UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 1996 Commission File No. 0-25994
SFS BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3366295
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
251-263 STATE STREET, SCHENECTADY, NY 12305
(Address of principal executive offices)
Registrant's telephone number, including area code: (518) 395-2300
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 12 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 of outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Number of shares outstanding
Class of Common Stock as of July 31, 1996
- - ---------------------- ----------------------------
Common Stock, Par $.01 1,339,672
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [ X ]
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
JUNE 30, 1996
INDEX
Part I FINANCIAL INFORMATION Page
Item 1. Financial Statements 1
Consolidated Statements of Income for the Three
months ended June 30, 1996 and 1995, (Unaudited) 2
Consolidated Statements of Income for the Six
months ended June 30, 1996 and 1995, (Unaudited) 3
Consolidated Statements of Financial Condition as
of June 30, 1996, (Unaudited) and December 31, 1995 4
Consolidated Statements of Changes in Stockholders'
Equity for the Six months ended June 30, 1996
and 1995, (Unaudited) 5
Consolidated Statements of Cash Flows for the Six
months ended June 30, 1996 and 1995 (Unaudited) 6
Notes to unaudited consolidated interim financial
statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Part II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
JUNE 30, 1996
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
SFS Bancorp, Inc. (the "Company") was formed in March of 1995 for the
purpose of acquiring all of the common stock of Schenectady Federal Savings
Bank (the "Bank"), concurrent with its conversion from mutual to stock form
of ownership. SFS Bancorp, Inc. completed its initial public stock offering
of 1,495,000 shares of $.01 par value stock on June 29, 1995. The Company
utilized approximately one half of the net stock sale proceeds to acquire all
of the common stock issued by the Bank. For additional discussion of the
Company's formation and intended operations, see the Form S-1 Registration
Statement (No. 33-95422) filed with the Securities and Exchange
Commission.
The financial statements presented in this Form 10-QSB reflect the
consolidated financial condition and results of operations of the Company
and its subsidiary for periods subsequent to June 29, 1995. Financial
statements presented for periods prior to June 29, 1995 are for the Bank
prior to its acquisition by the Company.
<TABLE>
SFS BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1996 1995
(Unaudited)
<S> <C> <C>
Interest income:
Real estate loans $2,123 1,871
Other loans 8 10
Mortgage-backed securities 356 347
Debt securities 261 227
Federal funds sold and cash deposits 68 169
Securities available for sale 112 124
Stock in Federal Home Loan Bank 19 22
Total interest income 2,947 2,770
Interest expense:
Deposits 1,527 1,581
Net interest income 1,420 1,189
Provision for loan losses 30 80
Net interest income after provision
for loan losses 1,390 1,109
Noninterest income:
Loss on sale of securities (36) --
Service fee income 5 5
Other loan charges 41 20
Bank fees and service charges 33 35
Other 30 5
Total noninterest income 73 65
Noninterest expense:
Compensation and employee benefits 644 547
Advertising and business promotion 23 26
Office occupancy and equipment expense 135 127
Federal deposit insurance premiums 80 80
Other insurance premiums 22 22
Mortgage servicing fees 10 18
Data processing fees 41 37
Other real estate writedown 7 --
Professional service fees 73 32
Other 84 60
Total noninterest expense 1,119 949
Income before taxes 344 225
Income tax expense 51 47
Net income $ 293 178
Earning per share $ .23 N/A
See accompanying notes to unaudited consolidated interim financial statements.
</TABLE>
<TABLE>
SFS BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1996 1995
(Unaudited)
<S> <C> <C>
Interest income:
Real estate loans $4,203 3,723
Other loans 21 19
Mortgage-backed securities 742 682
Debt securities 552 456
Federal funds sold and cash deposits 157 268
Securities available for sale 231 241
Stock in Federal Home Loan Bank 38 45
Total interest income 5,944 5,434
Interest expense:
Deposits 3,093 3,001
Net interest income 2,851 2,433
Provision for loan losses 60 160
Net interest income after provision
for loan losses 2,791 2,273
Noninterest income:
Loss on sale of securities (36) --
Service fee income 10 11
Other loan charges 84 35
Bank fees and service charges 66 81
Other 40 12
Total noninterest income 164 139
Noninterest expense:
Compensation and employee benefits 1,259 1,118
Advertising and business promotion 59 56
Office occupancy and equipment expense 264 264
Federal deposit insurance premiums 162 160
Other insurance premiums 46 41
Mortgage servicing fees 21 37
Data processing fees 83 77
Other real estate writedown 7 --
Professional service fees 140 68
Other 155 116
Total noninterest expense 2,196 1,937
Income before taxes 759 475
Income tax expense 176 178
Net income $ 583 297
Earning per share $ .44 N/A
See accompanying notes to unaudited consolidated interim financial statements.
