UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 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 July 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
JUNE 30, 1998
INDEX
Part I FINANCIAL INFORMATION
Item 1. Interim Financial Statements...........................................
Consolidated Statements of Income for the Three
months ended June 30, 1998 and 1997, (Unaudited)....................
Consolidated Statements of Income for the Six
months ended June 30, 1998 and 1997, (Unaudited)....................
Consolidated Statements of Financial Condition as
of June 30, 1998, (Unaudited) and December 31, 1997.................
Consolidated Statements of Changes in Stockholders' Equity for
the Six months ended June 30, 1998 and 1997, (Unaudited)...........
Consolidated Statements of Cash Flows for the Six
months ended June 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
JUNE 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
JUNE 30,
1998 1997
------ ------
(Unaudited)
<S> <C> <C>
Interest income:
Loans .................................................... $2,687 2,386
Investment securities .................................... 329 529
Securities available for sale ............................ 127 88
Federal funds sold and cash deposits ..................... 37 56
Stock in Federal Home Loan Bank .......................... 25 21
------ ------
Total interest income ............................. 3,205 3,080
Interest expense:
Deposits ................................................. 1,746 1,640
------ ------
Net interest income ............................... 1,459 1,440
Provision for loan losses ...................................... 30 30
------ ------
Net interest income after provision for loan losses 1,429 1,410
------ ------
Noninterest income:
Other loan charges ....................................... 43 23
Bank fees and service charges ............................ 44 45
Other .................................................... 34 16
------ ------
Total noninterest income .......................... 121 84
------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(continued)
THREE MONTHS ENDED
JUNE 30,
1998 1997
------ ------
(Unaudited)
<S> <C> <C>
Noninterest expense:
Compensation and employee benefits ....................... 629 643
Advertising and business promotion ....................... 9 20
Office occupancy and equipment expense ................... 150 151
Federal deposit insurance premiums ....................... 23 23
Other insurance premiums ................................. 19 22
Mortgage servicing fees .................................. 5 8
Data processing fees ..................................... 47 43
Professional service fees ................................ 79 56
Other .................................................... 83 69
------ ------
Total noninterest expense ......................... 1,044 1,035
------ ------
Income before taxes ............................... 506 459
Income tax expense ............................................. 208 191
------ ------
Net income ........................................ $ 298 268
====== ===
Earnings per share:
Basic ..................................................... $ .27 .24
====== ======
Diluted ................................................... $ .26 .23
====== ======
</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)
SIX MONTHS ENDED
JUNE 30,
-----------------
1998 1997
------ ------
(Unaudited)
<S> <C> <C>
Interest income:
Loans ..................................................... $5,325 4,695
Investment securities ..................................... 763 1,083
Securities available for sale ............................. 198 125
Federal funds sold and cash deposits ...................... 56 103
Stock in Federal Home Loan Bank ........................... 49 41
------ ------
Total interest income ............................. 6,391 6,047
Interest expense:
Deposits .................................................. 3,460 3,188
------ ------
Net interest income ................................ 2,931 2,859
Provision for loan losses ....................................... 60 60
------ ------
Net interest income after provision for loan losses 2,871 2,799
------ ------
Noninterest income:
Other loan charges ........................................ 84 54
Bank fees and service charges ............................. 83 82
Other ..................................................... 59 32
------ ------
Total noninterest income ........................... 226 168
------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(continued)
SIX MONTHS ENDED
JUNE 30,
-----------------
1998 1997
------ ------
(Unaudited)
<S> <C> <C>
Noninterest expense:
Compensation and employee benefits ........................ 1,328 1,330
Advertising and business promotion ........................ 19 61
Office occupancy and equipment expense .................... 307 309
Federal deposit insurance premiums ........................ 47 28
Other insurance premiums .................................. 36 44
Mortgage servicing fees ................................... 11 17
Data processing fees ...................................... 94 88
Professional service fees ................................. 138 121
Other ..................................................... 151 152
------ ------
Total noninterest expense .......................... 2,131 2,150
------ ------
Income before taxes ................................ 966 817
Income tax expense .............................................. 399 324
------ ------
Net income ......................................... $ 567 493
====== ======
Earnings per share:
Basic ...................................................... $ .52 .44
====== ======
Diluted .................................................... $ .49 .43
====== ======
</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)
June 30, December 31,
1998 1997
--------- ---------
