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 September 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 Identification Number)
incorporation or organization)
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 October 31, 1996
Common Stock, Par $.01 1,278,472
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [ X ]
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
SEPTEMBER 30, 1996
INDEX
Part I FINANCIAL INFORMATION Page
Item 1. Financial Statements............................................. 1
Consolidated Statements of Income for the Three
months ended September 30, 1996 and 1995, (Unaudited)............ 2
Consolidated Statements of Income for the Nine
months ended September 30, 1996 and 1995, (Unaudited)............ 3
Consolidated Statements of Financial Condition as
of September 30, 1996, (Unaudited) and December 31, 1995......... 4
Consolidated Statements of Changes in Stockholders' Equity for
the Nine months ended September 30, 1996 and 1995, (Unaudited)... 5
Consolidated Statements of Cash Flows for the Nine
months ended September 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
SEPTEMBER 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
SEPTEMBER 30,
1996 1995
(Unaudited)
<S> <C> <C>
Interest income:
Real estate loans $ 2,233 2,003
Other loans 12 10
Mortgage-backed securities 345 384
Debt securities 255 282
Federal funds sold and cash deposits 67 235
Securities available for sale 47 128
Stock in Federal Home Loan Bank 20 22
Total interest income 2,979 3,064
Interest expense:
Deposits 1,546 1,623
Net interest income 1,433 1,441
Provision for loan losses 30 180
Net interest income after provision for loan losses 1,403 1,261
Noninterest income:
Gain on sale of securities 44 --
Service fee income 5 5
Other loan charges 35 38
Bank fees and service charges 35 31
Other 27 12
Total noninterest income 146 86
Noninterest expense:
Compensation and employee benefits 634 596
Advertising and business promotion 28 14
Office occupancy and equipment expense 124 130
Federal deposit insurance premiums 1,010 81
Other insurance premiums 28 20
Mortgage servicing fees 10 13
Data processing fees 41 39
Professional service fees 49 46
Other 63 102
Total noninterest expense 1,987 1,041
Income (loss) before taxes (438) 306
Income tax expense (benefit) (313) 28
Net income (loss) $ (125) 278
Earnings (loss) per share $ (.10) .20
</TABLE>
See accompanying notes to unaudited consolidated interim financial
statements.
<TABLE>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
(Unaudited)
<S> <C> <C>
Interest income:
Real estate loans $ 6,436 5,727
Other loans 34 29
Mortgage-backed securities 1,087 1,066
Debt securities 806 739
Federal funds sold and cash deposits 224 502
Securities available for sale 278 368
Stock in Federal Home Loan Bank 58 67
Total interest income 8,923 8,498
Interest expense:
Deposits 4,639 4,624
Net interest income 4,284 3,874
Provision for loan losses 90 340
Net interest income after provision for loan losses 4,194 3,534
Noninterest income:
Gain on sale of securities 8 --
Service fee income 14 16
Other loan charges 120 73
Bank fees and service charges 101 112
Other 67 24
Total noninterest income 310 225
Noninterest expense:
Compensation and employee benefits 1,893 1,715
Advertising and business promotion 87 69
Office occupancy and equipment expense 388 394
Federal deposit insurance premiums 1,172 241
Other insurance premiums 73 61
Mortgage servicing fees 31 49
Data processing fees 124 117
Other real estate writedown 7 --
Professional service fees 189 114
Other 219 230
Total noninterest expense 4,183 2,990
Income before taxes 321 769
Income tax expense (benefit) (136) 194
Net income $ 457 575
Earnings per share $ .36 .20
</TABLE>
See accompanying notes to unaudited consolidated interim financial
statements.
