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, 1998 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 October 31, 1998
--------------------- -------------------------------
Common Stock, Par $.01 1,208,472
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [ X ]
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
SEPTEMBER 30, 1998
INDEX
Part I FINANCIAL INFORMATION
Item 1. Interim Financial Statement ..........................................
Consolidated Statements of Income for the three
months ended September 30, 1998 and 1997, (Unaudited)...............
Consolidated Statements of Income for the nine
months ended September 30, 1998 and 1997, (Unaudited)...............
Consolidated Statements of Financial Condition as
of September 30, 1998, (Unaudited) and December 31, 1997............
Consolidated Statements of Changes in Stockholders' Equity for
the nine months ended September 30, 1998 and 1997, (Unaudited).....
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 (Unaudited)...............
Notes to unaudited consolidated interim financial statements........
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations....................
Part II OTHER INFORMATION
Item 1. Legal Proceedings.....................................................
Item 2. Changes in Securities.................................................
Item 3. Defaults Upon Senior Securities.......................................
Item 4. Submission of Matters to a Vote of Security Holders...................
Item 5. Other Information.....................................................
Item 6. Exhibits and Reports on Form 8-K......................................
Signatures......................................................................
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
SEPTEMBER 30, 1998
-------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
Item 1. - Interim 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 interim financial statements presented in this Form 10-QSB reflect
the consolidated financial condition and results of operations of the Company
and its subsidiary.
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
(Unaudited)
<S> <C> <C>
Interest income:
Loans .................................................... $2,717 2,493
Investment securities .................................... 223 512
Securities available for sale ............................ 160 99
Federal funds sold and cash deposits ..................... 96 37
Stock in Federal Home Loan Bank .......................... 24 23
------ ------
Total interest income ............................. 3,220 3,164
Interest expense:
Deposits ................................................. 1,767 1,705
------ ------
Net interest income ............................... 1,453 1,459
Provision for loan losses ...................................... 30 30
------ ------
Net interest income after provision for loan losses 1,423 1,429
------ ------
Noninterest income:
Other loan charges ....................................... 35 28
Bank fees and service charges ............................ 49 38
Other .................................................... 27 33
------ ------
Total noninterest income .......................... 111 99
------ ------
Noninterest expense:
Compensation and employee benefits ....................... 669 653
Advertising and business promotion ....................... 6 12
Office occupancy and equipment expense ................... 154 156
Federal deposit insurance premiums ....................... 23 23
Other insurance premiums ................................. 19 27
Mortgage servicing fees .................................. 4 8
Data processing fees ..................................... 50 43
Professional service fees ................................ 105 58
Other .................................................... 68 68
------ ------
Total noninterest expense ......................... 1,098 1,048
------ ------
Income before taxes ............................... 436 480
Income tax expense ............................................. 184 184
------ ------
Net income ........................................ $ 252 296
====== ======
Earnings per share:
Basic ..................................................... $ .23 .27
====== ======
Diluted ................................................... $ .22 .26
====== ======
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------ ------
(Unaudited)
<S> <C> <C>
Interest income:
Loans ....................................................... $8,042 7,188
Investment securities ....................................... 987 1,594
Securities available for sale ............................... 358 224
Federal funds sold and cash deposits ........................ 151 140
Stock in Federal Home Loan Bank ............................. 73 64
------ ------
Total interest income ................................ 9,611 9,210
Interest expense:
Deposits .................................................... 5,227 4,892
------ ------
Net interest income .................................. 4,384 4,318
Provision for loan losses ......................................... 90 90
------ ------
Net interest income after provision for loan losses .. 4,294 4,228
------ ------
Noninterest income:
Other loan charges .......................................... 116 82
Bank fees and service charges ............................... 133 120
Other ....................................................... 86 65
------ ------
Total noninterest income ............................. 335 267
------ ------
Noninterest expense:
Compensation and employee benefits .......................... 1,995 1,983
Advertising and business promotion .......................... 24 74
Office occupancy and equipment expense ...................... 461 465
Federal deposit insurance premiums .......................... 69 51
Other insurance premiums .................................... 55 70
Mortgage servicing fees ..................................... 15 25
Data processing fees ........................................ 144 131
Professional service fees ................................... 244 179
Other ....................................................... 220 220
------ ------
Total noninterest expense ............................ 3,227 3,198
------ ------
Income before taxes .................................. 1,402 1,297
Income tax expense ................................................ 583 508
------ ------
Net income ........................................... $ 819 789
====== ======
Earnings per share:
Basic ........................................................ $ .75 .71
====== ======
Diluted ...................................................... $ .71 .68
====== ======
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Dollars in Thousands)
September 30, December 31,
1998 1997
------------- ------------
Assets (Unaudited)
<S> <C> <C>
Cash and due from banks ................................................... $ 1,259 1,876
Federal funds sold ........................................................ 6,100 300
--------- ---------
Total cash and cash equivalents ............................... 7,359 2,176
Securities available for sale, at fair value .............................. 10,126 4,067
Investment securities (estimated fair value of $12,928
at September 30, 1998 and $29,095 at December 31, 1997) ............... 12,821 28,979
Stock in Federal Home Loan Bank of NY, at cost ............................ 1,338 1,338
Loans receivable, net ..................................................... 140,482 133,786
Accrued interest receivable ............................................... 1,064 1,130
Premises and equipment, net ............................................... 2,133 2,242
Real estate owned ......................................................... 151 111
Prepaid expenses and other asset .......................................... 770 599
--------- ---------
Total Assets .......................................................... $ 176,244 174,428
========= =======
Liabilities and Stockholders' Equity
Liabilities:
Due to depositors:
Non-interest bearing deposits ................................... $ 2,739 2,265
Savings and interest bearing demand deposits .................... 53,716 53,463
Time deposit accounts ........................................... 95,358 94,741
--------- ---------
Total Deposits ......................................... 151,813 150,469
Advance payments by borrowers for property taxes and insurance ....... 818 1,281
Accrued expenses and other liabilities ............................... 1,469 1,247
--------- ---------
Total Liabilities ...................................... 154,100 152,997
--------- ---------
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 at September 30, 1998 and December 31, 1997 ............ 15 15
Additional paid-in capital ........................................... 14,411 14,365
Retained earnings, substantially restricted .......................... 12,950 12,422
Common stock acquired by :
Employee stock ownership plan ("ESOP") (83,720 shares) ............... (837) (837)
Recognition and retention plan ("RRP") (32,530 shares) .............. (352) (455)
Treasury stock, at cost (286,528 shares at September 30, 1998 and
December 31, 1997) .......................................... (4,089) (4,089)
Accumulated other comprehensive income ................................. 46 10
--------- ---------
Total Stockholders' Equity .............................. 22,144 21,431
--------- ---------
Total Liabilities and Stockholders' Equity ............ $ 176,244 174,428
========= =========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
Common Common
Additional Stock Stock
Common Paid-in Retained Treasury Acquired Acquired
Stock Capital Earnings Stock By ESOP By RRP
------- ------ ------ ------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
Nine Months Ended
September 30, 1998
Balance at December 31, 1997 ... $ 15 14,365 12,422 (4,089) (837) (455)
Comprehensive income:
Net income ................... -- -- 819 -- -- --
Other comprehensive income,
net of tax:
Unrealized net holding gains
arising during the year
(pre-tax $60) .......... -- -- -- -- -- --
Comprehensive income ...........