Assets (Unaudited)
------
<S> <C> <C>
Cash and due from banks ................................................... $ 980 1,876
Federal funds sold ........................................................ 5,600 300
--------- ---------
Total cash and cash equivalents ............................... 6,580 2,176
Securities available for sale, at fair value .............................. 8,062 4,067
Investment securities (estimated fair value of $16,992
at June 30, 1998 and $29,095 at December 31, 1997) ........... 16,910 28,979
Stock in Federal Home Loan Bank of NY, at cost ............................ 1,338 1,338
Loans receivable, net ..................................................... 141,222 133,786
Accrued interest receivable ............................................... 1,061 1,130
Premises and equipment, net ............................................... 2,171 2,242
Real estate owned ......................................................... 151 111
Prepaid expenses and other asset .......................................... 598 599
--------- ---------
Total Assets .................................................. $ 178,093 174,428
========= =======
Liabilities and Stockholders' Equity
Liabilities:
Due to depositors:
Non-interest bearing deposits ................................... $ 1,407 2,265
Savings and interest bearing demand deposits .................... 54,547 53,463
Time deposit accounts ........................................... 96,925 94,741
--------- ---------
Total Deposits ................................................ 152,879 150,469
Advance payments by borrowers for property taxes and insurance ....... 1,861 1,281
Accrued expenses and other liabilities ............................... 1,438 1,247
--------- ---------
Total Liabilities ............................................. 156,178 152,997
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Dollars in Thousands)
June 30, December 31,
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
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 June 30, 1998 and December 31, 1997 ................... 15 15
Additional paid-in capital ............................................. 14,411 14,365
Retained earnings, substantially restricted ............................ 12,795 12,422
Common stock acquired by :
Employee stock ownership plan ("ESOP") (83,720 shares) ................. (837) (837)
Recognition and retention plan ("RRP") (32,530 shares) ................. (386) (455)
Treasury stock, at cost (286,528 shares at June 30, 1998 and
December 31, 1997) .......................................... (4,089) (4,089)
Accumulated other comprehensive income ................................. 6 10
--------- ---------
Total Stockholders' Equity .............................. 21,915 21,431
--------- ---------
Total Liabilities and Stockholders' Equity ............ $ 178,093 174,428
========= =========
</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 Accumulated
Additional Stock Stock Other
Common Paid-in Retained Treasury Acquired Acquired Comprehensive
Stock Capital Earnings Stock By ESOP By RRP Income
----- ------- -------- ----- ------- ------ ------
Six Months Ended
June 30, 1998
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 .... $ 15 14,365 12,422 (4,089) (837) (455) 10
Comprehensive income:
Net income .................... -- -- 567 -- -- -- --
Other comprehensive income,
net of tax:
Unrealized net holding losses
arising during the year
(pre-tax $6) ............ -- -- -- -- -- -- (4)
Comprehensive income ............
Amortization of unearned RRP
compensation ................. -- -- -- -- -- 69 --
Cash dividends declared ........ -- -- (194) -- -- -- --
Tax benefit related to vested
RRP shares ................ -- 46 -- -- -- -- --
-------- ------ ------ ------ ---- ---- ----
Balance at June 30, 1998 ........ $ 15 14,411 12,795 (4,089) (837) (386) 6
======== ====== ====== ====== ==== ==== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
(continued)
Six Months Ended
June 30, 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996..... $ 15 14,260 11,687 (2,840) (957) (540) 46
Comprehensive income:
Net income .................... -- -- 493 -- -- -- --
Other comprehensive income,
net of tax:
Unrealized net holding losses
arising during the period
(pre-tax $5) .............. -- -- -- -- -- -- (3)
Comprehensive income ............
Amortization of unearned RRP
compensation ................. -- -- -- -- -- 166 --
Cash dividends declared ........ -- -- (163) -- -- -- --
Exercise of stock options ....... -- -- -- 94 -- -- --
-------- ------ ------ ------ ---- ---- ----
Balance at June 30, 1997 ........ $ 15 14,260 12,017 (3,450) (957) (374) 43
======== ====== ====== ====== ==== ==== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
Comprehensive
Income Total
------ -----
<S> <C> <C>
Balance at December 31, 1997 .... 21,431
Comprehensive income:
Net income .................... $ 567 567
Other comprehensive income,
net of tax:
Unrealized net holding losses
arising during the year
(pre-tax $6) ............ (4) (4)
--------
Comprehensive income ............ $ 563
========
Amortization of unearned RRP
compensation ................. 69
Cash dividends declared ........ (194)
Tax benefit related to vested
RRP shares ................ 46
------
Balance at June 30, 1998 ........ 21,915
======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
(continued)
Six Months Ended
June 30, 1997
<S> <C> <C>
Balance at December 31, 1996 .... $ 21,671
Comprehensive income:
Net income .................... $ 493 493
Other comprehensive income,
net of tax:
Unrealized net holding losses
arising during the period
(pre-tax $5) .............. (3) (3)
--------
Comprehensive income ............ $ 490
========
Amortization of unearned RRP
compensation ................. 166
Cash dividends declared ........ (163)
Exercise of stock options ....... 94
Purchase of Treasury shares .... (704)