<TABLE>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Dollars in Thousands)
<CAPTION>
September 30, December 31,
1996 1995
Assets (Unaudited)
<S> <C> <C>
Cash and due from banks $ 1,520 1,353
Federal funds sold 3,300 9,100
Total cash and cash equivalents 4,820 10,453
Securities available for sale, at fair value 1,986 7,976
Investment securities:
Debt securities (approximate fair value of $15,710
at September 30, 1996 and $18,712 at December 31, 1995) 15,876 18,658
Mortgage-backed securities (approximate fair value of
$20,867 at September 30, 1996 and $24,645 at December 31, 1995) 21,222 24,418
Investment required by law, stock in Federal Home Loan Bank of NY, at cost 1,216 1,117
Loans receivable, net 117,200 100,921
Accrued interest receivable 1,003 1,161
Premises and equipment, net 1,828 1,414
Real estate owned 88 200
Prepaid expenses and other asset 791 211
Total Assets $ 166,030 166,529
Liabilities and Stockholders' Equity
Liabilities:
Due to depositors:
Demand deposits $ 11,525 9,990
Savings accounts 43,510 44,982
Time deposit accounts 86,831 84,699
Total Deposits 141,866 139,671
Advance payments by borrowers for property taxes and insurance 676 1,402
Accrued expenses and other liabilities 2,314 1,195
Total Liabilities 144,856 142,268
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; 1,278,472 shares outstanding at September 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 11,390 11,013
Common stock acquired by :
Employee stock ownership plan (ESOP) (107,640 shares) (1,076) (1,076)
Recognition and retention plan (RRP) (53,222 shares) (672) --
Treasury stock, at cost (216,528 shares at September 30, 1996 and none at
December 31, 1995) (2,746) --
Net unrealized gain on securities available for sale 42 88
Total Stockholders' Equity 21,174 24,261
Total Liabilities and Stockholders' Equity $ 166,030 166,529
</TABLE>
See accompanying notes to unaudited consolidated interim financial
statements.
<TABLE>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
<CAPTION>
NET
UNREALIZED
GAIN (LOSS) COMMON COMMON
ADDITIONAL ON SECURITIES STOCK STOCK
COMMON PAID IN RETAINED AVAILABLE ACQUIRED ACQUIRED TREASURY
STOCK CAPITAL EARNINGS FOR SALE BY ESOP BY RRP STOCK TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nine Months Ended
September 30, 1996
Balance at December 31, 1995 $ 15 14,221 11,013 88 (1,076) -- -- 24,261
Net income -- -- 457 -- -- -- -- 457
Net unrealized loss on securities
available for sale -- -- -- (46) -- -- -- (46)
RRP shares issued -- -- -- -- -- (672) 672 --
Cash dividends declared -- -- (80) -- -- -- -- (80)
Purchase of Treasury shares -- -- -- -- -- -- (3,418) (3,418)
Balance at September 30, 1996 $ 15 14,221 11,390 42 (1,076) (672) (2,746) 21,174
Nine Months Ended
September 30, 1995
Balance at December 31, 1994 $ -- -- 10,158 (112) -- -- -- 10,046
Net income -- -- 575 -- -- -- -- 575
Net unrealized gain on securities
available for sale -- -- -- 168 -- -- -- 168
Common Stock Issued 15 14,185 -- -- -- -- -- 14,200
Purchase of ESOP -- -- -- -- (1,196) -- -- (1,196)
Balance at September 30, 1995 $ 15 14,185 10,733 56 (1,196) -- -- 23,793
</TABLE>
See accompanying notes to unaudited consolidated interim financial
statements.
<TABLE>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Nine Months Ended
September 30,
1996 1995
Increase (decrease) in cash and cash equivalents: (Unaudited)
<S> <C> <C>
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 457 575
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 103 107
Net accretion on investment securities (10) (21)
Provision for loan losses 90 340
Writedown of real estate owned 7 --
Gain on disposition of fixed assets (11) --
Proceeds from disposition of fixed assets 19 --
Gain on sale of available for sale securities (8) --
Decrease (increase) in accrued interest receivable 158 (10)
Increase in prepaid expense and other assets (580) (203)
Increase (decrease) in accrued expense and other liabilities 1,119 (92)
Total adjustments 887 121
Net cash provided by operating activities 1,344 696
Cash flows from investing activities:
Proceeds from maturity/paydown of investment securities 8,792 3,200
Proceeds from sale of Federal Home Loan Bank Stock -- 6
Purchase of investment securities (6,000) (6,995)
Purchase of mortgage-backed securities -- (5,382)
Purchase of Federal Home Loan Bank Stock (99) --
Principal repayments on mortgage-backed securities 3,196 2,075
Net increase in loans receivable (11,272) (959)
Purchase of loans receivable (5,185) (4,035)
Capital expenditures, net of disposals (525) (74)
Proceeds from sale of available for sale securities 5,952 --
Proceeds from the sale of real estate owned 193 279
Net cash used by investing activities (4,948) (11,885)
Cash flows from financing activities:
Net increase in deposits 2,195 4,019
Net decrease in advance payments by borrowers for
property taxes and insurance (726) (308)
Net proceeds from common stock issued in stock conversion -- 14,200
Acquisition of common stock by ESOP -- (1,196)
Dividends paid (80) --
Purchase of Treasury stock (3,418) --
Net cash (used) provided in financing activities (2,029) 16,715
Net (decrease) increase in cash and cash equivalents (5,633) 5,526
Cash and cash equivalents at beginning of period 10,453 6,468
Cash and cash equivalents at end of period $ 4,820 11,994
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid $ 4,622 4,651
Taxes paid 509 470
Transfer of loans to other real estate owned 88 362
Net unrealized (loss) gain on securities available for sale (46) 168
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 nine months
ended September 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 1,202,824 for the three months ended September
30, 1996 and 1,276,410 for the nine months ended September 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
SEPTEMBER 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 (SAIF), as administered by the
Federal Deposit Insurance Corporation (FDIC), 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 $5.7 million to $4.8 million at September 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 September 30, 1996, was 25.62%.