Amortization of unearned RRP
compensation ................ -- -- -- -- -- 103
Cash dividends declared ....... -- -- (291) -- -- --
Tax benefit related to vested
RRP shares ............... -- 46 -- -- -- --
------- ------ ------ ------ ---- ----
Balance at September 30, 1998 .. $ 15 14,411 12,950 (4,089) (837) (352)
======= ====== ====== ====== ==== ====
Nine Months Ended
September 30, 1997
Balance at December 31, 1996.... $ 15 14,260 11,687 (2,840) (957) (540)
Comprehensive income:
Net income ................... -- -- 789 -- -- --
Other comprehensive income,
net of tax:
Unrealized net holding gains
arising during the period
(pre-tax $17) .............. -- -- -- -- -- --
Comprehensive income ...........
Amortization of unearned RRP
compensation ................ -- -- -- -- -- 195
Cash dividends declared ....... -- -- (249) -- -- --
Exercise of stock options ...... -- -- -- 94 -- --
Purchase of Treasury shares ... -- -- -- (794) -- --
------- ------ ------ ------ ---- ----
Balance at September 30, 1997 .. $ 15 14,260 12,227 (3,540) (957) (345)
======= ====== ====== ====== ==== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
Accumulated
Other
Comprehensive Comprehensive
Income Income Total
------------- -------------- --------
<S> <C> <C> <C>
Balance at December 31, 1997 .... 10 21,431
Comprehensive income:
Net income .................... -- $ 819 819
Other comprehensive income,
net of tax:
Unrealized net holding gains
arising during the year
(pre-tax $60) ........... 36 36 36
--------
Comprehensive income ............ $ 855
========
Amortization of unearned RRP
compensation ................. -- 103
Cash dividends declared ........ -- (291)
Tax benefit related to vested
RRP shares ................ -- 46
-------- --------
Balance at September 30, 1998 ... 46 22,144
======== ========
Nine Months Ended
September 30, 1997
Balance at December 31, 1996 ..... 46 21,671
Comprehensive income:
Net income .................... -- $ 789 789
Other comprehensive income,
net of tax:
Unrealized net holding gains
arising during the period
(pre-tax $17) ............... 10 10 10
--------
Comprehensive income ............ $ 799
========
Amortization of unearned RRP
compensation ................. -- 195
Cash dividends declared ........ -- (249)
Exercise of stock options ....... -- 94
Purchase of Treasury shares .... -- (794)
-------- --------
Balance at September 30, 1997..... 56 21,716
======== ========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
September 30,
------------------------
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Reconciliation of net income to net cash provided
by operating activities:
Net income .......................................................... $ 819 789
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .................................... 152 140
Net accretion on investment securities ........................... (74) (38)
Net accretion on securities available for sale ................... (1) --
Amortization of unearned RRP compensation ........................ 103 195
Provision for loan losses ........................................ 90 90
Loss on sale of real estate owned ................................ -- 3
Decrease in accrued interest receivable .......................... 66 77
Increase in prepaid expense and other assets ..................... (171) (20)
Increase in accrued expense and other liabilities ................ 244 231
-------- --------
Total adjustments ......................................... 409 678
-------- --------
Net cash provided by operating activities ................... 1,228 1,467
-------- --------
Cash flows from investing activities:
Proceeds from maturity/paydown of investment securities .................. 10,927 4,501
Proceeds from maturity/paydown of securities available for sale .......... 2,000 2,000
Purchase of investment securities ........................................ -- (1,700)
Purchase of securities available for sale ................................ (7,998) (4,050)
Purchase of Federal Home Loan Bank Stock ................................. -- (123)
Principal repayments on mortgage-backed securities ....................... 5,305 2,416
Net increase in loans receivable ......................................... (4,839) (7,340)
Purchase of loans receivable ............................................. (2,014) (3,110)
Capital expenditures, net of disposals ................................... (43) (462)
Proceeds from the sale of real estate owned .............................. 27 102
-------- --------
Net cash provided (used) by investing activities .................... 3,365 (7,766)
-------- --------
Cash flows from financing activities:
Net increase in deposits ................................................. 1,344 9,238
Net decrease in advance payments by borrowers for
property taxes and insurance ........................................ (463) (309)
Proceeds upon exercise of common stock options ........................... -- 94
Dividends paid ........................................................... (291) (249)
Purchase of Treasury stock ............................................... -- (794)
-------- --------
Net cash provided by financing activities ........................... 590 7,980
-------- --------
Net increase in cash and cash equivalents ........................... 5,183 1,681
Cash and cash equivalents at beginning of period ......................... 2,176 2,896
-------- --------
Cash and cash equivalents at end of period ............................... $ 7,359 4,577
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(continued)
Nine Months Ended
September 30,
------------------------
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid ....................................................... $ 5,241 4,892
======== ========
Taxes paid .......................................................... $ 624 371
======== ========
Transfer of loans to other real estate owned ............................. $ 67 38
======== ========
Net unrealized gain on securities available for sale, net of taxes ....... $ 36 10
======== ========
Deferred tax expense on unrealized gain
on securities available for sale .................................... $ (24) (7)
======== ========
Deferred tax benefit related to vested RRP shares ........................ $ 46 --
======== ========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements
<PAGE>
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 consolidated financial
statements and the related management's discussion and analysis of financial
condition and results of operations filed with the 1997 Form 10-KSB of SFS
Bancorp, Inc. and Subsidiary (the "Company"). Amounts in prior periods'
unaudited consolidated interim financial statements are reclassified whenever
necessary to conform to the current periods' presentation. The results of
operations for the three and nine months ended September 30, 1998 are not
necessarily indicative of results that may be expected for the entire year
ending December 31, 1998.