--------
Balance at June 30, 1997 ........ 21,554
========
</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)
Six Months Ended
June 30,
--------------------
1998 1997
------- -----
Increase (decrease) in cash and cash equivalents: .................... (Unaudited)
<S> <C> <C>
Reconciliation of net income to net cash provided
by operating activities:
Net income .................................................. $ 567 493
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .......................... 100 91
Net accretion on investment securities ..................... (74) (5)
Net accretion on securities available for sale ............. (1) --
Amortization of unearned RRP compensation .................. 69 166
Provision for loan losses .................................. 60 60
Decrease (increase) in accrued interest receivable ......... 69 (60)
Decrease (increase) in prepaid expense and other assets .... 1 (20)
Increase in accrued expense and other liabilities .......... 239 332
------- -----
Total adjustments ................................. 463 564
------- -----
Net cash provided by operating activities ........... 1,030 1,057
------- -----
Cash flows from investing activities:
Proceeds from maturity/paydown of investment securities .......... 8,885 2,009
Purchase of securities available for sale ........................ (4,000) (4,050)
Purchase of Federal Home Loan Bank Stock ......................... -- (123)
Principal repayments on mortgage-backed securities ............... 3,258 1,629
Net increase in loans receivable ................................. (6,059) (3,932)
Purchase of loans receivable ..................................... (1,504) (1,852)
Capital expenditures, net of disposals ........................... (29) (440)
Proceeds from the sale of real estate owned ...................... 27 100
------- -----
Net cash provided (used) by investing activities ............ 578 (6,659)
------- -----
Cash flows from financing activities:
Net increase in deposits ......................................... 2,410 7,385
Net increase in advance payments by borrowers for
property taxes and insurance ................................ 580 367
Proceeds upon exercise of common stock options ................... -- 94
Dividends paid ................................................... (194) (163)
Purchase of Treasury stock ....................................... -- (704)
------- -----
Net cash provided by financing activities ........................ 2,796 6,979
------- -----
Net increase in cash and cash equivalents ................... 4,404 1,377
Cash and cash equivalents at beginning of period ................. 2,176 2,896
------- -----
Cash and cash equivalents at end of period ....................... $ 6,580 4,273
======= =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(continued)
Six Months Ended
June 30,
--------------------
1998 1997
------- -----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid ............................................... $ 3,475 3,188
======= =====
Taxes paid .................................................. $ 405 211
======= =====
Transfer of loans to other real estate owned ..................... $ 67 11
======= =====
Net unrealized loss on securities available for sale, net of taxes $ (4) (3)
======= =====
Deferred tax benefit on unrealized gain/loss
on securities available for sale ............................ $ 2 2
======= =====
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 six months ended June 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 six
month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended June 30:
(in thousands except share and per share information)
1998
--------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
<S> <C> <C> <C>
Basic EPS ................................ $ 298 1,092,222 $ 0.27
========
Dilutive effect of potential common shares
related to stock based compensation ... -- 55,590
---------
Diluted EPS .............................. $ 298 1,147,812 $ 0.26
========= ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997
--------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
<S> <C> <C> <C>
Basic EPS ................................. $ 268 1,112,210 $ 0.24
========
Dilutive effect of potential common shares
related to stock based compensation .... -- 29,616
--------- ---------
Diluted EPS ................................ $ 268 1,141,826 $ 0.23
========= ========= ========
<CAPTION>
Six Months Ended June 30:
(in thousands except share and per share information)
1998
--------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
<S> <C> <C> <C>
Basic EPS ................................ $ 567 1,091,464 $ 0.52
========
Dilutive effect of potential common shares
related to stock based compensation ... -- 56,563
--------- ---------
Diluted EPS .............................. $ 567 1,148,027 $ 0.49
========= ========= ========
<CAPTION>
1997
--------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
<S> <C> <C> <C>
Basic EPS $ 493 1,125,872 $ 0.44
========
Dilutive effect of potential common shares
related to stock based compensation -- 27,887
--------- ---------
Diluted EPS $ 493 1,153,759 $ 0.43
======== ========== ========
</TABLE>
<PAGE>
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
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.
NOTE 4. Proposed Merger
On July 31, 1998, SFS Bancorp, Inc. and Cohoes Savings Bank (Cohoes), Cohoes,
New York announced the execution of a definitive agreement pursuant to which the
Company will merge into a newly-formed holding company of Cohoes to be organized
in connection with Cohoes' conversion from a mutual to stock institution.
Consummation of the merger is subject to the approval of the shareholders of the
Company, the depositors of Cohoes, the conversion of Cohoes, and the receipt of
all required regulatory approvals. The transaction is anticipated to close in
the fourth quarter of 1998.