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 $1.3 million and $696,000 for the nine months
ended September 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 $4.9
million and $11.9 million for the nine months ended September 30, 1996 and
1995, respectively. Net cash used in financing activities, consisting
primarily of the purchase of treasury stock offset by a net increase in
deposit accounts, was $2.0 million for the nine months ended September
30, 1996. Net cash provided by financing activities for the nine months
ended September 30, 1995 of $16.7 million consisted primarily of net
increases in deposit accounts during the period and proceeds received
from the sale of stock.
During the nine month period ended September 30, 1996 the Company
repurchased 269,750 shares of which 216,528 shares were for treasury and
53,222 shares were for the recognition and retention program. The average
price of treasury shares purchased was $12.68 totaling $2.7 million. The
average price paid of $12.68 was approximately 76.6% of the Company's book
value per share of $16.56 at September 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 September 30, 1996, the Bank's capital exceeded each of the capital
requirements of the OTS. At September 30, 1996, the Bank's tangible and
core capital levels were both $17.3 million (10.4% of total adjusted assets)
and its risk-based capital level was $17.9 million (20.4% 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 $499,000 (0.3%) to $166.0 million at September 30,
1996 from $166.5 million at December 31, 1995. This decrease occurred as
loans receivable, net, grew $16.3 million (16.1%) to $117.2 million at
September 30, 1996. Offsetting the increase in loans receivable, net was a
decrease in federal funds sold of $5.8 million (63.7%) to $3.3 million, a
decrease in investment securities of $6.0 million (13.9%) to $37.1 million
and a decrease in securities available for sale of $6.0 million (75.1%)
to $2.0 million at September 30, 1996.
At September 30, 1996, total liabilities were $144.9 million representing
an increase of $2.6 million (1.8%) from December 31, 1995. Stockholders'
equity decreased $3.1 million to $21.2 million at September 30, 1996 as
compared to $24.3 million at December 31, 1995 largely as a result of the
Companys stock repurchase program. Retained earnings increased by
$377,000 primarily as a result of net income of the Company for the nine
month period ended September 30, 1996. Treasury stock increased $2.7
million as a result of the Company's repurchase of common stock. Net
unrealized gain on securities available for sale decreased $46,000 to
$42,000 at September 30, 1996.
Nonperforming assets increased $55,000 (5.3%) totaling $1.1 million at
September 30, 1996, compared with $1.0 million at December 31, 1995. The
ratio of nonperforming loans to total loans receivable, net was .86% at
September 30, 1996, compared with .83% at December 31, 1995. The ratio
of nonperforming assets to total assets at September 30, 1996, was .66%
compared with .62% at December 31, 1995.
Loan Receivable, Net
A summary of loans receivable, net at September 30, 1996 and December 31,
1995 is as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
<S> <C> <C>
Loans secured by real estate:
Residential:
Conventional $ 82,457 64,322
Home Equity 22,966 22,723
FHA Insured 3,679 4,797
VA Guaranteed 2,980 3,100
Commercial and multi-family 5,195 6,144
117,277 101,086
Other loans 592 434
117,869 101,520
Less:
Unearned discount and net deferred loan fees 23 27
Allowance for loan losses 646 572
669 599
Loans receivable, net $ 117,200 100,921
</TABLE>
The following table sets forth the information with regard to nonperforming
assets.