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
The following is a reconciliation of the numerators and denominators for the
basic and diluted earnings per share (EPS) calculations for the three and nine
month periods ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended September 30:
(in thousands except share and per share information)
1998
------------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- --------
<S> <C> <C> <C>
Basic EPS ................................ $ 252 1,092,222 $ 0.23
========
Dilutive effect of potential common shares
related to stock based compensation ... -- 65,698
--------- ---------
Diluted EPS .............................. $ 252 1,157,920 $ 0.22
========= ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
------------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- --------
<S> <C> <C> <C>
Basic EPS $ 296 1,101,492 $ 0.27
========
Dilutive effect of potential common shares
related to stock based compensation -- 50,227
--------- ---------
Diluted EPS $ 296 1,151,719 $ 0.26
========= ========= ========
<CAPTION>
Nine Months Ended September 30:
(in thousands except share and per share information)
1998
------------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- --------
<S> <C> <C> <C>
Basic EPS $ 819 1,091,719 $ 0.75
========
Dilutive effect of potential common shares
related to stock based compensation -- 62,691
--------- ---------
Diluted EPS $ 819 1,154,410 $ 0.71
========== ========== =========
<CAPTION>
1997
------------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- --------
<S> <C> <C> <C>
Basic EPS $ 789 1,117,656 $ 0.71
=========
Dilutive effect of potential common shares
related to stock based compensation -- 37,482
--------- ---------
Diluted EPS $ 789 1,155,139 $ 0.68
========= ========= =========
</TABLE>
NOTE 3. Comprehensive Income
On January 1, 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
establishes standards for reporting and display of comprehensive income and its
components. Comprehensive income includes the reported net income of a company
adjusted for items that are currently accounted for as direct entries to equity,
such as the mark to market adjustment on securities available for sale, foreign
<PAGE>
currency items and minimum pension liability adjustments. At the Company,
comprehensive income represents net income plus other comprehensive income,
which consists of the net change in unrealized gains or losses on securities
available for sale for the period. Accumulated other comprehensive income
represents the net unrealized gains or losses on securities available for sale
as of the balance sheet dates. Comprehensive income for the three month periods
ended September 30, 1998 and 1997 was $292,000 and $309,000, respectively.
NOTE 4. Proposed Merger
On October 23, 1998, SFS Bancorp, Inc. and Cohoes Savings Bank (Cohoes)
announced the mutual termination of the definitive agreement entered into on
July 31, 1998, pursuant to which the Company was to merge into a newly-formed
holding company of Cohoes to be organized in connection with Cohoes' conversion
from a mutual to a stock institution. Cohoes had advised the Company that due to
the recent significant decline in the market values of publicly held thrift
institutions and institutions undertaking mutual-to-stock conversions, and
regulatory concerns regarding the pricing of the transaction, the transaction
was no longer feasible. Despite the best efforts of both parties, revised terms
acceptable to everyone could not be agreed upon. Pursuant to the definitive
agreement, Cohoes has paid SFS Bancorp, Inc. a termination fee of $2 million.
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
SEPTEMBER 30, 1998
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. Collectively, these entities are referred to herein as the
"Company". 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.
On October 23, 1998, SFS Bancorp, Inc. and Cohoes Savings Bank ("Cohoes")
jointly announced the execution of a Termination Agreement dated October 23,
1998 (the "Termination Agreement"), which terminated the definitive agreement
dated as of July 31, 1998 by and between the Company and Cohoes (the "Merger
Agreement"). Under the terms of the Merger Agreement, the Company was to have
merged into a newly-formed holding company of Cohoes to be organized in
connection with Cohoes' conversion from a mutual to a stock institution (the
"Merger"). The Merger was terminated after Cohoes determined that due to the
recent significant decline in the market values of publicly held thrift
institutions, including institutions undertaking mutual-to-stock conversions,
and regulatory concerns regarding the amount of stock that SFS Bancorp, Inc.
shareholders would receive in the Merger, that the Merger was no longer feasible
and could adversely affect the Cohoes conversion. Pursuant to the Termination
Agreement, Cohoes has paid the Company a termination fee of $2 million.
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 four
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 to a lesser extent by the provision for loan losses and by
gains and losses on the sale of its securities available for sale portfolio and
<PAGE>
other noninterest income. The Bank's operating expenses principally consist of
compensation and employee benefits, 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.
Except for historical information contained herein, the matters contained in
this review are "forward-looking statements" that involve risk and
uncertainties, including statements concerning future events or performance and
assumptions and other statements of historical facts. The Company wishes to
caution its readers that the following important factors, among others, could
cause the Company's actual results for subsequent periods to differ materially
from those expressed in any forward-looking statement made by or on behalf of
the Company herein:
the effect of changes in laws and regulations, including federal and
state banking laws and regulations, with which the Company and its
banking subsidiary must comply, the cost of such compliance and the
potential material adverse effect if the Company or its banking
subsidiary were not in substantial compliance either currently or in
the future as applicable;
the effect of changes in accounting policies and practices, as may be
adopted by the regulatory agencies as well as by the Financial
Accounting Standards Board, or changes in the Company's organization,
compensation and benefit plans;
the effect on the Company's competitive position within its market
area of increasing consolidation within the banking industry and
increasing competition from larger regional and out-of-state banking
organizations as well as non-bank providers of various financial
services;
the effect of unforeseen changes in interest rates; and
the effect of changes in business cycles and downturns in the local,
regional, or national economies.
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 $2.2 million at December 31, 1997, increased $5.2 million to
$7.4 million at September 30, 1998 as a result of an increase in federal funds
sold. Securities available for sale increased $6.1 million from December 31,
1997 to $10.1 million at September 30, 1998 primarily as a result of
management's intention to provide greater flexibility in the overll management
of the investment securities portfolio. 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.
<PAGE>
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 4%. The Bank's liquidity ratio
was 20.84% and 20.21% at September 30, 1998 and December 31, 1997, respectively.