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
JUNE 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 July 31, 1998, SFS Bancorp, Inc. and Cohoes Savings Bank (Cohoes), Cohoes,
New York announced the execution of a definitive agreement pursuant to which the
Company will merge into a newly-formed holding company of Cohoes to be organized
in connection with Cohoes' conversion from a mutual to stock institution. Under
the terms of the agreement, each share of SFS Bancorp, Inc. will be exchanged
for a number of shares of common stock of the newly-formed holding company equal
to the lesser of $26.50 divided by the initial public offering price of the
newly-formed holding company common stock or $35.00 divided by the average
closing price of that stock for the first ten trading days. The transaction is
expected to constitute a tax-free reorganization under the Internal Revenue
Code, so that shareholders of SFS Bancorp, Inc. who receive the newly-formed
holding company common stock will not recognize gain or loss in connection with
the exchange. In connection with the execution of the definitive agreement, the
outstanding Incentive Stock Option Agreements and Restricted Stock Agreements of
the directors and certain officers of the Company were not amended as permitted
by the approval at the 1998 Annual Stockholders' Meeting of the Amended and
Restated Stock Option and Incentive Plan and the Amended and Restated
Recognition and Retention Plan to provide for acceleration of vesting of awards.
Consummation of the merger is subject to the approval of the shareholders of the
Company, the depositors of Cohoes, the conversion of Cohoes, and the receipt of
all required regulatory approvals. The transaction is anticipated to close in
the fourth quarter of 1998.
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
<PAGE>
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, 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 any of 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;
the effect of changes in business cycles and downturns in the local,
regional, or national economies.
<PAGE>
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 $4.4 million to
$6.6 million at June 30, 1998 primarily as a result of increases in federal
funds sold. 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 4%. The Bank's liquidity ratio
was 21.03% and 20.21% at June 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 interest and dividends received on earning assets less
interest paid on deposits, was $1.0 million and $1.1 million for the six months
ended June 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 $6.7 million for the
six months ended June 30, 1997. Net cash of $578,000 was provided by investing
activities for the six months ended June 30, 1998 and consisted primarily of
proceeds from the maturity, call and paydown of investment securities and
mortgage-backed securities offset by the purchase of securities available for
sale and the increase in loans receivable. Net cash provided by financing
activities for the six months ended June 30, 1998 of $2.8 million consisted
primarily of net increases in deposit accounts during the period offset by the
payment of dividends. Net cash provided by financing activities, consisting
primarily of net increases in deposit accounts during the period offset by the
purchase of treasury stock and payment of dividends, was $7.0 million for the
six months ended June 30, 1997.
During the six month period ended June 30, 1998, the Company did not repurchase
any of its shares. During the six month period ended June 30, 1997 the Company
repurchased 42,475 shares. The average price of treasury shares purchased was
$16.58 totaling $704,000. The average price paid of $16.58 was approximately
95.1% of the Company's book value per share of $17.44 at June 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 of 5% annually based on extenuating facts and circumstances.
<PAGE>
At June 30, 1998, the Bank's capital exceeded each of the capital requirements
of the OTS. At June 30, 1998, the Bank's tangible and core capital levels were
both $19.6 million (11.0% of total adjusted assets) and its risk-based capital
level was $20.5 million (20.3% 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 $3.7 million (2.1%) to $178.1 million at June 30, 1998
from $174.4 million at December 31, 1997. This increase occurred as loans
receivable, net, grew $7.4 million (5.6%) to $141.2 million at June 30, 1998.
The growth in the loan portfolio consisted primarily of residential mortgage
loans. Securities available for sale increased $4.0 million (98.2%) to $8.1
million at June 30, 1998. Federal funds sold increased $5.3 million at June 30,
1998 from $300,000 at December 31, 1997 due in part to securities called late in
the second quarter of 1998. Offsetting these increases was a decrease in
investment securities of $12.1 million (41.6%) to $16.9 million.
At June 30, 1998, total liabilities were $156.2 million representing an increase
of $3.2 million (2.1%) from December 31, 1997. The increase was primarily
attributable to an increase in retail deposits. Stockholders' equity increased
$484,000 to $21.9 million at June 30, 1998 as compared to $21.4 million at
December 31, 1997. Retained earnings increased by $373,000 as a result of net
income of the Company for the six month period ended June 30, 1998 partially
offset by cash dividends declared.
Nonperforming assets increased $45,000 (3.1%) totaling $1.5 million at June 30,
1998. Management of the Bank does not view this increase as a significant
adverse trend. The ratio of nonperforming loans to total loans receivable was
.95% at June 30, 1998, compared with 1.00% at December 31, 1997. The ratio of
nonperforming assets to total assets was .84% at June 30, 1998 and December 31,
1997.