</TABLE>
<TABLE>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Dollars in Thousands)
June 30, December 31,
1996 1995
<S> <C> <C>
Assets (Unaudited)
Cash and due from banks $ 1,523 1,353
Federal funds sold 5,400 9,100
Total cash and cash equivalents 6,923 10,453
Securities available for sale, at fair value 3,968 7,976
Investment securities:
Debt securities (approximate fair value of $15,782
at June 30, 1996 and $18,712 at December 31, 1995) 15,988 18,658
Mortgage-backed securities (approximate fair value of
$21,816 at June 30, 1996 and $24,645 at December 31, 1995) 22,246 24,418
Investment required by law, stock in Federal Home Loan Bank of NY, at cost 1,216 1,117
Loans receivable, net 110,720 100,921
Accrued interest receivable 1,174 1,161
Premises and equipment, net 1,656 1,414
Real estate owned 185 200
Prepaid expenses and other asset 290 211
Total Assets $164,366 166,529
Liabilities and Stockholders' Equity
Liabilities:
Due to depositors:
Demand deposits $ 10,077 9,990
Savings accounts 44,502 44,982
Time deposit accounts 84,808 84,699
Total Deposits 139,387 139,671
Advance payments by borrowers for property taxes and insurance 1,436 1,402
Accrued expenses and other liabilities 1,256 1,195
Total Liabilities 142,079 142,268
Stockholders' Equity:
Preferred stock, $.01 par value. Authorized 500,000 shares; none issued -- --
Common stock, $.01 par value. Authorized 2,500,000 shares; 1,495,000
shares issued; 1,292,450 shares outstanding at June 30, 1996 and
1,495,000 shares at December 31, 1995 15 15
Additional paid-in capital 14,221 14,221
Retained earnings, substantially restricted 11,596 11,013
Common stock acquired by ESOP (107,640 shares) (1,076) (1,076)
Treasury stock, at cost (202,550 shares at June 30, 1996 and none at
December 31, 1995) (2,549) --
Net unrealized gain on securities available for sale 80 88
Total Stockholders' Equity 22,287 24,261
Total Liabilities and Stockholders' Equity $164,366 166,529
See accompanying notes to unaudited consolidated interim financial statements.
</TABLE>
<TABLE>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
<CAPTION>
NET UNREALIZED
GAIN (LOSS) COMMON
ADDITIONAL ON SECURITIES STOCK
COMMON PAID IN RETAINED AVAILABLE ACQUIRED TREASURY
STOCK CAPITAL EARNINGS FOR SALE BY ESOP STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1996
Balance at December 31, 1995 $15 14,221 11,013 88 (1,076) -- 24,261
Net income -- -- 583 -- -- -- 583
Net unrealized loss on
securities available for sale -- -- -- (8) -- -- (8)
Purchase of Treasury shares -- -- -- -- -- (2,549) (2,549)
Balance at June 30, 1996 $15 14,221 11,596 80 (1,076) (2,549) 22,287
Six Months Ended June 30, 1995
Balance at December 31, 1994 $-- -- 10,158 (112) -- -- 10,046
Net income -- -- 297 -- -- -- 297
Net unrealized gain on
securities available for sale -- -- -- 176 -- -- 176
Common Stock Issued 15 14,185 -- -- -- -- 14,200
Purchase of ESOP -- -- -- -- (1,196) -- (1,196)
Balance at June 30, 1995 $15 14,185 10,455 64 (1,196) -- 23,523
See accompanying notes to unaudited consolidated interim financial statements.
</TABLE>
<TABLE>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Six Months Ended
June 30,
1996 1995
<S> <C> <C>
Increase (decrease) in cash and cash equivalents (Unaudited)
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 583 297
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 70 71
Net accretion on investment securities (8) (13)
Provision for loan losses 60 160
Writedown of real estate owned 7 --
Gain on disposition of fixed assets (11) --
Proceeds from disposition of fixed assets 19 --
Loss on sale of available for sale securities 36 --
Decrease (increase) in accrued interest receivable (13) 17
Decrease (increase) in prepaid expense and other assets (79) 19
Increase (decrease) in accrued expense and other liabilities 61 (78)
Total adjustments 142 176
Net cash provided by operating activities 725 473
Cash flows from investing activities:
Proceeds from maturity/paydown of investment securities 8,678 2,858
Proceeds from sale of Federal Home Loan Bank Stock -- 6
Purchase of investment securities (6,000) (2,000)
Purchase of mortgage-backed securities -- (2,322)
Purchase of Federal Home Loan Bank Stock (99) --
Principal repayments on mortgage-backed securities 2,172 1,252
Net (increase) decrease in loans receivable (7,188) 204
Purchase of loans receivable (2,671) (2,723)
Capital expenditures, net of disposals (320) (65)
Proceeds from sale of available for sale securities 3,964 --
Proceeds from the sale of real estate owned 8 228
Net cash used by investing activities (1,456) (2,562)
Cash flows from financing activities:
Net (decrease) increase in deposits (284) 4,976
Net increase in advance payments by borrowers for
property taxes and insurance 34 323
Net proceeds from common stock issued in stock conversion -- 14,200
Acquisition of common stock by ESOP -- (1,196)
Purchase of Treasury stock (2,549) --
Net cash (used) provided in financing activities (2,799) 18,303
Net (decrease) increase in cash and cash equivalents (3,530) 16,214
Cash and cash equivalents at beginning of period 10,453 6,468
Cash and cash equivalents at end of period $ 6,923 22,682
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid $ 3,096 3,024
Taxes paid 342 405
Transfer of loans to other real estate owned -- 362
Net unrealized (loss) gain on securities available for sale (8) 176
See accompanying notes to unaudited consolidated interim financial statements.
