter
ended June 30, 1999, as compared to net income of $746,000 for the quarter ended
June 30, 1998. The decrease in net income was due primarily to an increase in
non-interest expenses of $611,000, partially offset by an increase in net
interest income of $297,000 and a $93,000 decrease in income tax expense.
Net Interest Income. Net interest income for the quarter ended June 30,
1999 amounted to $2.6 million, a $297,000 increase from the same period in the
prior year. The Company's interest rate spread was 3.01% and 3.28% for the
quarters ended June 30, 1999 and 1998, respectively. The Company's net interest
margin for those periods was 3.61% and 3.70%, 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. The low
interest rates during the past year have caused many homeowners to refinance
existing homes and has created demand for loans to purchase new homes. Most
customers have opted for fixed rate loans which is the Bank's primary mortgage
product. This resulted in the overall growth of the loan portfolio but this
growth was at lower interest rates than the existing loan portfolio. In
addition, the low interest rates resulted in accelerated prepayments of
mortgage-backed securities. The cash flows from mortgage-backed securities were
also reinvested at lower rates than the existing securities portfolio.
Interest Income. Interest income totaled $4.8 million in the quarter
ended June 30, 1999 as compared to $4.5 million for the same period in the prior
year. This increase is due to a $39.4 million increase in average
interest-earning assets to $287.0 million during the quarter ended June 30, 1999
as compared to $247.6 million for the same quarter in the prior year, partially
offset by a 62 basis point decrease in the average yield on interest-earning
assets to 6.74%. The increase in the average balance of interest-earning assets
was due to investment of funds from deposit growth during the past year and the
Offering proceeds.
Interest income on loans increased $135,000 or 4.9% to $2.9 million for
the current quarter, due primarily to a $18.1 million increase in the average
balance to $148.0 million. The increase in the average balance was partially
offset by a 67 basis point decrease in the yield earned to 7.78% for the quarter
ended June 30, 1999 as compared to the same quarter in the prior year. The
growth of the loan portfolio is a result of the low interest rate environment,
which has created a strong demand for fixed rate loans (the Company's primary
mortgage loan product). The low interest rates have also created a strong market
for home purchases and the refinancing of existing mortgage loans in the
Company's market area. The new loan production and the refinancing activity were
also the primary reasons for the decrease in the yield earned on mortgage loans
since the rates on these loans are lower than those of the existing portfolio.
Interest income on mortgage-backed securities amounted to $851,000 for
the quarter ended June 30, 1999 as compared to $873,000 for the same quarter in
1998. This decrease is due to a 63 basis point decrease in the average yield
earned to 5.91% partially offset by a $4.2 million increase in the average
balance to $57.7 million. Many of these mortgage-backed securities have rates
that adjust annually, typically based on Treasury bill rates. As a result, these
securities have also experienced declining yields. In addition, principal
prepayments have resulted in declining yields on the mortgage-backed securities
portfolio from the acceleration of premium amortization.
Interest on other securities increased $266,000 to $491,000 for the
quarter ended June 30, 1999 as compared to $225,000 for the same quarter in
1998. The average balance of other securities was $32.2 million for the quarter
ended June 30, 1999 as compared to $15.0 million for the same quarter in the
prior year and the average yield earned increased 11 basis points to 6.12%.
Interest earned on federal funds decreased $87,000 to $407,000 for the
1999 quarter as compared to $494,000 for the quarter ended June 30, 1998. This
decrease is due to a $750,000 decrease in the average
9
<PAGE>
balance to $34.2 million as compared to $35.0 million for the same quarter in
1998. In addition, the yield earned on federal funds decreased 90 basis points
to 4.77% as compared to 5.67% in 1998.
Interest income on certificates of deposit at other financial
institutions amounted to $158,000 for the quarter ended June 30, 1999 as
compared to $178,000 for the same quarter in the prior year. This decrease
reflects a 60 basis point decrease in the average yield earned to 5.54% and a
$202,000 decrease in the average balance to $11.4 million for the 1999 quarter
from $11.6 million for the same quarter in 1998.
Interest Expense. Interest expense for the quarter ended June 30, 1999
totaled $2.2 million as compared to $2.3 million for the quarter ended June 30,
1998. The average balance of interest-bearing liabilities increased $18.0
million to $240.5 million for the quarter ended June 30, 1999 from $222.5
million for the same quarter in the prior year. The increase in the average
balance is due primarily to a $17.9 million increase in the average balance of
deposits to $238.8 million. The average cost of interest-bearing liabilities
decreased 34 basis points to 3.73% for the quarter ended June 30, 1999 as
compared to the same quarter in the prior year.
Interest on time deposits totaled $1.7 million for the current quarter
as compared to $1.6 million for the same quarter in 1998. This increase is
primarily a result of a $16.8 million or 14.0% increase in the average balance
of time deposits to $137.3 million for the quarter ended June 30, 1999 as
compared to the same quarter in 1998. The increase in the average balance of
time deposits was partially offset by a 45 basis point decrease in the average
cost to 4.93%. Total interest expense on other deposit accounts (passbook, club,
money market and NOW accounts) amounted to $539,000 for the quarter ended June
30, 1999 as compared to $632,000 for the same quarter in the prior year. The
average balance of these accounts was $101.5 million for the 1999 quarter as
compared to $100.5 million for the same quarter in 1998, and the overall average
rate was 2.13% and 2.52% for the respective periods.