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
<S> <C> <C>
Loans on a nonaccrual status $ 925 798
Loans contractually past due 90 days or
more and still accruing interest 81 41
Total nonperforming loans 1,006 839
Other real estate owned 88 200
Total nonperforming assets $ 1,094 1,039
</TABLE>
The following table sets forth the information with regard to changes in the
allowance for loan losses.
<TABLE>
<CAPTION>
For the nine months ended September 30,
1996 1995
<S> <C> <C>
Balance, beginning of period $ 572 861
Provision charged to operations 90 340
Loans charged off (45) (660)
Recoveries on loans previously charged off 29 44
Balance, end of period $ 646 585
</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 nine months ended September 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 SEPTEMBER 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> $ 114,978 $ 2,245 7.77% $ 97,779 $ 2,013 8.17%
Mortgage-backed securities 21,807 345 6.29 24,062 384 6.33
Securities available for sale 3,105 47 6.02 7,947 128 6.39
Debt securities 15,902 255 6.38 18,226 282 6.14
Other interest-earning asset
including cash equivalents 5,136 67 5.19 16,043 235 5.81
FHLB stock 1,216 20 6.54 1,117 22 7.81
Total interest-earning assets 162,144 2,979 7.31 165,174 3,064 7.36
Savings accounts 38,507 292 3.02 41,991 319 3.01
Money market accounts 5,641 46 3.24 4,602 32 2.76
Demand and NOW accounts<F2> 10,489 39 1.48 9,459 35 1.47
Certificate accounts 85,918 1,161 5.38 85,402 1,228 5.70
Escrow 1,570 8 2.03 1,689 9 2.11
Total interest-bearing liabilities 142,125 1,546 4.33 143,143 1,623 4.50
Net interest income $ 1,433 $ 1,441
Net interest rate spread 2.98% 2.86%
Net earning assets $ 20,019 $ 22,031
Net yield on average
interest-earning assets 3.52% 3.46%
Average interest-earning
assets to average
interest-bearing liabilities 1.14 1.15
<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>
NINE MONTHS ENDED SEPTEMBER 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> $ 108,902 $ 6,470 7.94% $ 96,110 $ 5,756 8.01%
Mortgage-backed securities 22,929 1,087 6.33 22,623 1,066 6.30
Securities available for sale 6,236 278 5.95 7,896 368 6.23
Debt securities 17,010 806 6.33 16,570 739 5.96
Other interest-earning assets
including cash equivalents 5,693 224 5.26 11,453 502 5.86
FHLB stock 1,199 58 6.46 1,119 67 8.01
Total interest-earning assets 161,969 8,923 7.36 155,771 8,498 7.29
Interest-bearing liabilities:
Savings accounts 39,377 889 3.02 45,144 1,015 3.01
Money market accounts 5,004 114 3.04 4,916 98 2.67
Demand and NOW accounts<F2> 9,866 108 1.46 9,086 101 1.49
Certificate accounts 85,229 3,507 5.50 82,114 3,388 5.52
Escrow 1,257 21 2.23 1,317 22 2.23
Total interest-bearing liabilities 140,733 4,639 4.40 142,577 4,624 4.34
Net interest income $ 4,284 $ 3,874
Net interest rate spread 2.96% 2.95%
Net earning assets $ 21,236 $ 13,194
Net yield on average
interest-earning assets 3.53% 3.33%
Average interest-earning
assets to average
interest-bearing liabilities 1.15 1.09
<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)
THREE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED WITH
THREE MONTHS ENDED SEPTEMBER 30, 1995
<CAPTION>
INCREASE (DECREASE)
DUE TO
VOLUME RATE NET
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 336 (104) 232
Mortgage-backed securities (37) (2) (39)
Securities-available for sale (74) (7) (81)
Debt securities (38) 11 (27)
Other interest-earning assets (145) (23) (168)
FHLB stock 2 (4) (2)
Total interest-earning assets $ 44 (129) (85)
Interest-bearing liabilities:
Savings deposits $ (27) 0 (27)
Money market accounts 8 6 14
Demand and NOW deposits 4 0 4
Certificate accounts 7 (74) (67)
Escrow (1) 0 (1)
Total interest-bearing liabilities $ (9) (68) (77)
Change in net interest income $ (8)
</TABLE>
<TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED WITH
NINE MONTHS ENDED SEPTEMBER 30, 1995
INCREASE (DECREASE)
DUE TO
VOLUME RATE NET
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 765 (51) 714