<PAGE>
Loan Receivable, Net
A summary of loans receivable, net at June 30, 1998 and December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Loans secured by real estate:
Residential:
Conventional ............................ $109,961 100,277
Home Equity ............................. 21,024 22,658
FHA Insured ............................. 2,470 2,772
VA Guaranteed ........................... 1,662 2,028
Commercial and multi-family ................ 6,070 6,130
-------- --------
141,187 133,865
Other loans ................................... 918 721
-------- --------
142,105 134,586
-------- --------
Less:
Unearned discount and net deferred loan fees 28 22
Allowance for loan losses .................. 855 778
-------- --------
883 800
-------- --------
Loans receivable, net ......................... $141,222 133,786
======== ========
</TABLE>
The following table sets forth the information with regard to nonperforming
assets.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1997
------------- -----------------
<S> <C> <C>
Loans on a nonaccrual status ............... $1,161 1,328
Loans contractually past due 90 days or
more and still accruing interest ........ 191 19
------ ------
Total nonperforming loans ............ 1,352 1,347
Other real estate owned .................... 151 111
------ ------
Total nonperforming assets ........... $1,503 1,458
====== ======
</TABLE>
<PAGE>
The following table sets forth the information with regard to changes in the
allowance for loan losses.
<TABLE>
<CAPTION>
For the six months ended June 30,
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of period ............. $778 642
Provision charged to operations .......... 60 60
Loans charged off ........................ (21) (2)
Recoveries on loans previously charged off 38 18
---- ---
Balance, end of period ................... $855 718
==== ===
</TABLE>
Average Balance Data, Interest Rates and Interest Differential and Rate/Volume
Analysis
The following information regarding average balances and rates earned/paid and
the rate/volume analysis is an integral component of the discussion of operating
results for the three months and six months ended June 30, 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) (Unaudited)
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------- ---- ---- ------- ---- ----
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net (1) ..... $139,875 $ 2,687 7.71% $122,114 $ 2,386 7.84%
Mortgage-backed securities .... 14,828 227 6.14 19,306 305 6.34
Securities available for sale . 7,904 127 6.44 5,265 88 6.70
Debt securities ............... 5,674 102 7.21 13,987 224 6.42
Other interest-earning asset
including cash equivalents 2,736 37 5.42 4,136 56 5.43
FHLB stock ................... 1,338 25 7.49 1,338 21 6.30
-------- -------- -------- --------
Total interest-earning assets ....... 172,355 3,205 7.46 166,146 3,080 7.44
-------- -------- -------- --------
Savings accounts .............. 36,561 274 3.01 37,285 280 3.01
Money market accounts ......... 7,428 59 3.19 6,859 59 3.45
Demand and NOW accounts (2) ... 11,550 41 1.42 10,625 40 1.51
Certificate accounts .......... 96,186 1,364 5.69 91,552 1,254 5.49
Escrow ........................ 1,463 8 2.19 1,212 7 2.32
-------- -------- -------- --------
Total interest-bearing liabilities .. 153,188 1,746 4.57 147,533 1,640 4.46
-------- -------- -------- --------
Net interest income ................. $ 1,459 $ 1,440
======== ========
Net interest rate spread ............ 2.89% 2.98%
==== ====
Net earning assets .................. $ 19,167 $ 18,613
======== ========
Net yield on average
interest-earning assets ...... 3.40% 3.48%
==== ====
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) (Unaudited)
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------
1998 1997
--------------------------------------- -----------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------- ---- ---- ------- ---- ----
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net (1) ..... $137,639 $5,325 7.80% $120,551 $ 4,695 7.85%
Mortgage-backed securities .... 15,682 486 6.25 19,665 622 6.38
Securities available for sale . 6,116 198 6.53 3,869 125 6.52
Debt securities ............... 8,033 277 6.95 14,446 461 6.44
Other interest-earning assets
including cash equivalents 2,102 56 5.37 3,901 103 5.32
FHLB stock .................... 1,338 49 7.39 1,305 41 6.34
-------- ------ -------- -------
Total interest-earning assets ....... 170,910 6,391 7.54 163,737 6,047 7.45
-------- ------ -------- -------
Interest-bearing liabilities:
Savings accounts .............. 36,443 544 3.01 37,160 555 3.01
Money market accounts ......... 7,492 122 3.28 6,581 111 3.40
Demand and NOW accounts (2) ... 11,035 78 1.43 10,364 78 1.52
Certificate accounts .......... 95,793 2,703 5.69 89,910 2,433 5.46
Escrow ........................ 1,209 13 2.17 1,011 11 2.19
-------- ------ -------- -------
Total interest-bearing liabilities .. 151,972 3,460 4.59 145,026 3,188 4.43
-------- ------ -------- -------
Net interest income ................. $ 2,931 $ 2,859
======== ========
Net interest rate spread ............ 2.95% 3.02%
==== ====
Net earning assets .................. $ 18,938 $ 18,711
======== ========
Net yield on average
interest-earning assets ...... 3.46% 3.52%
==== ====
Average interest-earning
assets to average
interest-bearing liabilities . 1.12 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) (Unaudited)