Provision for Loan Losses. The provision for loan losses was $25,000
for the quarter ended June 30, 1999 as compared to $81,000 for the quarter ended
June 30, 1998. Non-performing loans amounted to $817,000 or 0.53% of total loans
at June 30, 1999 as compared to $1.1 million or 0.75% of total loans at March
31, 1999 and $1.5 million or 1.11% of total loans at June 30, 1998. The
allowance for loan losses amounted to $1.1 million at June 30, 1999 and March
31, 1999. There were no loan charge-offs during the quarters ended June 30, 1999
and 1998.
In determining the adequacy of the allowance for loan losses,
management considers historical loan loss experience, the level of
non-performing loans, the volume and type of lending conducted and general
economic conditions in the Company's market area. Although the Company maintains
its allowance for loan losses at a level which it considers to be adequate to
provide for probable losses on existing loans, there can be no assurance that
such losses will not exceed the current estimated amounts. As a result, higher
provisions for loan losses may be necessary in future periods which would
adversely affect operating results.
Non-Interest Income. Non-interest income totaled $130,000 for the
quarter ended June 30, 1999 as compared to $50,000 for the quarter ended June
30, 1998. The $80,000 increase primarily reflects an $81,000 gain on the sale of
real estate owned in the current quarter. Service fees, which consist
principally of service charges on deposit accounts, late charges on loans and
various other service fees, amounted to $49,000 and $50,000 for the quarters
ended June 30, 1999 and 1998, respectively.
Non-Interest Expense. Non-interest expense totaled $1.6 million for the
quarter ended June 30, 1999 as compared to $994,000 for the quarter ended June
30, 1998. Compensation and benefits increased $193,000 to $735,000 in the
quarter ended June 30, 1999 as compared to $542,000 in the quarter ended June
30, 1998. The increase in compensation and benefits was primarily
10
<PAGE>
due to a $132,000 increase in salaries and $52,000 in expense recognized in the
current quarter for the Bank's ESOP which did not exist in the first quarter of
the prior year. The increase in salaries is due to staffing increases attributed
primarily to the new branch that was opened in December 1998 and a branch office
in Greenwich, Connecticut that is expected to open in September 1999. Occupancy
and equipment increased $136,000 to $193,000 due primarily to expenses related
to the new branch locations and a refund of real estate taxes in 1998 as a
result of certiorari proceedings. Other non-interest expenses increased $198,000
to $465,000 for the quarter ended June 30, 1999 as compared to the same quarter
in 1998. This increase is due primarily to professional fees related to the
establishment of a real estate investment trust ("REIT"). The REIT was
established in April 1999 to provide a lower effective tax rate for fiscal year
2000 and beyond. The increase in other non-interest expense is also due to
additional costs related to operations as a public company and costs incurred in
establishing the new branches.
Income Taxes. Income tax expense amounted to $424,000 for the quarter
ended June 30, 1999 as compared to $517,000 in the same quarter in 1998. The
effective tax rates for those same periods were 39% and 41%, respectively.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, the proceeds from
principal and interest payments on loans and mortgage-backed securities, and the
proceeds from maturities of investments. While maturities and scheduled
amortization of loans and securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The Bank is required to maintain an average daily balance of liquid
assets as a percentage of net withdrawable deposit accounts plus short-term
borrowings as defined by the regulations of the Office of Thrift Supervision
("OTS"). The minimum required liquidity ratio is currently 5%. At June 30, 1999,
the Bank's liquidity ratio under OTS regulations was approximately 32%.
The primary investing activities of the Company are the origination of
loans and the purchase of securities. For the quarter ended June 30, 1999 and
for the year ended March 31, 1999, the Company originated loans totaling $15.6
million and $44.2 million, respectively. The Company purchased securities,
including mortgage-backed securities, totaling $12.4 million for the quarter
ended June 30, 1999 and $47.3 million for the year ended March 31, 1999.
Liquidity management for the Company is both a daily and long-term
process which is part of the Company's overall management strategy. Excess funds
are generally invested in short-term investments such as Federal funds and
certificates of deposit. In the event that the Bank should require additional
sources of funds, it could borrow from the Federal Home Loan Bank of New York
under an available line of credit.
At June 30, 1999, the Company had outstanding loan commitments of $21.7
million. The Company anticipates that it will have sufficient funds available to
meet its current loan commitments. Time deposits scheduled to mature in one year
or less from June 30, 1999, totaled $125.5 million. Management believes that a
significant portion of such deposits will remain with the Company.