</TABLE>
SFS BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1. Presentation of Financial Information
The accompanying unaudited consolidated interim financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. The accompanying unaudited
consolidated interim financial statements should be read in conjunction
with the financial statements and the related management's discussion and
analysis of financial condition and results of operations filed with the 1995
form 10-KSB of SFS Bancorp, Inc. and Subsidiary (the "Company"). In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included.
The results of operations for the three and six months ended June 30, 1996,
are not necessarily indicative of results that may be expected for the entire
year ending December 31, 1996.
The unaudited consolidated interim financial statements include the
accounts of SFS Bancorp, Inc. (the "Holding Company") and its wholly owned
subsidiary, Schenectady Federal Savings Bank and subsidiary (the "Bank").
NOTE 2. Earnings Per Share
Earnings per share are based on the weighted average number of shares
outstanding, less unallocated employee stock ownership plan shares, during
the period.
For purposes of calculating earnings per share, the weighted average number
of shares outstanding was 1,261,669 for the three months ended June 30,
1996 and 1,313,608 for the six months ended June 30, 1996.
No earnings per share data was presented for the periods prior to the
completion of the Company's initial stock offering.
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
JUNE 30, 1996
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
SFS Bancorp, Inc. (the "Holding Company") is the holding company for
Schenectady Federal Savings Bank and its subsidiary (the "Bank"), a federally
chartered stock savings bank. On June 29, 1995, the Bank completed its
conversion from a federal mutual savings and loan association to a federal
stock savings bank. On that date, the Holding Company issued and sold
1,495,000 shares of its common stock at $10.00 per share in connection
with the conversion. Net proceeds to the Holding Company were $14.2
million after reflecting conversion expenses of $750,000. The Holding
Company used $7.1 million of the net proceeds to acquire all of the issued
and outstanding stock of the Bank.
The Bank operates as a thrift institution with the principal business being
the solicitation of deposits from the general public; these deposits, together
with funds generated from operations, are invested primarily in single-
family, owner occupied adjustable-rate mortgage loans. The Bank is a
member of the Federal Home Loan Bank of New York ("FHLB") and is subject
to certain regulations of the Board of Governors of the Federal Reserve
System with respect to reserves required to be maintained against deposits
and certain other matters. The Bank's deposit accounts are insured by the
Savings Association Insurance Fund, as administered by the Federal Deposit
Insurance Corporation, up to the maximum amount permitted by law. The
Bank is subject to regulation by the Office of Thrift Supervision ("OTS").
The Bank conducts its business through a three branch network located in
Schenectady County situated in eastern upstate New York. The Bank's results
of operations are dependent primarily on net interest income, which is the
difference between the interest income earned on its loan and mortgage-
backed securities portfolios, investment securities and securities available
for sale portfolios and other earning assets, and its cost of funds,
consisting of the interest paid on its deposits. The Bank's operating results
are also impacted by the provision for loan losses, and to a lesser extent,
by gains and losses on the sale of its securities available for sale portfolio
and other noninterest income. The Bank's operating expenses principally
consist of employee compensation and benefits, federal deposit insurance
premiums, occupancy expense and other general and administrative expenses.
The Bank's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of the regulatory
authorities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash and cash equivalents and
available for sale securities. The level of these assets is dependent on the
Company's operating, financing and investing activities during any given
period. Cash and cash equivalents of $10.5 million at December 31, 1995,
decreased $3.6 million to $6.9 million at June 30, 1996 primarily as a result
of the origination of residential mortgage loans and the purchase of treasury
stock. The Company's primary sources of funds are deposits and principal
and interest payments on its loan and securities portfolios. While
maturities and scheduled amortization of loans and securities are, in
general, a predictable source of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates, economic conditions and
competition.
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS Regulations. This requirement, which may vary at the direction of
the OTS depending on economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio of
liquid assets to deposits and short-term borrowings is currently 5%. The
Bank's liquidity ratio at June 30, 1996, was 25.87%.
The Company's cash flows are comprised of three classifications: cash
flows from operating activities; cash flows from investing activities; and
cash flows from financing activities. Net cash flows provided by operating
activities, consisting primarily of interest and dividends received less
interest paid on deposits, was $725,000 and $473,000 for the six months
ended June 30, 1996 and 1995, respectively. Net cash used by investing
activities, consisting primarily of disbursements for the origination and
purchase of loans and the acquisition of securities partially offset by
principal collections on loans and mortgage-backed securities and by
proceeds from the sale and maturity of securities, was $1.5 million and $2.6
million for the six months ended June 30, 1996 and 1995, respectively. Net
cash used in financing activities, consisting primarily of the purchase of
treasury stock and net decrease in deposit accounts, was $2.8 million for
the six months ended June 30, 1996. Net cash provided by financing
activities for the six months ended June 30, 1995 of $18.3 million consisted
primarily of net increases in deposit accounts during the period and
proceeds received from the sale of common stock.