THREE MONTHS ENDED JUNE 30, 1998
COMPARED WITH
THREE MONTHS ENDED JUNE 30, 1997
INCREASE (DECREASE)
-----------------------------------
DUE TO
---------------------
VOLUME RATE NET
------ ---- ---
Interest-earning assets:
<S> <C> <C> <C>
Loans receivable, net ................. $ 340 (39) 301
Mortgage-backed securities ............ (69) (9) (78)
Securities-available for sale ......... 43 (4) 39
Debt securities ....................... (154) 32 (122)
Other interest-earning assets ......... (19) 0 (19)
FHLB stock ............................ 0 4 4
----- ----- -----
Total interest-earning assets ........... $ 141 (16) 125
===== ===== =====
Interest-bearing liabilities:
Savings deposits ...................... $ (6) 0 (6)
Money market accounts ................. 5 (5) 0
Demand and NOW deposits ............... 3 (2) 1
Certificate accounts .................. 65 45 110
Escrow ................................ 1 0 1
----- ----- -----
Total interest-bearing liabilities ...... $ 68 38 106
===== ===== =====
Change in net interest income ........... $ 19
=====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
RATE VOLUME ANALYSIS
(In Thousands) (Unaudited)
SIX MONTHS ENDED JUNE 30, 1998
COMPARED WITH
SIX MONTHS ENDED JUNE 30, 1997
INCREASE (DECREASE)
-----------------------------------
DUE TO
------------------
VOLUME RATE NET
------ ---- ---
Interest-earning assets:
<S> <C> <C> <C>
Loans receivable, net .................... $ 661 (31) 630
Mortgage-backed securities ............... (124) (12) (136)
Securities-available for sale ............ 73 0 73
Debt securities .......................... (225) 41 (184)
Other interest-earning assets ............ (48) 1 (47)
FHLB stock ............................... 1 7 8
----- ----- -----
Total interest-earning assets .............. $ 338 6 344
===== ===== =====
Interest-bearing liabilities:
Savings deposits ......................... $ (11) 0 (11)
Money market accounts .................... 15 (4) 11
Demand and NOW deposits .................. 5 (5) 0
Certificate accounts ..................... 163 107 270
Escrow ................................... 2 0 2
----- ----- -----
Total interest-bearing liabilities ....... $ 174 98 272
===== ===== =====
Change in net interest income .............. $ 72
=====
</TABLE>
<PAGE>
COMPARISONS OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998
Three months ended June 30, 1998 compared with three months ended June 30,1997
Net income for the quarter ended June 30, 1998, was $298,000 or $.27 basic
earnings per share and $.26 diluted earnings per share. This represents an
increase of $30,000 (11.2%) from the comparable quarter of the prior year. The
increase in net income was primarily a result of an increase in net interest
income and an increase in noninterest income. These increases were partially
offset by increases in noninterest expense and income tax expense. The provision
for loan losses was consistent with the same quarter a year ago. The annualized
return on average assets ("ROA") for the current quarter amounted to .68%
compared with .63% for the comparable quarter a year ago. The annualized return
on average equity ("ROE") was 5.57% (on average equity of $21.4 million)
compared with 4.19% (on average equity of $21.2 million) a year earlier.
Interest income for the three months ended June 30, 1998, totaled $3.2 million,
an increase of $125,000 (4.1%) from 1997's second 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 73.5% during the second quarter 1997 to 81.2% for the same period in
1998. Other factors affecting interest income was an increase in earnings on
loans which increased $301,000 (12.6%) as a result of a $17.8 million (14.5%)
increase in the average balance invested offset by a 13 basis point decrease in
average rates earned. Interest earned on mortgage-backed securities decreased
$78,000 (25.6%) as a result of the combined effect of a $4.5 million (23.2%)
decrease in the average balance invested and a 20 basis point decrease in
average rates earned. Interest income on securities available for sale increased
$39,000 (44.3%) as a result of an increase of $2.6 million (50.1%) in the
average invested balance offset by a decrease of 26 basis points in average
rates earned. Interest income on debt securities decreased $122,000 (54.5%) as a
result of a decrease in average invested balances of $8.3 million (59.4%) offset
by an increase in rates earned of 79 basis points. Earnings on other interest
earning assets, primarily federal funds sold, decreased $19,000 (33.9%) as a
result of a $1.4 million (33.8%) decrease in the average invested balance
combined with a 1 basis point decrease in the average rate earned.
Interest expense for the quarter ended June 30, 1998, amounted to $1.7 million,
$106,000 (6.5%) greater than the corresponding quarter of the prior year. The
increase occurred as a result of a $5.7 million (3.8%) increase in average
interest bearing liabilities to $153.2 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 $4.6 million
(5.1%) and in money market accounts and demand and NOW accounts by $1.5 million
(8.5%). Average savings account balance declined $724,000 (1.9%). The increase
in average rates paid on certificate accounts of 20 basis points to 5.69% was a
reflection of general interest rates and a competitive environment that
prevailed during the second quarter of 1998 compared with 1997.