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 net income was $1.2 million and $1.5 million for the
nine months ended September 30, 1998 and 1997, respectively. Net cash used by
investing activities, consisting primarily of disbursements for the origination
and purchase of loans and the acquisition of securities available for sale
partially offset by principal collections on loans and mortgage-backed
securities and by proceeds from the maturity of investment securities, was $7.8
million for the nine months ended September 30, 1997. Net cash of $3.4 million
was provided by investing activities for the nine months ended September 30,
1998 primarily due to proceeds from the maturity, call and paydown of investment
securities and mortgage-backed securities partially offset by an increase in the
purchase of securities available for sale. Net cash provided by financing
activities for the nine months ended September 30, 1998 of $590,000 consisted
primarily of a $1.3 million net increase in deposit accounts during the period
offset by the payment of dividends. Net cash provided by financing activities,
consisting primarily of a $9.2 million net increase in deposit accounts during
the period offset by the purchase of treasury stock and payment of dividends,
was $8.0 million for the nine months ended September 30, 1997.
During the nine month period ended September 30, 1998, the Company did not
repurchase any of its shares. During the nine month period ended September 30,
1997 the Company repurchased 47,475 shares. The weighted average price of
treasury shares purchased was $16.73 totaling $794,000. The average price paid
of $16.73 was approximately 94.8% of the Company's book value per share of
$17.64 at September 30, 1997. 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 based on extenuating facts and
circumstances. As of June 29, 1998, the OTS no longer restricts the amount of
shares the Company may elect to repurchase.
At September 30, 1998, the Bank's capital exceeded each of the capital
requirements of the OTS. At September 30, 1998, the Bank's tangible and core
capital levels were both $20.0 million (11.4% of total adjusted assets) and its
risk-based capital level was $20.9 million (22.0% 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 increased $1.8 million (1.0%) to $176.2 million at September 30,
1998 from $174.4 million at December 31, 1997. This increase occurred as loans
receivable, net, grew $6.7 million (5.0%) to $140.5 million at September 30,
1998. The growth in the loan portfolio was due to residential mortgage loans.
Securities available for sale increased $6.1 million (149.0%) to $10.1 million
at September 30, 1998. Federal funds sold increased $5.8 million at September
30, 1998 from $300,000 at December 31, 1997. Offsetting these increases was a
decrease in investment securities of $16.2 million (55.8%) to $12.8 million.
<PAGE>
At September 30, 1998, total liabilities were $154.1 million representing an
increase of $1.1 million (0.7%) from December 31, 1997. The increase was
primarily attributable to an increase in deposits. Stockholders' equity
increased $713,000 to $22.1 million at September 30, 1998 as compared to $21.4
million at December 31, 1997. Retained earnings increased by $528,000 as a
result of net income of the Company for the nine month period ended September
30, 1998, which was partially offset by cash dividends declared.
Nonperforming assets decreased $16,000 (1.1%) to $1.4 million at September 30,
1998. The ratio of nonperforming loans to total loans receivable was .91% at
September 30, 1998, compared with 1.00% at December 31, 1997. The ratio of
nonperforming assets to total assets was .82% at September 30, 1998 compared
with .84% at December 31, 1997.
Loan Receivable, Net
A summary of loans receivable, net at September 30, 1998 and December 31, 1997
is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Loans secured by real estate:
Residential:
Conventional ............................. $110,735 100,277
Home Equity .............................. 20,498 22,658
FHA Insured .............................. 2,264 2,772
VA Guaranteed ............................ 1,512 2,028
Commercial and multi-family ................. 5,761 6,130
-------- --------
140,770 133,865
Other loans .................................... 709 721
-------- --------
141,479 134,586
-------- --------
Less:
Unearned discount and net deferred loan fees 105 22
Allowance for loan losses ................... 891 778
-------- --------
996 800
-------- --------
Loans receivable, net .......................... $140,482 133,786
======== ========
</TABLE>
<PAGE>
The following table sets forth information with regard to nonperforming assets.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------ ------
(In thousands)
<S> <C> <C>
Loans on a nonaccrual status ................... $1,284 1,328
Loans contractually past due 90 days or
more and still accruing interest ............ 7 19
------ ------
Total nonperforming loans ................ 1,291 1,347
Other real estate owned ........................ 151 111
------ ------
Total nonperforming assets ............... $1,442 1,458
====== ======
</TABLE>
The following table sets forth information with regard to changes in the
allowance for loan losses.
<TABLE>
<CAPTION>
For the nine months
ended September 30,
1998 1997
----- -----
(In thousands)
<S> <C> <C>
Balance, beginning of period ................... $ 778 642
Provision charged to operations ................ 90 90
Loans charged off .............................. (21) (2)
Recoveries on loans previously charged off ..... 44 29
----- -----
Balance, end of period ......................... $ 891 752
===== =====
</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, 1998, 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. All average balances are
daily average balances. 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.
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Average Balance Data, Interest Rates and Interest Differential
(Dollars in Thousands)
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
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 (1) ..... $141,788 $ 2,717 7.60% $126,834 $ 2,493 7.80%
Mortgage-backed securities .... 12,604 196 6.17 18,408 292 6.29
Securities available for sale . 10,134 160 6.26 5,864 99 6.70
Debt securities ............... 1,435 27 7.46 13,428 220 6.50
Other interest-earning assets
including cash equivalents 7,066 96 5.39 2,671 37 5.50
FHLB stock ................... 1,338 24 7.12 1,338 23 6.82
-------- -------- -------- --------
Total interest-earning assets ....... 174,365 3,220 7.33 168,543 3,164 7.44
-------- -------- -------- --------
Savings accounts .............. 36,951 280 3.01 37,306 283 3.01
Money market accounts ......... 7,534 63 3.32 7,712 70 3.60
Demand and NOW accounts (2) ... 12,194 44 1.43 11,137 42 1.50
Certificate accounts .......... 96,096 1,369 5.65 91,843 1,301 5.62
Escrow ........................ 2,040 11 2.14 1,736 9 2.06
-------- -------- -------- --------
Total interest-bearing liabilities .. 154,815 1,767 4.53 149,734 1,705 4.52
-------- -------- -------- --------
Net interest income ................. $ 1,453 $ 1,459
======== ========
Net interest rate spread ............ 2.80% 2.93%
==== ====
Net earning assets .................. $ 19,550 $ 18,809
======== ========
Net yield on average
interest-earning assets ...... 3.31% 3.43%
==== ====
Average interest-earning
assets to average
interest-bearing liabilities . 1.13 1.13
==== ====
</TABLE>
(1) Calculated net of deferred loan fees.
(2) Includes noninterest-bearing demand accounts.