Mortgage-backed securities 15 6 21
Securities-available for sale (74) (16) (90)
Debt securities 20 47 67
Other interest-earning assets (230) (48) (278)
FHLB stock 5 (14) (9)
Total interest-earning assets $ 500 (75) 425
Interest-bearing liabilities:
Savings deposits $ (129) 3 (126)
Money market accounts 2 14 16
Demand and NOW deposits 9 (2) 7
Certificate accounts 131 (12) 119
Escrow (1) 0 (1)
Total interest-bearing liabilities $ 12 3 15
Change in net interest income $ 410
</TABLE>
COMPARISONS OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER
30, 1996
Three months ended September 30, 1996 compared with 1995
Net loss for the quarter ended September 30, 1996, was $125,000 or $.10
per share, a decrease of $403,000 (145.0%) from the comparable quarter of
the prior year. The decrease in net income was attributable to a one-time
charge of $930,000 for SAIF premiums partially offset by an increase in net
interest income after provision for loan losses and noninterest income. See
"Regulatory Developments".
Interest income for the three months ended September 30, 1996, totaled
$3.0 million, a decrease of $85,000 (2.8%) from 1995's third quarter, as
average interest-earning assets decreased by $3.0 million (1.8%) to $162.1
million and average rates earned decreased by 5 basis points (0.7%) to 7.31%.
The most significant factor contributing to the decreased level of interest
income was the decrease in earnings on other interest earning assets,
essentially federal funds sold, which decreased $168,000 (71.5%) as a result
of a $10.9 million (68.0%) decrease in the average balance invested.
Interest earned on loans increased $232,000 (11.5%) as a result of the
combined effect of a $17.2 million (17.6%) increase in the average loan
balance offset by a 40 basis point (4.9%) decrease in average rates earned.
Earnings on debt securities decreased $27,000 (9.6%) as a result of an
increase in average rates earned of 24 basis points (3.9%) offset by a
decrease in average invested balances of $2.3 million (12.8%).
Interest expense for the quarter ended September 30, 1996, amounted to
$1.5 million, $77,000 (4.7%) less than the year ago quarter. The decrease
occurred as a result of a $1.0 million (0.7%) decrease in average interest
bearing liabilities to $142.1 million combined with a 17 basis point (3.8%)
decrease in average rates paid to 4.33%. The mix within the deposit
structure changed as the average balance of certificate accounts grew
$516,000 (0.6%), while savings accounts declined $3.5 million (8.3%). The
decrease in average rates paid on certificate accounts of 32 basis points
(5.6%) to 5.38% was a reflection of general interest rates and a competitive
environment that prevailed during the third quarter of 1996 compared with
1995.
Net interest income for the three months ended September 30, 1996 totaled
$1.4 million, $8,000 (0.6%) less than the comparable quarter a year ago.
The interest rate spread increased 12 basis points to 2.98% for the quarter
ended September 30, 1996; the net interest margin for the most recent
quarter of 3.52% was 6 basis points greater than the comparable quarter a
year ago.
Provision for Loan Losses
The provision for loan losses amounted to $30,000 and $180,000 for the
quarters ended September 30, 1996 and September 30, 1995, respectively.
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 September 30, 1996, the Bank's
allowance for loan losses totaled $646,000 (.55% of loans and 64.2% of
nonperforming loans) compared with $572,000 (.57% of loans and 68.2% of
nonperforming loans) at December 31, 1995.
Noninterest Income
Noninterest income increased to $146,000 for the three months ended
September 30, 1996, compared with $86,000 for the corresponding period in
the previous year. Increases in the three month period ended September 30,
1996 compared with 1995 were primarily the result of gains taken on the
sale of available for sale securities.