The Bank is subject to certain minimum leverage, tangible and
risk-based capital requirements established by regulations of the OTS. These
regulations require savings associations to meet three minimum capital
standards: a tangible capital ratio requirement of 1.5% of total assets as
adjusted under the OTS regulations; a leverage ratio requirement of 4.0% of core
capital to such adjusted total assets; and a risk-based capital ratio
requirement of 8.0% of core and supplementary capital to total risk-based
assets. The OTS prompt corrective action regulations impose a 4.0% core capital
requirement for categorization as an "adequately capitalized" thrift and a 5.0%
core capital requirement for categorization as a "well capitalized" thrift. In
determining the amount of risk-weighted assets for purposes of the risk-based
capital requirement, a
11
<PAGE>
savings association must compute its risk-based assets by multiplying its assets
and certain off-balance sheet items by risk-weights, which range from 0% for
cash and obligations issued by the United States Government or its agencies to
100% for consumer and commercial loans, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of assets.
At June 30, 1999, the Bank exceeded all of the OTS minimum regulatory capital
requirements, and was classified as a well-capitalized institution for
regulatory purposes.
The following table sets forth the capital position of the Bank as
calculated at June 30, 1999. The Bank's capital level reflects the receipt of
$9.0 million from Sound Federal Bancorp for the Bank's issuance of common stock,
equal to 50% of the net proceeds received in the Offering. Accordingly, the
actual capital amounts and ratios set forth below do not include additional
capital retained by Sound Federal Bancorp.
<TABLE>
<CAPTION>
OTS Requirements
____________________________________________
Minimum Capital Classification as
Bank Actual Adequacy Well Capitalized
___________________ _____________________ ___________________
Amount Ratio Amount Ratio Amount Ratio
_______ _____ _________ _______ ______ ______
(Dollars in thousands)
June 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Tangible capital.................... $ 44,198 14.8% $ 4,481 1.5%
Tier I (core) capital............... 44,198 14.8 11,949 4.0 $ 14,936 5.0%
Risk-based capital:
Tier I........................... 44,198 38.2 6,944 6.0
Total............................ 45,249 39.1 9,259 8.0 11,573 10.0
March 31, 1999
Tangible capital.................... $ 43,551 14.8% $ 4,439 1.5%
Tier I (core) capital............... 43,551 14.8 8,878 3.0 $ 14,796 5.0%
Risk-based capital:
Tier I........................... 43,551 38.3 6,820 6.0
Total............................ 44,577 39.2 9,094 8.0 11,367 10.0
</TABLE>
12
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's most significant form of market risk is interest rate
risk, as the majority of the Company's assets and liabilities are sensitive to
changes in interest rates. The Company's assets consist primarily of fixed rate
mortgage loans, which have longer maturities than the Company's liabilities
which consist primarily of deposits. The Company's mortgage loan portfolio,
consisting primarily of loans secured by residential real property located in
Westchester County, is also subject to risks associated with the local economy.
The Company does not own any trading assets. At June 30, 1999, the Company did
not have any hedging transactions in place, such as interest rate swaps and
caps. The Company's interest rate risk management program focuses primarily on
evaluating and managing the composition of the Company's assets and liabilities
in the context of various interest rate scenarios. Factors beyond management's
control, such as market interest rates and competition, also have an impact on
interest income and interest expense.
During the quarter ended June 30, 1999, there were no significant
changes in the Company's assessment of market risk.
13
<PAGE>
Part II--OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings in the aggregate are believed by management to be
immaterial to the Company's financial condition and results of operations.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27--Financial Data schedule*
(b) Reports on Form 8-K
None
* Submitted only with filing in electronic format.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sound Federal Bancorp
---------------------------------------
(Registrant)
By: /s/ Anthony J. Fabiano
Anthony J. Fabiano
Duly Authorized and Chief Financial
and Accounting Officer
August 10, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet and the consolidated statement of income,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001064236
<NAME> Sound Federal Bancorp
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,094
<INT-BEARING-DEPOSITS> 11,776
<FED-FUNDS-SOLD> 28,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,776
<INVESTMENTS-CARRYING> 41,908
<INVESTMENTS-MARKET> 41,483
<LOANS> 154,229
<ALLOWANCE> 1,119
<TOTAL-ASSETS> 298,109
<DEPOSITS> 240,931
<SHORT-TERM> 86
<LIABILITIES-OTHER> 583
<LONG-TERM> 0
0
0
<COMMON> 521
<OTHER-SE> 54,289
<TOTAL-LIABILITIES-AND-EQUITY> 298,109
<INTEREST-LOAN> 2,871
<INTEREST-INVEST> 1,341
<INTEREST-OTHER> 610
<INTEREST-TOTAL> 4,822
<INTEREST-DEPOSIT> 2,226
<INTEREST-EXPENSE> 2,233
<INTEREST-INCOME-NET> 2,585
<LOAN-LOSSES> 25
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,605
<INCOME-PRETAX> 1,085
<INCOME-PRE-EXTRAORDINARY> 1,085
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 661
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.13
<YIELD-ACTUAL> 3.61
<LOANS-NON> 817
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,094
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,119
<ALLOWANCE-DOMESTIC> 1,119
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