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Average Balance Data, Interest Rates and Interest Differential
(Dollars in Thousands)
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
1998 1997
----------------------------------------- ---------------------------------------
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 (1) ....... $139,037 $ 8,042 7.73% $122,668 $ 7,188 7.83%
Mortgage-backed securities ...... 14,644 682 6.23 19,241 913 6.34
Securities available for sale ... 7,470 358 6.41 4,560 224 6.57
Debt securities ................. 5,810 305 7.02 14,085 681 6.46
Other interest-earning assets
including cash equivalents . 3,775 151 5.35 3,486 140 5.37
FHLB stock ...................... 1,338 73 7.29 1,316 64 6.50
-------- -------- -------- --------
Total interest-earning assets ......... 172,074 9,611 7.47 165,356 9,210 7.45
-------- -------- -------- --------
Interest-bearing liabilities:
Savings accounts ................ 36,614 824 3.01 37,209 837 3.01
Money market accounts ........... 7,507 185 3.29 6,962 181 3.48
Demand and NOW accounts (2) ..... 11,425 122 1.43 10,626 120 1.51
Certificate accounts ............ 95,895 4,073 5.68 90,561 3,734 5.51
Escrow .......................... 1,489 23 2.07 1,255 20 2.13
-------- -------- -------- --------
Total interest-bearing liabilities .... 152,930 5,227 4.57 146,613 4,892 4.46
-------- -------- -------- --------
Net interest income ................... $ 4,384 $ 4,318
======== ========
Net interest rate spread .............. 2.90% 2.99%
==== ====
Net earning assets .................... $ 19,144 $ 18,743
======== ========
Net yield on average
interest-earning assets ........ 3.41% 3.49%
==== ====
Average interest-earning
assets to average
interest-bearing liabilities ... 1.13 1.13
==== ====
</TABLE>
(1) Calculated net of deferred loan fees.
(2) Includes noninterest-bearing demand accounts.
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
RATE VOLUME ANALYSIS
(In Thousands)
THREE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED WITH
THREE MONTHS ENDED SEPTEMBER 30, 1997
INCREASE (DECREASE)
DUE TO
----------------------
VOLUME RATE NET
------ ---- ---
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net ............. $ 285 (61) 224
Mortgage-backed securities ........ (90) (6) (96)
Securities-available for sale ..... 68 (7) 61
Debt securities ................... (231) 38 (193)
Other interest-earning assets ..... 60 (1) 59
FHLB stock ........................ 0 1 1
----- ----- -----
Total interest-earning assets ....... 92 (36) 56
----- ----- -----
Interest-bearing liabilities:
Savings deposits .................. (3) 0 (3)
Money market accounts ............. (2) (5) (7)
Demand and NOW deposits ........... 4 (2) 2
Certificate accounts .............. 61 7 68
Escrow ............................ 2 0 2
----- ----- -----
Total interest-bearing liabilities .. $ 62 0 62
----- ----- -----
Change in net interest income ....... $ 30 $ (36) $ (6)
===== ===== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED WITH
NINE MONTHS ENDED SEPTEMBER 30, 1997
INCREASE (DECREASE)
DUE TO
----------------------
VOLUME RATE NET
------ ---- ---
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net ................... $ 945 (91) 854
Mortgage-backed securities .............. (214) (17) (231)
Securities-available for sale ........... 140 (6) 134
Debt securities ......................... (440) 64 (376)
Other interest-earning assets ........... 12 (1) 11
FHLB stock .............................. 1 8 9
----- ----- -----
Total interest-earning assets ............. 444 (43) 401
----- ----- -----
Interest-bearing liabilities:
Savings deposits ........................ (13) 0 (13)
Money market accounts ................... 14 10) 4
Demand and NOW deposits ................. 9 (7) 2
Certificate accounts .................... 224 115 339
Escrow .................................. 4 (1) 3
----- ----- -----
Total interest-bearing liabilities ........ 238 97 335
===== ===== =====
Change in net interest income ............. $ 206 $(140) $ 66
===== ====== =====
</TABLE>
<PAGE>
COMPARISONS OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
WITH THREE MONTHS ENDED SEPTEMBER 30, 1997
Net income for the quarter ended September 30, 1998, was $252,000 or $.23 basic
earnings per share and $.22 diluted earnings per share. This represents a
decrease of $44,000 (14.9%) from the comparable quarter of the prior year. The
decrease in net income was primarily a result of a decrease in net interest
income and an increase in noninterest expense. These decreases were partially
offset by an increase in noninterest income. The provision for loan losses and
income tax expense was consistent with the same quarter a year ago. The
annualized return on average assets ("ROA") for the current quarter amounted to
.57% compared with .68% for the comparable quarter a year ago. The annualized
return on average equity ("ROE") was 4.66% (on average equity of $21.6 million)
compared with 5.59% (on average equity of $21.2 million) a year earlier.
Interest income for the three months ended September 30, 1998, totaled $3.2
million, an increase of $56,000 (1.8%) from 1997's third quarter. The primary
reason for the increase was the fact that average loans, which are the Company's
highest yielding assets, increased as a percentage of total interest-earning
assets from 75.3% during the third quarter 1997 to 81.3% for the same period in
1998. The interest income on loans increased $224,000 (9.0%) as a result of a
$15.0 million (11.8%) increase in the average balance invested offset by a 20
basis point decrease in average rates earned. Other factors affecting interest
income were a decrease in interest earned on investment securities which
decreased $289,000 (56.4%) as a result of the combined effect of a $17.8 million
(55.9%) decrease in the average balance invested and an 8 basis point decrease
in average rates earned. Interest income on securities available for sale
increased $61,000 (61.6%) as a result of an increase of $4.3 million (72.8%) in
the average invested balance offset by a decrease of 44 basis points in average
rates earned. The Company has classified recent security purchases as available
for sale in an effort to provide management with the opportunity to maximize the
return of the securities portfolio. Earnings on other interest earning assets,
primarily federal funds sold, increased $59,000 (159.5%) as a result of a $4.4
million (164.6%) increase in the average invested balance offset by an 11 basis
point decrease in the average rate earned.