Noninterest Expense
Noninterest expense increased $946,000 (90.9%) to $2.0 million for the
three months ended September 30, 1996, as compared with $1.0 million for
the same period in 1995. FDIC premiums increased $929,000 to $1.0 million
as a result of the one time charge for SAIF premiums. Compensation and
employee benefits increased $38,000 (6.4%) 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. Office occupancy and equipment expense,
other insurance premium, mortgage servicing fees, data processing fees, and
professional service fees remained relatively the same for the quarters
ended September 30, 1996 and September 30, 1995. Advertising and
business promotion increased $14,000 (100.0%) to $28,000 resulting
primarily from increased advertising in lending products. Other
noninterest expense decreased $39,000 (38.2%) during the third quarter
of 1996 compared with the same quarter a year ago. This decrease
resulted from decreases in real estate owned expense, postage expense
and home equity origination expense.
COMPARISONS OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1996
Nine months ended September 30, 1996, compared with 1995
Net income for the nine months ended September 30, 1996, decreased by
$118,000 (20.5%) and totaled $457,000 compared with $575,000 realized in
the first three quarters of 1995. Earnings per share for the nine months
ended September 30, 1996 was $.36 per share. The decrease in net income
was attributable to increases in noninterest expense partially offset by
increases net interest income and noninterest income and a reduction in the
provision for loan losses and income tax expense. Return on average assets
(ROA) for the first three quarters of 1996 amounted to .37% compared
with .48% for the comparable period a year ago. Return on average equity
(ROE) was 2.68% (on average equity of $22.7 million) compared with 5.24%
(on average equity of $14.6 million) a year earlier.
Interest income for the nine months ended September 30, 1996, totaled $8.9
million, an increase of $425,000 (5.0%) from 1995s first three quarters.
This increase was a result of an increase in average interest-earning assets
of $6.2 million (4.0%) to $162.0 million and an increase in the average rate
earned of 7 basis points (1.0%) to 7.36%. The largest factor contributing
to the increase in interest income was the increase in earnings on loans
which increased $714,000 (12.4%) as a result of a $12.8 million (13.3%)
increase in the average balance invested combined with a 7 basis point
(0.9%) decrease in average rates earned. Interest earned on debt securities
increased $67,000 (9.1%) as a result of an increase in average rates earned
of 38 basis points (6.4%). Earnings on other interest earning assets,
essentially federal funds sold, decreased $278,000 (55.4%) as a result of
the combined effect of a $5.8 million (50.3%) decrease in the average balance
invested and a 61 basis point (10.4%) reduction in average rates earned.
Interest expense for the nine months ended September 30, 1996, amounted
to $4.6 million, essentially unchanged from the year ago period. The mix
within the deposit structure changed as the average balance of certificate
account balances grew $3.1 million (3.8%) while savings accounts declined
$5.8 million (12.8%). The increase in average rates paid was a reflection of
the change in deposit mix.
Net interest income for the nine months ended September 30, 1996
increased by $410,000 (10.6%) and totaled $4.3 million compared with $3.9
million a year ago. The interest rate spread increased one basis point to
2.96% for the nine months ended September 30, 1996. The net interest
margin increased 20 basis points to 3.53% compared with 3.33% for the
same period last year.
Provision for Loan Losses
For the nine months ended September 30, 1996, the provision for loan losses
decreased $250,000 (73.5%) to $90,000 compared with the corresponding
period a year ago. See "Provision for Loan Losses" at page 15.
Noninterest Income
Noninterest income increased for the nine month period ended September 30,
1996 to $310,000 compared with $225,000 for the corresponding period in
the previous year. Increases in other loan charges and other noninterest
income comprised the majority of the increase from the same period last
year.
Noninterest Expense
Noninterest expense increased $1.2 million (39.9%) to $4.2 million for the
nine months ended September 30, 1996, as compared with $3.0 million for
the same period in 1995. Compensation and employee benefits, the largest
component of noninterest expense, increased $178,000 (10.4%). This
increase was a result of annual merit increases and the establishment of the
Recognition and Retention Plan, as noted previously. Office occupancy and
equipment expense, data processing fees and other noninterest expenses
remained relatively the same for the nine month period ended September 30,
1996 and September 30, 1995. FDIC premiums increased $931,000 to $1.2
million resulting from a one time charge for SAIF premiums. Advertising and
business promotion increased $18,000 (26.1%) from the same period in 1995
as a result of increased advertising for loans. Mortgage servicing fees
decreased $18,000 (36.7%) to $31,000 for the nine months ended September
30, 1996. The decrease is a function of the reduction in loans being
serviced by others for the Company. Professional service fees increased
$75,000 (65.8%) for the nine months ended September 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.