Net interest income for the three months ended June 30, 1998 totaled $1.5
million, $19,000 (1.3%) greater than the comparable quarter a year ago. The
interest rate spread decreased 9 basis points to 2.89% for the quarter ended
June 30, 1998. The net interest margin for the most recent quarter of 3.40% was
8 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 June
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 June 30, 1998, the Bank's allowance for
loan losses totaled $855,000 (0.60% of total gross loans and 63.2% 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 $121,000 for the three months ended June 30, 1998
compared to $84,000 for the three months ended June 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 $15,000
(246.2%) in revenue over the same period a year ago and an increase in other
loan charges of $20,000 (87.0%) to $43,000.
Noninterest Expense
Noninterest expense increased $9,000 (0.8%) to $1.0 million for the three months
ended June 30, 1998, as compared with the same period in 1997. Compensation and
employee benefits decreased $14,000 (2.2%) between the respective quarters.
Advertising and business promotion decreased $11,000 (55.0%) to $9,000 resulting
primarily from decreased advertising in relation to the new branch opening in
the latter part of the first quarter in 1997. Professional service fees
increased $23,000 (41.1%) 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. Other noninterest expense increased $14,000
(20.3%) to $83,000 primarily due to expenses associated with the payment of back
taxes and maintenance of real estate owned. Office occupancy and equipment
expense, federal deposit insurance premiums, other insurance premiums, mortgage
servicing fees and data processing fees remained relatively the same for the
quarters ended June 30, 1998 and June 30, 1997.
Income Tax Expense
Income tax expense totaled $208,000 and $191,000 for the three months ended June
30, 1998 and 1997, respectively. The increase in income tax expense was
primarily attributable to the $47,000 (10.2%) increase in income before taxes to
$506,000 for the three months ended June 30, 1998. The effective tax rate for
the three months ended June 30, 1998 was 41.1% compared to 41.6% for the same
period a year ago.
<PAGE>
COMPARISONS OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998
Six months ended June 30, 1998, compared with six months ended June 30, 1997
Net income for the six months ended June 30, 1998, was $567,000 or $.52 basic
earnings per share and $.49 diluted earnings per share. This represents an
increase of $74,000 (15.0%) 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 combined with a decrease in noninterest expense
and offset by an increase in income tax expense. The provision for loan losses
was consistent with the same period a year ago. The annualized return on average
assets ("ROA") for the first half of 1998 amounted to .65% compared with .59%
for the comparable period a year ago. The annualized return on average equity
("ROE") was 5.34% (on average equity of $21.4 million) compared with 4.62% (on
average equity of $21.3 million) a year earlier.
Interest income for the six months ended June 30, 1998, totaled $6.4 million, an
increase of $344,000 (5.7%) from 1997's first half. 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
73.6% during the first half 1997 to 80.5% for the same period in 1998. Other
factors affecting contributing to the interest income was an increase in
earnings on loans which increased $630,000 (13.4%) as a result of a $17.1
million (14.2%) increase in the average balance invested offset by a 5 basis
point decrease in average rates earned. Interest earned on mortgage-backed
securities decreased $136,000 (21.9%) as a result of the combined effect of a
$4.0 million (20.3%) decrease in the average balance invested and a 13 basis
point decrease in average rates earned. Interest income on securities available
for sale increased $73,000 (58.4%) as a result of an increase of $2.2 million
(58.1%) in the average invested balance combined with an increase of 1 basis
point in average rates earned. Interest income on debt securities decreased
$184,000 (39.9%) as a result of a decrease in average invested balances of $6.4
million (44.4%) offset by an increase in rates earned of 51 basis points.
Earnings on other interest earning assets, primarily federal funds sold,
decreased $47,000 (45.6%) as a result of a $1.8 million (46.1%) decrease in the
average invested balance offset by a 5 basis point increase in the average rate
earned.
Interest expense for the six months ended June 30, 1998, amounted to $3.5
million, $272,000 (8.5%) greater than the corresponding period of the prior
year. The increase occurred as a result of a $6.9 million (4.8%) increase in
average interest bearing liabilities to $152.0 million combined with an 16 basis
point increase in average rates paid to 4.59%. The mix within the deposit
structure changed as the average balances grew in certificate accounts by $5.9
million (6.5%) and in money market accounts and demand and NOW accounts by $1.6
million (9.3%). Average savings account balance declined $717,000 (1.9%). The
increase in average rates paid on certificate accounts of 23 basis points to
5.69% was a reflection of general interest rates and a competitive environment
that prevailed during the first six months of 1998 compared with 1997.