During the six month period ended June 30, 1996 the Company repurchased
202,550 shares for treasury at an average price of $12.58 for a total of
$2.5 million. The average price paid of $12.58 was approximately 73.0% of
the Company's book value per share of $17.24 at June 30, 1996. Management
believes that the repurchase of shares at less than book value is an
appropriate utilization of excess capital. The Office of Thrift Supervision
(OTS) restricts the number of shares which may be repurchased during the
three year period following conversion. Generally, only 5% of shares
outstanding may be repurchased annually during the first three years
following conversion. However, the OTS has allowed additional share
repurchases of 5% annually based on extenuating facts and circumstances.
At June 30, 1996, the Bank's capital exceeded each of the capital
requirements of the OTS. At June 30, 1996, the Bank's tangible and core
capital levels were both $17.5 million (10.65% of total adjusted assets) and
its risk-based capital level was $18.1 million (21.21% of total risk-
weighted assets). The current minimum regulatory capital ratio
requirements are 1.5% for tangible capital, 3.0% for core capital and 8.0%
for risk-weighted capital.
FINANCIAL CONDITION
Total assets decreased $2.1 million (1.3%) to $164.4 million at June 30,
1996 from $166.5 million at December 31, 1995. This decrease occurred as
loans receivable, net, grew $9.8 million (9.7%) to $110.7 million at June 30,
1996 while federal funds sold decreased $3.7 million (40.7%) to $5.4 million
and investment securities decreased $4.8 million (11.1%) to $38.2 million at
June 30, 1996.
At June 30, 1996, total liabilities were $142.1 million, substantially
unchanged from $142.3 million at December 31, 1995. Stockholders' equity
decreased $2.0 million to $22.3 million at June 30, 1996 as compared to
$24.3 million at December 31, 1995 largely as a result of the Company's
stock repurchase program. Retained earnings increased by $583,000 as a
result of increased net income of the Company for the six month period
ended June 30, 1996. Treasury Stock increased $2.5 million as a result of
the Company's repurchase of common stock. Net unrealized gain on
securities available for sale decreased $8,000 to $80,000 at June 30, 1996.
Nonperforming assets increased $129,000 (12.4%) totaling $1.2 million at
June 30, 1996, compared with $1.0 million at December 31, 1995. The ratio
of nonperforming loans to total loans receivable, net was .89% at June 30,
1996, compared with .83% at December 31, 1995. The ratio of
nonperforming assets to total assets at June 30, 1996, was .71% compared
with .62% at December 31, 1995.
Loan Receivable, Net
A summary of loans receivable, net at June 30, 1996 and December 31, 1995
is as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
<S> <C> <C>
Loans secured by real estate:
Residential:
Conventional $ 75,576 64,322
Home Equity 22,987 22,723
FHA Insured 4,406 4,797
VA Guaranteed 2,685 3,100
Commercial and multi-family 5,154 6,144
110,808 101,086
Other loans 561 434
111,369 101,520
Less:
Unearned discount and net deferred loan fees 23 27
Allowance for loan losses 626 572
649 599
Loans receivable, net $110,720 100,921
</TABLE>
The following table sets forth the information with regard to non-performing
assets.
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
<S> <C> <C>
Loans on a nonaccrual status $ 924 798
Loans contractually past due 90 days or
more and still accruing interest 58 41
Total non-performing loans 982 839
Other real estate owned 185 200
Total non-performing assets $1,167 1,039
</TABLE>
The following table sets forth the information with regard to changes in
the allowance for loan losses.
<TABLE>
<CAPTION>
For the six months ended June 30,
1996 1995
<S> <C> <C>
Balance, beginning of period $572 861
Provision charged to operations 60 160
Loans charged off (28) (294)
Recoveries on loans previously charged off 22 26
Balance, end of period $626 753
</TABLE>
Average Balance Data, Interest Rates and Interest Differential and
Rate/Volume Analysis
The following information regarding average balances and rates earned/paid
and the rate/volume analysis is an integral component of the discussion of
operating results for the three months and six months ended June 30, 1996,
compared with the corresponding periods of the prior year.
The average balance data that follows reflects the average yield on assets
and average cost of liabilities for the periods indicated. Such yields and
costs are derived by dividing income or expenses by the average balance of
assets or liabilities, respectively, for the periods shown. The yields and
costs include fees which are considered adjustments to yields.
The rate/volume analysis table presents the extent to which changes in
interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in
each category with respect to (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume), and (iii) the
net change. The changes attributable to the combined impact of volume and
rate have been allocated proportionately to the changes due to volume and the
changes due to rate.
<TABLE>
SFS BANCORP, INC. AND SUBSIDIARY
Average Balance Data, Interest Rates and Interest Differential
(Dollars in Thousands) (Unaudited)
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1996 1995
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED YIELD/
BALANCE PAID RATE BALANCE PAID RATE
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net <F1> $108,319 $2,131 7.91% $ 95,355 $1,881 7.91%
Mortgage-backed securities 22,891 356 6.25 22,120 347 6.29
Securities available for sale 7,660 112 5.88 7,921 124 6.28
Debt securities 16,492 261 6.37 15,528 227 5.86
Other interest-earning asset
including cash equivalents 5,164 68 5.30 11,239 169 6.03
FHLB stock 1,216 19 6.28 1,117 22 7.90
Total interest-earning assets 161,742 2,947 7.33 153,280 2,770 7.25
Savings accounts 39,468 296 3.02 45,393 339 3.00
Money market accounts 5,004 38 3.05 4,873 34 2.80
Demand and NOW accounts <F2> 9,871 35 1.43 8,949 33 1.48
Certificate accounts 85,008 1,151 5.45 83,991 1,168 5.58
Escrow 1,207 7 2.33 1,282 7 2.19
Total interest-bearing liabilities 140,558 1,527 4.37 144,488 1,581 4.39
Net interest income $1,420 $1,189
Net interest rate spread 2.96% 2.86%
Net earning assets $ 21,184 $ 8,792
Net yield on average 3.53% 3.11%
Average interest-earning
assets to average
interest-bearing liabilities 1.15 1.06
<FN>
<F1> Calculated net of deferred loan fees.