Interest expense for the quarter ended September 30, 1998, amounted to $1.8
million, $62,000 (3.6%) greater than the corresponding quarter of the prior
year. The increase occurred as a result of a $5.1 million (3.4%) increase in
average interest bearing liabilities to $154.8 million combined with a one basis
point increase in average rates paid to 4.53%. The mix within the deposit
structure changed as the average balances grew in certificate accounts by $4.3
million (4.6%) and in money market accounts and demand and NOW accounts by
$879,000 (4.7%). Average savings account balance declined $355,000 (1.0%). The
increase in average rates paid on certificate accounts of 3 basis points to
5.65% was a reflection of general interest rates and a competitive environment
that prevailed during the third quarter of 1998 compared with 1997.
Net interest income for the three months ended September 30, 1998 totaled $1.5
million, $6,000 (0.4%) less than the comparable quarter a year ago. The interest
rate spread decreased 13 basis points to 2.80% for the quarter ended September
30, 1998. The net interest margin for the most recent quarter of 3.31% was 12
basis points less than the comparable quarter a year ago.
<PAGE>
Provision for Loan Losses
The provision for loan losses amounted to $30,000 for the quarters ended
September 30, 1998 and 1997. 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, 1998, the Bank's
allowance for loan losses totaled $891,000 (0.63% of total gross loans and 69.0%
of nonperforming loans) compared with $778,000 (0.58% of total gross loans and
57.8% of nonperforming loans) at December 31, 1997.
Noninterest Income
Noninterest income amounted to $111,000 for the three months ended September 30,
1998 compared to $99,000 for the three months ended September 30, 1997. The
increase was primarily attributable to increased penalties on the early
withdrawal of certificate of deposit accounts totalling $9,000 (430.7%) to
$11,000 combined with an increase in other loan charges of $7,000 (25.0%) to
$35,000.
Noninterest Expense
Noninterest expense increased $50,000 (4.8%) to $1.1 million for the three
months ended September 30, 1998, as compared with the same period in 1997.
Compensation and employee benefits increased $16,000 (2.5%) between the
respective quarters. The increase was due in part to annual merit increases, and
increased employee benefits partially due to increases in the employee stock
ownership plan partially offset by a reduction in the average number of
employees. Professional service fees increased $47,000 (81.0%) to $105,000
primarily attributable to expenses associated with recent merger negotiations.
Other insurance premiums decreased $8,000 (29.6%) to $19,000 as a result of
reduced premiums on certain policies put out to competitive bid prior to
renewal. Data processing fees increased $7,000 (16.3%) due in part to
incremental expenses related to the Bank's efforts to comply with the Year 2000
data processing issue. Advertising and business promotion, office occupancy and
equipment expense, federal deposit insurance premiums, mortgage servicing fees
and other noninterest expense remained relatively the same for the quarters
ended September 30, 1998 and September 30, 1997.
Income Tax Expense
Income tax expense totaled $184,000 for the three months ended September 30,
1998 and 1997. The effective tax rate for the three months ended September 30,
1998 was 42.2% compared to 38.3% for the same period a year ago. The increase in
effective tax rate was primarily attributable to an increase in the
nondeductible portion of the compensation expense of the Company's Employee
Stock Ownership Plan.
<PAGE>
COMPARISONS OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTMEBER 30, 1998
WITH NINE MONTHS ENDED SEPTEMBER 30, 1997
Net income for the nine months ended September 30, 1998, was $819,000 or $.75
basic earnings per share and $.71 diluted earnings per share. This represents an
increase of $30,000 (3.8%) from the comparable period of the prior year. The
increase in net income was primarily a result of increases in net interest
income and noninterest income, partially offset by increases in noninterest
expense and income tax expense. The provision for loan losses and income tax was
consistent with the same period a year ago. The annualized return on average
assets ("ROA") for the first nine months of 1998 and 1997 amounted to .62%. The
annualized return on average equity ("ROE") was 5.11% (on average equity of
$21.4 million) compared with 4.94% (on average equity of $21.3 million) a year
earlier.
Interest income for the nine months ended September 30, 1998, totaled $9.6
million, an increase of $401,000 (4.4%) from 1997's first nine months. The
primary reason for the increase was the fact that average loans, which are the
Company's highest yielding assets, increased as a percentage of total
interest-earning assets from 74.2% during the first nine months of 1997 to 80.8%
for the same period in 1998. Interest on loans increased $854,000 (11.9%) as a
result of a $16.4 million (13.3%) increase in the average balance invested
offset by a 10 basis point decrease in average rates earned. Interest earned on
mortgage-backed securities decreased $231,000 (25.3%) as a result of the
combined effect of a $4.6 million (23.9%) decrease in the average balance
invested and an 11 basis point decrease in average rates earned. Interest income
on securities available for sale increased $134,000 (59.8%) as a result of an
increase of $2.9 million (63.8%) in the average invested balance offset by a
decrease of 9 basis points in average rates earned. Interest income on debt
securities decreased $376,000 (55.2%) as a result of a decrease in average
invested balances of $8.3 million (58.7%) offset by an increase in rates earned
of 56 basis points. Earnings on other interest earning assets, primarily federal
funds sold, increased $11,000 (7.9%) as a result of a $286,000 (8.3%) increase
in the average invested balance offset by a 2 basis point decrease in the
average rate earned.
Interest expense for the nine months ended September 30, 1998, amounted to $5.2
million, $335,000 (6.8%) greater than the corresponding period of the prior
year. The increase occurred as a result of a $6.3 million (4.3%) increase in
average interest bearing liabilities to $152.9 million combined with an 11 basis
point increase in average rates paid to 4.57%. The mix within the deposit
structure changed as the average balances grew in certificate accounts by $5.3
million (5.9%) and in money market accounts and demand and NOW accounts by $1.3
million (7.6%). Average savings account balance declined $595,000 (1.6%). The
increase in average rates paid on certificate accounts of 17 basis points to
5.68% was a reflection of general interest rates and a competitive environment
that prevailed during the first nine months of 1998 compared with 1997.
Net interest income for the nine months ended September 30, 1998 totaled $4.4
million, $66,000 (1.5%) greater than the comparable period a year ago.Net
earning assets increased $401,000 (2.1%) during the first nine months of 1998
from the comparagle 1997 period. The interest rate spread decreased 9 basis
points to 2.90% for the nine months ended September 30, 1998. The net interest
margin for the nine months ended September 30, 1998 was 3.41% which was 8 basis
points less than the comparable period a year ago.
<PAGE>
Provision for Loan Losses
For the nine months ended September 30, 1998 and 1997, the provision for loan
losses totaled $90,000. See "Provision for Loan Losses" at page 18.