Net interest income for the six months ended June 30, 1998 totaled $2.9 million,
$72,000 (2.5%) greater than the comparable period a year ago. The interest rate
spread decreased 7 basis points to 2.95% for the six months ended June 30, 1998.
The net interest margin for the six months ended June 30, 1998 was 3.46% which 6
basis points less than the comparable period a year ago.
<PAGE>
Provision for Loan Losses
For the six months ended June 30, 1998 and 1997, the provision for loan losses
totaled $60,000. See "Provision for Loan Losses" at page 18.
Noninterest Income
Noninterest income amounted to $226,000 for the six months ended June 30, 1998
compared to $168,000 for the six months ended June 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 $25,000
(212.3%) in revenue over the same period a year ago and an increase in other
loan charges of $30,000 (55.6%) to $84,000.
Noninterest Expense
Noninterest expense decreased $19,000 (0.9%) to $2.1 million for the six months
ended June 30, 1998, as compared with the same period in 1997. Advertising and
business promotion decreased $42,000 (68.9%) to $19,000 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 $19,000 (67.9%) to $47,000
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 $8,000 (18.2%) to
$36,000 as a result of reduced premiums on certain policies put out to
competitive bid prior to renewal. Professional service fees increased $17,000
(14.0%) 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. Compensation and employee benefits, office occupancy and
equipment expense, mortgage servicing fees, data processing fees and other
noninterest expense remained relatively the same for the six months ended June
30, 1998 and June 30, 1997.
Income Tax Expense
Income tax expense totaled $399,000 and $324,000 for the six months ended June
30, 1998 and 1997, respectively. The increase in income tax expense was
primarily attributable to the $149,000 (18.2%) increase in income before taxes
to $966,000 for the six months ended June 30, 1998. The effective tax rate for
the six months ended June 30, 1998 ws 41.3% compared to 39.7% 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.
Impact of New Accounting Standards
In February 1998, the Financial Accounting Standards Board 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 Account 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.
<PAGE>
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
established 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.
Impact of the Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium ("Year 2000") approaches. The Year
2000 problem is pervasive and complex as virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance. It is
anticipated that all reprogramming efforts will be completed by December 31,
1998, allowing adequate time for testing. To date, confirmations have been
received from the Company's primary processing vendors that plans are being
developed to address processing of transactions in the year 2000. Incremental
expenses related to this issue are not, at this time, expected to be material to
the performance of the Company.
The risks of this issue go beyond the Company's own ability to solve the Year
2000 issues. Should suppliers of critical services fail in their efforts to
become Year 2000 compliant, or if significant third party interfaces fail to be
compatible with SFS Bancorp, Inc. or fail to be Year 2000 compliant, it could
have significant adverse affects on the operations and financial results of the
Company. Accordingly, the Company has begun a process of assessing and
monitoring the progress of all vendors of services and third party interfaces
for compatibility and Year 2000 compliance. Management intends to develop
contingency plans for all vendors and/or interfaces deemed to inadequately
address the problems of the Year 2000.
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
JUNE 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
(a) On April 22, 1998, the Company held its Annual Meeting of
Stockholders.
(b) At the meeting, John F. Assini, M.D. and Robert A. Schlansker
were elected for terms to expire in 2001.
(c) Stockholders voted on the following matters:
(i) The election of the following directors of the Company:
Broker
Votes: For Withheld Non-Votes
------ --- -------- ---------
John F. Assini, M.D. 1,040,093 1,250 --
Robert A. Schlansker 1,039,884 1,459 --
(ii) The approval of the adoption of the Amended and Restated
Stock Option and Incentive Plan.
Broker
Votes: For Against Abstain Non-Votes
------ --- ------- ------- ---------
997,483 36,810 7,050 --
(iii) The approval and adoption of the Amended and Restated
Recognition and Retention Plan.
Broker
Votes: For Against Abstain Non-Votes
------ --- ------- ------- ---------
949,214 85,079 7,050 --
(iv) The ratification of the appointment of KPMG Peat Marwick
LLP as independent auditors of the Company for the fiscal
year ending December 31, 1998.
Broker
Votes: For Against Abstain Non-Votes
------ --- ------- ------- ---------
1,034,949 2,844 3,550 --
<PAGE>
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 lw.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On August 5, 1998, Form 8-K was filed in connection with the
announced execution of a definitive agreement between SFS
Bancorp, Inc, and Cohoes Savings Bank as previously described
in Part I Item 2. of the 10-QSB for the quarter ended June 30,
1998.
<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: August 14, 1998 BY: /s/ Joseph H. Giaquinto
-----------------------
Joseph H. Giaquinto
Chairman of the Board,
President and Chief Executive Officer
(Duly Authorized Officer)
DATE: August 14, 1998 BY: /s/ David J. Jurczynski
-----------------------
David J. Jurczynski
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
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<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY
REPORT ON FORM 10-Q SB FOR THE FISCAL QUARTER ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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