<F2> Includes noninterest-bearing demand accounts.
</TABLE>
<TABLE>
SFS BANCORP, INC. AND SUBSIDIARY
Average Balance Data, Interest Rates and Interest Differential
(Dollars in Thousands) (Unaudited)
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED YIELD/
BALANCE PAID RATE BALANCE PAID RATE
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net <F1> $105,831 $4,224 8.03% $ 95,226 $3,742 7.92%
Mortgage-backed securities 23,496 742 6.35 21,891 682 6.28
Securities available for sale 7,819 231 5.94 7,871 241 6.17
Debt securities 17,570 552 6.32 15,728 456 5.85
Other interest-earning assets
including cash equivalents 5,974 157 5.28 9,126 268 5.92
FHLB stock 1,191 38 6.42 1,119 45 8.11
Total interest-earning assets 161,881 5,944 7.38 150,961 5,434 7.26
Interest-bearing liabilities:
Savings accounts 39,816 598 3.02 46,747 696 3.00
Money market accounts 4,681 68 2.92 5,075 66 2.62
Demand and NOW accounts <F2> 9,552 69 1.45 8,896 66 1.50
Certificate accounts 84,881 2,346 5.56 80,443 2,160 5.41
Escrow 1,099 12 2.20 1,128 13 2.32
Total interest-bearing liabilities 140,029 3,093 4.44 142,289 3,001 4.25
Net interest income $2,851 $2,433
Net interest rate spread 2.94% 3.01%
Net earning assets $ 21,852 $ 8,672
Net yield on average
interest-earning assets 3.54% 3.25%
Average interest-earning
assets to average
interest-bearing liabilities 1.16 1.06
<FN>
<F1> Calculated net of deferred loan fees.
<F2> Includes noninterest-bearing demand accounts.
</TABLE>
<TABLE>
SFS BANCORP, INC. AND SUBSIDIARY
RATE VOLUME ANALYSIS
(In Thousands) (Unaudited)
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1996
COMPARED WITH
THREE MONTHS ENDED JUNE 30, 1995
INCREASE (DECREASE)
DUE TO
VOLUME RATE NET
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $250 0 250
Mortgage-backed securities 11 (2) 9
Securities-available for sale (4) (8) (12)
Securities-held for investment 14 20 34
Other interest-bearing assets (82) (19) (101)
FHLB stock 2 (5) (3)
Total interest-earning assets $191 (14) 177
Interest-bearing liabilities:
Savings deposits $(45) 2 (43)
Money market accounts 1 3 4
Demand and NOW deposits 3 (1) 2
Certificate accounts 13 (30) (17)
Escrow 0 0 0
Total interest-bearing liabilities $(28) (26) (54)
Change in net interest income $231
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
COMPARED WITH
SIX MONTHS ENDED JUNE 30, 1995
INCREASE (DECREASE)
DUE TO
VOLUME RATE NET
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 432 50 482
Mortgage-backed securities 52 8 60
Securities-available for sale (1) (9) (10)
Securities-held for investment 57 39 96
Other interest-bearing assets (85) (26) (111)
FHLB stock 1 (8) (7)
Total interest-earning assets $ 456 54 510
Interest-bearing liabilities:
Savings deposits $(102) 4 (98)
Money market accounts (2) 4 2
Demand and NOW deposits 4 (1) 3
Certificate accounts 126 60 186
Escrow 0 (1) (1)
Total interest-bearing liabilities $ 26 66 92
Change in net interest income $418
</TABLE>
COMPARISONS OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1996
Net Income and Interest Analysis
Three months ended June 30, 1996 compared with 1995
Net income for the quarter ended June 30, 1996, was $293,000 or $.23 per
share, an increase of $115,000 (64.6%) from the comparable quarter of the
prior year. The increase in net income was attributable to increases in net
interest income and noninterest income and a decrease in the provision for
loan losses partially offset by increases in noninterest expense and income
tax expense. The annualized return on average assets ("ROA") for the
current quarter amounted to .72% compared with .45% for the comparable
quarter a year ago. The annualized return on average equity ("ROE") was
5.19% (on average equity of $22.7 million) compared with 6.85% (on average
equity of $10.4 million) a year earlier.
Interest income for the three months ended June 30, 1996, totaled $2.9
million, an increase of $177,000 (6.4%) from 1995's second quarter, as
average interest-earning assets increased by $8.4 million (5.5%) to $161.7
million and average rates earned increased by 8 basis points (1.1%) to 7.33%.