Income Tax Expense
Income tax benefit totaled $313,000 for the three months ended September
30, 1996 and $136,000 for the nine months ended September 30, 1996. The
benefit was recognized as a result of net losses for the quarter ended
September 30, 1996 due mainly to the one time charge for SAIF premiums.
The tax effect of net income was also reduced by a reduction in the
deferred tax asset valuation reserve.
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, the adoption of
SFAS No. 122 has not had a significant effect on the Companys 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 Companys 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 options 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 options 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
Federal law requires that the FDIC maintain reserves at both the Savings
Association Insurance Fund (SAIF) and the Bank Insurance Fund (BIF) of
at least 1.25% of insured deposits. The reserves are funded through the
payment of insurance premiums by the insured institution members of each
fund. The BIF reached this level during 1995. Upon attainment of the
required reserve level, the FDIC may reduce insurance premiums applicable
to BIF-insured institutions while retaining the premiums applicable to SAIF
members, such as the Bank, at their current levels until the SAIF reaches
its required reserve level.
In order to help eliminate this disparity and any competitive disadvantage
due to disparate deposit insurance premium schedules, legislation to
recapitalize the SAIF was enacted in September 1996. The legislation
provides for a one-time assessment to be imposed on all deposits assessed
at the SAIF rates, as of March 31, 1995, in order to recapitalize the SAIF.
It also provides for the merger of the BIF and SAIF on January 1, 1999
provided no savings associations then exist. The special assessment rate
is currently anticipated to range between .65% and .70% and will be payable
by November 29, 1996. Accordingly, this special assessment increased
noninterest expense and adversely affected the Banks results of operations.
The Banks liability for the special assessment, estimated to total
approximately $930,000, has been recorded in the third quarter of 1996.
Following the special assessment, and depending on capital level and
supervisory rating, the Banks deposit insurance premiums could decrease
significantly for the future periods.
Prior to the enactment of the legislation a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing for resolving the
thrift crisis in the 1980s. Although the SAIF rates are expected to be
reduced significantly, in the near future the minimum assessment paid by
SAIF-insured institutions is not anticipated to be equalized with the
minimum BIF rate as a result of this continuing obligation. Although the
legislation also now requires assessments to be made on BIF-assessable
deposits for this purpose, that assessment will be limited to 20% of the
rate imposed on SAIF assessable deposits until the earlier of December 31,
1999 or when no savings association continues to exist, thereby imposing
a greater burden on SAIF member institutions such as the Bank. Thereafter,
however, assessments on BIF-member institutions will be made on the same
basis as SAIF-member institutions. The rates to be established by the FDIC
to implement this requirement for all FDIC-insured institutions are
uncertain this time.
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
SEPTEMBER 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. 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) Exhibits
None
(b) Reports on Form 8-K
None
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: November 5, 1996 BY: /s/ Joseph H. Giaquinto
Joseph H. Giaquinto
Chairman of the Board,
President and Chief Executive Officer
(Duly Authorized Officer)
DATE: November 5, 1996 BY: /s/ David J. Jurczynski
David J. Jurczynski
Vice President, Treasurer 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 SEPTEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,520
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,986
<INVESTMENTS-CARRYING> 37,098
<INVESTMENTS-MARKET> 36,577
<LOANS> 117,846
<ALLOWANCE> 646
<TOTAL-ASSETS> 166,030
<DEPOSITS> 141,866
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,990
<LONG-TERM> 0
<COMMON> 15
0
0
<OTHER-SE> 21,159
<TOTAL-LIABILITIES-AND-EQUITY> 166,030
<INTEREST-LOAN> 6,470
<INTEREST-INVEST> 2,171
<INTEREST-OTHER> 282
<INTEREST-TOTAL> 8,923
<INTEREST-DEPOSIT> 4,639
<INTEREST-EXPENSE> 4,639
<INTEREST-INCOME-NET> 4,284
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 4,183
<INCOME-PRETAX> 321
<INCOME-PRE-EXTRAORDINARY> 321
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 457
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
<YIELD-ACTUAL> 3.53
<LOANS-NON> 925
<LOANS-PAST> 81
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 572
<CHARGE-OFFS> 45
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 646
<ALLOWANCE-DOMESTIC> 368
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 278
</TABLE>
