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 March 31, 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 April 30, 1998
--------------------- ---------------------------
Common Stock, Par Value $.01 1,208,472
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [ X ]
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
March 31, 1998
INDEX
Part I FINANCIAL INFORMATION
Item 1. Interim Financial Statements..........................................
Consolidated Statements of Income for the three
months ended March 31, 1998 and 1997, (Unaudited)...................
Consolidated Statements of Financial Condition as
of March 31, 1998, (Unaudited) and December 31, 1997................
Consolidated Statements of Changes in Stockholders' Equity for
the three months ended March 31, 1998 and 1997, (Unaudited)........
Consolidated Statements of Cash Flows for the three
months ended March 31, 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
March 31, 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
MARCH 31,
1998 1997
------ ------
(Unaudited)
<S> <C> <C>
Interest income:
Loans .................................................... $2,638 2,309
Investment securities .................................... 434 554
Federal funds sold and cash deposits ..................... 19 47
Securities available for sale ............................ 71 37
Stock in Federal Home Loan Bank .......................... 24 20
------ ------
Total interest income ............................. 3,186 2,967
Interest expense:
Deposits ................................................. 1,714 1,548
------ ------
Net interest income ............................... 1,472 1,419
Provision for loan losses ...................................... 30 30
------ ------
Net interest income after provision for loan losses 1,442 1,389
------ ------
Noninterest income:
Other loan charges ....................................... 69 38
Bank fees and service charges ............................ 39 38
Other .................................................... 25 15
------ ------
Total noninterest income .......................... 133 91
------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(continued)
THREE MONTHS ENDED
MARCH 31,
1998 1997
------ ------
(Unaudited)
<S> <C> <C>
Noninterest expense:
Compensation and employee benefits ....................... 726 695
Advertising and business promotion ....................... 9 42
Office occupancy and equipment expense ................... 157 157
Federal deposit insurance premiums ....................... 23 5
Other insurance premiums ................................. 17 22
Mortgage servicing fees .................................. 6 9
Data processing fees ..................................... 47 45
Professional service fees ................................ 61 65
Other .................................................... 68 83
------ ------
Total noninterest expense ......................... 1,123 1,114
------ ------
Income before taxes ............................... 461 357
Income tax expense ............................................. 132 191
------ ------
Net income ........................................ $ 270 225
====== ======
Earnings per share:
Basic ..................................................... $ .25 .20
====== ======
Diluted ................................................... $ .23 .19
====== ======
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(in Thousands, Except Share Data)
March 31, December 31,
1998 1997
--------- ---------
Assets (Unaudited)
<S> <C> <C>
Cash and due from banks ..................................................... $ 1,579 1,876
Federal funds sold .......................................................... 2,700 300
--------- ---------
Total cash and cash equivalents ................................. 4,279 2,176
Securities available for sale, at fair value ................................ 7,064 4,067
Investment securities (estimated fair value of $21,940
at March 31, 1998 and $29,095 at December 31, 1997) ............ 21,806 28,979
Stock in Federal Home Loan Bank of NY, at cost.............................. 1,338 1,338
Loans receivable, net ....................................................... 136,912 133,786
Accrued interest receivable ................................................. 1,006 1,130
Premises and equipment, net ................................................. 2,215 2,242
Real estate owned ........................................................... 84 111
Prepaid expenses and other asset ............................................ 716 599
--------- ---------
Total Assets .................................................... $ 175,420 174,428
Liabilities and Stockholders' Equity
Liabilities:
Due to depositors:
Non-interest bearing deposits ..................................... $ 2,387 2,265
Savings and interest bearing demand deposits ...................... 53,024 53,463
Time deposit ...................................................... 95,775 94,741
--------- ---------
Total Deposits ............................................... 151,186 150,469
Advance payments by borrowers for property taxes and insurance ......... 1,085 1,281
Accrued expenses and other liabilities ................................. 1,468 1,247
--------- ---------
Total Liabilities ............................................. 153,739 152,997
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(in Thousands, Except Share Data)
(continued)
March 31, 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 March 31, 1998 and December 31, 1997 .......... 15 15
Additional paid-in capital ............................................... 14,411 14,365
Retained earnings, substantially restricted .............................. 12,594 12,422
Common stock acquired by :
Employee stock ownership plan ("ESOP") (83,720 shares) ................... (837) (837)
Recognition and retention plan ("RRP") (41,680 shares) ................... (420) (455)
Treasury stock, at cost (286,528 shares at March 31, 1998 and
December 31, 1997) .............................................. (4,089) (4,089)
Accumulated other comprehensive income.................................... 7 10
--------- ---------