The most significant factor contributing to the increased level of interest
income was the increase in earnings on loans which increased $250,000
(13.3%) as a result of a $12.9 million (13.5%) increase in the average balance
invested. Interest earned on investment securities increased $34,000
(15.0%) as a result of an increase in average rates earned of 51 basis points
(8.7%). Earnings on other interest earning assets, essentially federal funds
sold, decreased $101,000 (59.8%) as a result of the combined effect of a
$6.0 million (53.6%) decrease in the average balance invested and a 73 basis
point (12.1%) decrease in average rates earned.
Interest expense for the quarter ended June 30, 1996, amounted to $1.5
million, $54,000 (3.4%) less than the year ago quarter as a result of a $3.9
million (2.7%) decrease in average interest bearing liabilities to $140.6
million combined with a 2 basis point (0.5%) decrease in average rates paid
to 4.37%. The mix within the deposit structure changed as the average
balance of certificate accounts grew $1.0 million (1.2%), while savings
accounts declined $5.9 million (13.0%). The decrease in average rates paid
on certificate accounts of 13 basis points (2.3%) to 5.45% was a reflection
of the general interest rate and competitive environment that prevailed
during the second quarter of 1996 compared with 1995.
Net interest income for the three months ended June 30, 1996 totaled $1.4
million, $231,000 (19.4%) greater than the comparable quarter a year ago.
The interest rate spread increased 10 basis points to 2.96% for the quarter
ended June 30, 1996; the net interest margin for the most recent quarter of
3.53% was 42 basis points greater than the comparable quarter a year ago.
Six months ended June 30, 1996, compared with 1995
Net income for the six months ended June 30, 1996, increased by $286,000
(96.3%) and totaled $583,000 compared with $297,000 realized in the first
half of 1995. Earnings per share for the six months ended June 30, 1996
was $.44 per share. The increase in net income was attributable to
increases in net interest income and noninterest income and a reduction in
the provision for loan losses partially offset by increases in noninterest
expense and income tax expense. Return on average assets ("ROA") for the
first six months of 1996 amounted to .71% compared with .39% for the
comparable period a year ago. Return on average equity ("ROE") was 5.04%
(on average equity of $23.3 million) compared with 5.94% (on average equity
of $10.0 million) a year earlier.
Interest income for the six months ended June 30, 1996, totaled $5.9
million, an increase of $510,000 (9.4%) from 1995's first half. This
increase was a result of an increase in average interest-earning assets of
$10.9 million (7.2%) to $161.9 million and an increase in the average rate
earned of 12 basis points (1.7%) to 7.38%. The largest factor contributing
to the increase in interest income was the increase in earnings on loans
which increased $482,000 (12.9%) as a result of a $10.6 million (11.1%)
increase in the average balance invested combined with an 11 basis point
(1.4%) increase in average rates earned. Interest earned on investment
securities increased $96,000 (21.1%) as a result of an increase in average
rates earned of 47 basis points (8.0%). Earnings on other interest earning
assets, essentially federal funds sold, decreased $111,000 (41.4%) as a
result of the combined effect of a $3.1 million (34.1%) decrease in the
average balance invested and a 64 basis point (10.8%) reduction in average
rates earned.
Interest expense for the six months ended June 30, 1996, amounted to $3.1
million, $92,000 (3.1%) greater than the year ago period. This increase was
largely a result of a 19 basis point (4.5%) increase in average rates paid to
4.44%. The mix within the deposit structure changed as the average balance
of certificate account balances grew $4.5 million (5.6%) while savings and
money market accounts declined $6.9 million (14.8%) and $394,000 (7.8%),
respectively. The increase in average rates paid was a reflection of the
change in deposit mix.
Net interest income for the six months ended June 30, 1996 increased by
$418,000 (17.2%) and totaled $2.8 million compared with $2.4 million a year
ago. The interest rate spread decreased 7 basis points to 2.94% for the six
months ended June 30, 1996. The net interest margin increased 29 basis
points to 3.54% compared with 3.25% for the same period last year.
Provision for Loan Losses
The provision for loan losses amounted to $30,000 and $80,000 for the
quarters ended June 30, 1996 and June 30, 1995, respectively. For the six
months ended June 30, 1996, the provision for loan losses decreased $100,000
(62.5%) to $60,000 compared with the corresponding period a year ago. The
Bank utilizes the provision for loan losses to maintain an allowance for
loan losses that it deems appropriate to provide for known and inherent
risks in its loan portfolio. In determining the adequacy of its allowance
for loan losses, management takes into account the current status of the
Bank's loan portfolio and changes in appraised values of collateral as well
as general economic conditions. As of June 30, 1996, the Bank's allowance
for loan losses totaled $626,000 (.56% of loans and 63.7% of nonperforming
loans) compared with $572,000 (.56% of loans and 68.2% of nonperforming
loans) at December 31, 1995.
Noninterest Income
Noninterest income increased to $73,000 for the three months ended June
30, 1996, compared with $65,000 for the corresponding period in the
previous year. Noninterest income increased for the six month period ended
June 30, 1996 to $164,000 compared with $139,000 for the corresponding
period in the previous year. Increases in the three month and six month
periods ended June 30, 1996 compared with 1995 were the result of
increases in other loan charges and other noninterest income relating to
income on other real estate and gain on the disposition of fixed assets
partially offset by loss on the sale of securities.