Noninterest Income
Noninterest income amounted to $335,000 for the nine months ended September 30,
1998 compared to $267,000 for the nine months ended September 30, 1997. The
increase was primarily attributable to increased sales production in non-deposit
insurance products by the Bank's subsidiary which resulted in an increase of
$26,000 (95.4%) in revenue over the same period a year ago, as well as an
increase in other loan charges of $34,000 (41.5%) to $116,000. Bank service fees
increased $13,000 (10.8%) to $133,000 due in part to an increase in the fees
associated with an increase in volume of ATM transactions and in
transaction-related deposit accounts.
Noninterest Expense
Noninterest expense increased $29,000 (0.9%) to $3.2 million for the nine months
ended September 30, 1998, as compared with the same period in 1997. Advertising
and business promotion decreased $50,000 (67.6%) to $24,000 resulting primarily
from decreased advertising in relation to the new branch opening in the latter
part of the first quarter in 1997. FDIC premiums increased $18,000 (35.3%) to
$69,000 as a result of the SAIF insurance premium refunded the Bank in the first
quarter of 1997 which had been paid in the fourth quarter of 1996 subsequent to
the capitalization of SAIF. Other insurance premiums decreased $15,000 (21.4%)
to $55,000 as a result of reduced premiums on certain policies put out to
competitive bid prior to renewal. Professional service fees increased $65,000
(36.3%) due in part to the amendment of certain incentive benefit plans which
were presented to shareholders in the Company's 1998 annual meeting held in the
second quarter and to expenses associated with recent merger negotiations. Data
processing fees increased $13,000 (9.9%) due in part to incremental expenses
related to the Bank's efforts to comply with the Year 2000 data processing
issue. Compensation and employee benefits, office occupancy and equipment
expense, mortgage servicing fees and other noninterest expense remained
relatively the same for the nine months ended September 30, 1998 and September
30, 1997.
Income Tax Expense
Income tax expense totaled $583,000 and $508,000 for the nine months ended
September 30, 1998 and 1997, respectively. The increase in income tax expense
was primarily attributable to the $105,000 (8.1%) increase in income before
taxes to $1.4 million for the nine months ended September 30, 1998. The
effective tax rate for the nine months ended September 30, 1998 was 41.6%
compared to 39.2% for the same period a year ago. The increase was primarily
attributable to an increase in the nondeductible portion of the compensation
expense of the Company's Employee Stock Ownership Plan.
<PAGE>
Impact of New Accounting Standards
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits," (Statement 132), which amends
the disclosure requirements for Statement of Financial Accounting Standards No.
87, "Employers' Accounting for Pensions," (Statement 87), Statement of Financial
Accounting Standards No. 88, "Employers' Accounting for Settlement and
Curtailments of Defined Benefit Pension Plans and for Termination of Benefits,"
(Statement 88), and Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
(Statement 106). Statement 132 standardizes the disclosure requirements of
Statement 87 and Statement 106 to the extent practicable and recommends a
parallel format for presenting information about pensions and other
postretirement benefits. This Statement is applicable to all entities and
addresses disclosure only. The Statement does not change any of the measurement
or recognition provisions provided for in Statements 87, 88, or 106. The
Statement is effective for fiscal years beginning after December 15, 1997.
Management anticipates providing the required disclosures in the December 31,
1998 consolidated financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Management is currently evaluating
the impact of this Statement on the Company's consolidated financial statements.
Year 2000 Issue
General. The Year 2000 ("Y2K") issue confronting the Company and its suppliers,
customers, customers' suppliers and competitors centers on the inability of
computer systems to recognize the year 2000. Many existing computer programs and
systems originally were programmed with six digit dates that provided only two
digits to identify the calendar year in the date field. With the impending new
millennium, these programs and computers will recognize "00" as the year 1900
rather than the year 2000.
Financial institution regulators recently have increased their focus upon Y2K
compliance issues and have issued guidance concerning the responsibilities of
senior management and directors. The Federal Financial Institutions Examination
Council ("FFIEC") has issued several interagency statements on Y2K Project
Management Awareness. These statements require financial institutions to, among
other things, examine the Y2K implications of their reliance on vendors and with
respect to data exchange and the potential impact of the Y2K issue on their
customers, suppliers and borrowers. These statements also require each federally
regulated financial institution to survey its exposure, measure its risk and
prepare a plan to address the Y2K issue. In addition, the federal banking
regulators have issued safety and soundness guidelines to be followed by insured
depository institutions, such as the Bank, to assure resolution of any Y2K
problems. The federal banking agencies have assessed that Y2K testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and, thus, that an institution's failure to address appropriately the Y2K
issue could result in supervisory action, including the reduction of the
institution's supervisory ratings, the denial of applications for approval of
mergers or acquisitions or the imposition of civil money penalties.
<PAGE>
Risks. Like most financial services providers, the Company and its operations
may be significantly affected by the Y2K issue due to its dependence on
technology and date-sensitive data. Computer software and hardware and other
equipment, both within and outside the Company's direct control, and third
parties with whom the Company electronically or operationally interfaces
(including without limitation its customers and third party vendors) are likely
to be affected. If computer systems are not modified in order to be able to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on date field
information, such as interest, payment or due dates and other operating
functions, could generate results which are significantly misstated, and the
Company could experience an inability to process transactions, prepare
statements or engage in similar normal business activities. Likewise, under
certain circumstances, a failure to adequately address the Y2K issue could
adversely affect the viability of the Company's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Y2K
issue could result in a significant adverse impact on the Company's operations
and, in turn, its financial condition and results of operations.
State of Readiness. During May 1998, the Company formally approved its plan to
address the Y2K issue. Since that time the Company has taken the following
steps:
Established senior management advisory and review responsibilities;
Completed a Company-wide inventory of applications and system software;
Implemented a tracking database for applications and vendor software
created by regulators;
Developed compliance plans and schedules for all lines of business;
Begun computer application testing;
Initiated vendor compliance verification;
Contacted all vendors with whom the Company interacts to determine their
state of readiness;
Modified loan documents to include requirements for Y2K compliance by all
commercial customers;
Begun awareness and education activities for employees through existing
internal communication channels; and
Developed a process to respond to customer inquires as well as help educate
customers on the Y2K issue.