Noninterest Expense
Noninterest expense increased $170,000 (17.9%) to $1.1 million for the
three months ended June 30, 1996, as compared with $949,000 for the
same period in 1995. Compensation and employee benefits, the largest
component of noninterest expense, increased $97,000 (17.7%) between the
respective quarters. This increase was a result of annual merit increases,
and increased employee benefits as a result of the establishment of the
Recognition and Retention Plan. Advertising and business promotion, office
occupancy and equipment expense, federal deposit insurance premiums, other
insurance premium and data processing fees remained relatively the same
for the quarters ended June 30, 1996 and June 30, 1995. Mortgage servicing
fees decreased $8,000 (44.4%) for the quarter ended June 30, 1996,
compared with the previous year quarter as the balance of loans being
serviced for the Bank declined. Professional service fees increased $41,000
(128.1%) for the quarter ended June 30, 1996 compared with the June 30,
1995 quarter as a result of additional legal, accounting and other fees
related to being a publicly traded company. Other noninterest expense
increased $24,000 (40.0%) during the second quarter of 1996 compared with
the same quarter a year ago. This increase resulted from increases in real
estate owned expense, stationery and printing expense and home equity
origination expense. The ratios of noninterest expense to average assets
were 2.71% and 2.43% on an annualized basis for the three months ended
June 30, 1996 and 1995, respectively.
Noninterest expense increased $259,000 (13.4%) to $2.2 million for the six
months ended June 30, 1996, as compared with $1.9 million for the same
period in 1995. Compensation and employee benefits, the largest component
of noninterest expense, increased $141,000 (12.6%). This increase was a
result of annual merit increases and the establishment of the Recognition
and Retention Plan, as noted previously. Advertising and business
promotion, office occupancy and equipment expense, federal deposit
insurance premiums, other insurance premiums and data processing fees
remained relatively the same for the six month period ended June 30, 1996
and June 30, 1995. Mortgage servicing fees decreased $16,000 (43.2%)
between the 1995 and 1996 periods as serviced loan balances continued to
decline. Professional service fees increased $72,000 (105.9%) for the six
months ended June 30, 1996 as compared to the same period in 1995 as a
result of additional legal, accounting and other fees related to being a
publicly traded company. Other noninterest expense increased $39,000
(33.6%) during the first half of 1996 compared with the same period a year
ago. This increase resulted from increases in real estate owned expense,
stationery and printing expense and home equity origination expense. The
ratios of noninterest expense to average assets were 2.66% and 2.52% on an
annualized basis for the six months ended June 30, 1996 and 1995,
respectively.
Income Tax Expense
Income tax expense totaled $51,000 for the three months ended June 30,
1996, an increase of $4,000 (8.5%) over the three months ended June 30,
1995. The effective tax rate for the three months ended June 30, 1996 was
14.8% and reflects a reduction in the deferred tax asset valuation reserve
reducing the tax effect on net income. The effective tax rate for the three
months ended June 30, 1995 was 20.9% and reflects the net charges to the
allowance for loan losses taken during the quarter.
Income tax expense totaled $176,000 for the six months ended June 30,
1996, a decrease of $2,000 (1.1%) over the six months ended June 30, 1995.
The effective tax rate for the six months ended June 30, 1996 was 23.2%
compared with 37.5% for the corresponding period in 1995. The reduction in
the effective tax rate resulted from a reduction in the deferred tax asset
valuation reserve reducing the tax effect on net income.
Impact of New Accounting Standards
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 122, "Accounting for Mortgage Servicing
Rights" (SFAS No. 122), which amends SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities." SFAS No. 122 requires that entities recognize
as separate assets, the rights to service mortgage loans for others,
regardless of how those servicing rights are acquired. Additionally, SFAS
No. 122 requires that the capitalized mortgage servicing rights be assessed
for impairment based on the fair value of those rights, and that impairment,
if any, be recognized through a valuation allowance. Based on the current
volume of mortgage loans sold on a servicing retained basis, management
anticipates the adoption of SFAS No. 122 will not have a significant effect
on the Company's consolidated financial position and results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation," which establishes a fair value based method of
accounting for employee stock options or similar equity instruments such as
the Holding Company's Stock Option Plan. Under SFAS No. 123, entities can
recognize stock-based compensation expense in the basic financial
statements using either (i) the intrinsic value based approach set forth in
Accounting Principles Board ("APB") Opinion No. 25 or (ii) the fair value
based method introduced in SFAS No. 123. Entities electing to remain with
the accounting in APB Opinion 25, must make pro forma disclosures of net
income and earnings per share, as if the fair value based method of
accounting defined in SFAS No. 123 had been applied. Under APB Opinion No.
25, compensation expense is determined based upon the option's intrinsic
value, or the excess (if any) of the market price of the underlying stock at
the measurement date over the amount the employee is required to pay.
Under the fair value based method introduced by SFAS No. 123, compensation
expense is based on the option's estimated fair value at the grant date and
is generally recognized over the vesting period. Management has not
determined which method the Bank and the Holding Company will use to
measure stock-based compensation.
Regulatory Developments
The deposits of savings associations such as Schenectady Federal Savings
Bank, are presently insured by the Savings Association Insurance Fund
("SAIF"), which, along with the Bank Insurance Fund ("BIF"), comprise the
two insurance funds administered by the Federal Deposit Insurance
Corporation ("FDIC"). Financial institutions which are members of the BIF
have an insurance premium schedule which ranges from .04% to .31% of
insured deposits (as compared to the current range of .23% to .31% of SAIF
insured deposits). In addition, in November 1995, the FDIC further revised
the schedule to provide a range of 0% to .27% (with a minimum annual
premium of $2,000), effective January 1996. The majority of BIF-insured
members will be subject to the minimum $2,000 annual premium. As a
result, BIF members will generally pay significantly lower premiums than
SAIF members.
Proposed legislation currently under consideration by the Congress would
require a merger of the BIF and SAIF on January 1, 1998. The legislation
being considered provides for a special assessment of .80% to .90% of SAIF
insured deposits held as of March 31, 1995 including those held by
commercial banks. If the assessment is made at .90%, the effect on the Bank
would be a pretax charge of approximately $1.3 million, which must be
expensed in the period in which the related budgetary legislation is enacted.
Should this occur, the Bank would remain a well capitalized institution. No
assurance can be given, however, as to whether the proposed recapitalization
plan will be implemented or as to the nature or extent of any competitive
disadvantage which may be experienced by SAIF member institutions.
Accordingly, this special assessment would significantly increase
noninterest expense and adversely affect the Bank's results ofoperations, in
the period the legislation is enacted. Conversely, depending upon the Bank's
capital level and supervisory rating, and assuming, although there can be no
assurance, that the premium levels for BIF and SAIF members are again
equalized, deposit premiums could decrease significantly to as low as
$2,000 for future periods.
The proposed legislation includes the abolition of the percentage bad debt
deduction for federal income tax purposes and will require the recapture of
cumulative bad debt deductions in excess of the greater of the pre-1988 bad
debt reserves or the reserve balance permitted under the experience method.
The Bank had no excess bad debt deduction over pre-1988 tax bad debt
reserves at December 31, 1995.
Under the proposed legislation all federal thrift institutions, such as
Schenectady Federal, must either convert to a national bank or state
chartered depository institution by January 1, 1998. In addition, the Holding
Company would no longer be regulated as a thrift holding company, but
rather as a bank holding company, and thus would be restricted to activities
that are related to the business of banking. The OTS also would be abolished
and its functions transferred among the other federal banking regulators.
The final form of the proposed legislation remains to be resolved and
therefore no assurance can be given as to whether or in what form the
proposed legislation will be enacted or its effect on the Holding Company
and the Bank.
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
JUNE 30, 1996
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Holding Company and the Bank are not engaged in any legal
proceedings of a material nature at the present time.
Item 2. Changes in Securities
None
Item 3. Default upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) On April 17, 1996, the Company held its Annual Meeting of
Stockholders.
(b) At the meeting, George J. Finster was elected for a term to
expire in 1999.
(c) Stockholders voted on the following matters:
(i) The election of the following director
of the Company:
Broker
Votes: For Withheld Non-Votes
George J. Finster 1,266,762 12,319 --
(ii) The ratification of the appointment of KPMG Peat
Marwick LLP as independent auditors of the Company
for the fiscal year ending December 31, 1996
Broker
Votes: For Against Abstain Non-Votes
1,272,128 3,739 3,214 --
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
During the quarter ended June 30, 1996, the Company
filed a report on Form 8-K on June 21, 1996 issuing a
press release, dated June 21, 1996 announcing the
Company's stock repurchase program.
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.
SFS BANCORP, INC.
(Registrant)
DATE: August 5, 1996 BY: /s/ Joseph H. Giaquinto
Joseph H. Giaquinto
Chairman of the Board,
President and Chief Executive Officer
(Duly Authorized Officer)
DATE: August 5, 1996 BY: /s/ Richard A. Ahl
Richard A. Ahl
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q SB FOR THE FISCAL QUARTER ENDED JUNE 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,523
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,968
<INVESTMENTS-CARRYING> 38,234
<INVESTMENTS-MARKET> 37,598
<LOANS> 111,346
<ALLOWANCE> 626
<TOTAL-ASSETS> 164,366
<DEPOSITS> 139,387
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,692
<LONG-TERM> 0
<COMMON> 15
0
0
<OTHER-SE> 22,272
<TOTAL-LIABILITIES-AND-EQUITY> 164,366
<INTEREST-LOAN> 4,224
<INTEREST-INVEST> 1,525
<INTEREST-OTHER> 195
<INTEREST-TOTAL> 5,944
<INTEREST-DEPOSIT> 3,093
<INTEREST-EXPENSE> 3,093
<INTEREST-INCOME-NET> 2,851
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 36
<EXPENSE-OTHER> 2,196
<INCOME-PRETAX> 759
<INCOME-PRE-EXTRAORDINARY> 759
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 583
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
<YIELD-ACTUAL> 3.54
<LOANS-NON> 924
<LOANS-PAST> 58
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 572
<CHARGE-OFFS> 28
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 626
<ALLOWANCE-DOMESTIC> 354
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 272
</TABLE>