The following paragraphs summarize the phases of the Company's Y2K plan:
Awareness Phase. The Company formally established a Y2K plan headed by a senior
manager, and a Y2K committee was assembled for management of the project. The
project committee created a plan of action that includes milestones, budget
estimates, strategies, and methodologies to track and report the status of the
project. Members of the project committee also attended conferences and
information sharing sessions to gain more insight into the Y2K issue and
potential strategies for addressing it. This phase is substantially complete.
Assessment Phase. The Company's strategies were further developed with respect
to how the objectives of the Y2K plan would be achieved, and a Y2K business risk
assessment was made to quantify the extent of the Company's Y2K exposure. A
corporate inventory (which is periodically updated as new technology is acquired
and as systems progress through subsequent phases) was developed to identify and
monitor Y2K readiness for information systems (hardware, software, utilities,
and vendors) as well as environmental systems (security systems, facilities,
<PAGE>
etc.). Systems were prioritized based on business impact and available
alternatives. Mission critical systems supplied by vendors were researched to
determine Y2K readiness. If Y2K-ready versions were not available, the Company
began identifying functional replacements which were either upgradeable to
currently Y2K-ready, and a formal plan was developed to repair, upgrade or
replace all mission critical systems. This phase is substantially complete.
Beginning in 1997 and throughout 1998, the Company began Y2K evaluation of all
commercial borrowers at the time of the annual review of their loans. All
commercial customers were evaluated for Y2K exposure by the Internal Loan Review
Committee using a questionnaire developed by the Company's Y2K committee and an
assessment as to the borrower's reliance on data processing and the risk to the
overall viability of the business. As part of the current credit approval
process, all new and renewed loans are evaluated for Y2K risk. While the Company
will continue to monitor the progress being made by its commercial customers in
addressing their own Y2K issues, to date the Company is generally satisfied with
customers' responses and their progress in addressing their Y2K risk. The
Company's primary assets are residential mortgage loans which have been assessed
with minimal risk as it relates to Y2K and the impact on the creditworthiness of
these loans individually or as a whole.
Conversion/Renovation Phase. The Company's corporate inventory revealed that
upgrades are available for all vendor supplied mission critical systems except
for the Company's accounting general ledger system. The majority of these
Y2K-ready versions have been delivered and placed into production and have
entered the validation process. The accounting general ledger system has been
identified as the only mission critical system whereby a Y2K-ready upgrade has
not yet been received. The vendor has projected December 31, 1998 as the release
date for the Y2K-ready version of the accounting general ledger application.
Validation/Implementation Phase. This phase is designed to test the ability of
hardware and software to accurately process date sensitive data. The Company
currently is in the process of validation testing of each mission critical
system (except for the accounting general ledger system). The Company's Y2K test
environment, periodically supplied by its service bureau data center, is
virtually insulated from production and development environments. The Company
has reassigned internal personnel responsibilities in anticipation of the
increased work efforts and has increased staff to support normal business
activities. The Company's validation phase is expected to be completed by
December 31, 1998 for all mission critical systems except for the accounting
general ledger system which will undergo validation testing in the first quarter
of 1999. During the validation testing process to date, no significant Y2K
problems have been identified relating to any modified or upgraded mission
critical systems.
The Company's plan calls for completing Y2K-ready systems and placing them into
production by March 31, 1999. Y2K-ready modified or upgraded versions have been
installed and placed into production with respect to all mission critical
systems with the exception of the Company's accounting general ledger system to
which software upgrades are expected to be completed by December 31, 1998.
Company's Resources Invested. The Company's Y2K committee has been assigned the
task of ensuring that all systems across the Company are identified, analyzed
for Y2K compliance, corrected if necessary, tested, and changes put into
service. The Y2K committee members represent all functional areas of the
Company, including retail banking, data processing, loan administration,
accounting, operations, compliance, internal audit, human resources, and
<PAGE>
marketing. The committee is headed by a senior vice president who reports
directly to the Company's chief executive officer. The Company's Board of
Directors oversees the Y2K plan and provides guidance and resources to the
project committee. The Board is updated periodically as to the progress of the
committee.
The Company is expensing all costs associated with required system changes as
those projects are incurred, and such costs are being funded through operating
cash flow. The cost of the Y2K conversion project, exclusive of internal costs,
is estimated to be approximately $100,000. Expenses of approximately $9,000 were
incurred and expensed by the Company through September 30, 1998. The Company
does not expect significant increases in future data processing costs related to
Y2K compliance above the aforementioned estimate.
Contingency Plans. Virtually all the Company's mission critical systems are
dependent on third party vendors or service providers. Therefore, contingency
plans include selecting a new vendor or service provider and converting to their
system. In the event a current vendor's system fails during validation testing
and it is determined that the vendor is unable or unwilling to correct the
failure, the Company will convert to a new system from a list of prospective
vendors. In each case, realistic trigger dates have been established to allow
for orderly and successful conversion. A formal contingency plan will be
presented to the Board of Directors by December 31, 1998 for approval.
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
SEPTEMBER 30, 1998
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
In order to be eligible for inclusion in the Company's proxy
materials for next year's Annual Meeting of Stockholders, any
stockholder proposal to take action at such meeting must be
received at the Company's main office, at 251 - 263 State Street,
Schenectady, New York 12305, no later than November 17, 1998. Any
such proposal shall be subject to the requirements of the proxy
rules adopted under the Securities Exchange Act of 1934, as
amended. Otherwise, any stockholder proposal to take action at
such meeting must be received at the Company's main office by
February 23, 1999; provided, however, that in the event that the
date of the annual meeting is before April 2, 1999 or after June
21, 1999, the shareholder proposal must be received not later than
the close of business on the later of the 60th day prior to such
annual meeting or the tenth day following the day on which notice
of the date of the annual meeting was mailed or public
announcement of the date of such meeting was first made. All
shareholder proposals must also comply with the Company's bylaws
and Delaware law.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On October 29, 1998, Form 8-K was filed pursuant to Item 5,
Other Events in connection with the announced execution of a
termination agreement between SFS Bancorp, Inc. and Cohoes
Savings Bank as previously described in Part I Item 2. of the
Form 10-QSB for the quarter ended September 30, 1998. No
financial statements were required to be filed with the Form
8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SFS BANCORP, INC.
(Registrant)
DATE: November 16, 1998 BY: /s/ Joseph H. Giaquinto
-----------------------
Joseph H. Giaquinto
Chairman of the Board,
President and Chief Executive Officer
(Duly Authorized Officer)
DATE: November 16, 1998 BY: /s/ David J. Jurczynski
-----------------------
David J. Jurczynski
Senior 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, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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