Total Stockholders' Equity ............................................. 21,681 21,431
--------- ---------
Total Liabilities and Stockholders' Equity ............................. $ 175,420 174,428
========= =========
</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 Comprehensive
Stock Capital Earnings Stock By ESOP By RRP Income Income Total
----- ------- -------- ------ ------- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Three Months
Ended March 31, 1998
Balance at December 31, 1997 $ 15 14,365 12,422 (4,089) (837) (455) 10 21,431
Comprehensive income:
Net income -- -- 270 -- -- -- -- $ 270 270
Other comprehensive income,
net of tax:
Unrealized net holding losses
arising during the year
(pre-tax $5) -- -- -- -- -- -- (3) (3) (3)
------
Comprehensive income $ 267
======
Amortization of unearned RRP
compensation -- -- -- -- -- 35 -- 35
Cash dividends declared -- -- (98) -- -- -- -- (98)
Tax benefit related to vested
RRP shares -- 46 -- -- -- -- -- 46
Purchase of Treasury shares -- -- -- -- -- -- -- --
------ ------ ------ ------ ---- ---- -- -------
Balance at March 31, 1998 $ 15 14,411 12,594 (4,089) (837) (420) 7 21,681
====== ====== ====== ====== ==== ==== === =======
</TABLE>
<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 Comprehensive
Stock Capital Earnings Stock By ESOP By RRP Income Income Total
----- ------- -------- ----- ------ ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Three Months
Ended March 31, 1997
Balance at December 31, 1996 $ 15 14,260 11,687 46 (957) (540) (2,840) 21,671
Comprehensive income:
Net income -- -- 225 -- -- -- -- $ 225 225
Unrealized net holding losses
arising during the period
(pre-tax $39) -- -- -- (24) -- -- -- (24) (24)
-------
Comprehensive income $ 201
=======
Amortizationof unearned RRP
compensation -- -- -- -- -- 137 -- 137
Cash dividends declared -- -- (76) -- -- -- -- (76)
Purchase of Treasury shares -- -- -- -- -- -- -- --
------ ------ ------ -- ---- ---- ------ -------
Balance at March 31, 1997 $ 15 14,260 11,836 22 (957) (403) (2,840) 21,933
====== ====== ====== == ==== ==== ====== =======
</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)
Three Months Ended
March 31,
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 .................................................. $ 270 225
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .......................... 51 42
Net accretion on investment securities ................. (38) (2)
Net accretion on securities available for sale ......... (2) --
Amortization of unearned RRP compensation............... 35 137
Provision for loan losses .............................. 30 30
Decrease in accrued interest receivable ................ 124 138
Increase in prepaid expense and other assets ........... (117) (71)
Increase in accrued expense and other liabilities ...... 269 159
------- -------
Total adjustments ................................. 352 433
------- -------
Net cash provided by operating activities ........... 622 658
------- -------
Cash flows from investing activities:
Proceeds from maturity/paydown of investment securities .......... 6,044 1,229
Purchase of securities available for sale ........................ (3,000) (3,000)
Purchase of Federal Home Loan Bank stock ......................... -- (123)
Principal repayments on mortgage-backed securities ............... 1,167 777
Net (increase) decrease in loans receivable ...................... (2,125) 187
Purchase of loans receivable ..................................... (1,031) (300)
Capital expenditures, net of disposals ........................... (24) (315)
Proceeds from the sale of real estate owned ...................... 27 101
------- -------
Net cash provided (used) by investing activities ... 1,058 (1,444)
------- -------
Cash flows from financing activities:
Net increase in deposits ......................................... 717 3,758
Net decrease in advance payments by borrowers for
property taxes and insurance ................................ (196) (211)
Dividends paid ................................................... (98) (76)
------- -------
Net cash provided by financing activities ......... 423 3,471
------- -------
Net increase in cash and cash equivalents ........................ 2,103 2,685
Cash and cash equivalents at beginning of period ................. 2,176 2,896
------- -------
Cash and cash equivalents at end of period ....................... $ 4,279 5,581
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
March 31,
1998 1997
------- -------
(Unaudited)
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid ............................................... $ 1,728 1,549
======= =======
Taxes paid .................................................. $ 15 --
======= =======
Transfer of loans to other real estate owned ..................... $ -- 12
======= =======
Net unrealized loss on securities available for sale, net of taxes $ (3) (24)
======= =======
Deferred tax (benefit) expense on unrealized gain/loss
on securities available for sale ............................ $ 2 (15)
======= =======
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 months ended March 31, 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 months
ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
(in thousands except share and per share information)
1998
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
<S> <C> <C> <C>
Basic EPS ................................ $ 270 1,090,697 $ 0.25
========
Dilutive effect of potential common shares
related to stock based compensation ... -- 62,019
--------- ---------
Diluted EPS .............................. $ 270 1,152,716 $ 0.23
========= ========= ========
<CAPTION>
1997
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
<S> <C> <C> <C>
Basic EPS ................................ $ 225 1,139,687 $ 0.20
========
Dilutive effect of potential common shares
related to stock based compensation ... -- 33,396
--------- ---------
Diluted EPS .............................. $ 225 1,173,084 $ 0.19
========= ========= ========
</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.
<PAGE>
SFS BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
MARCH 31, 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. On June 29, 1995, the Bank completed its conversion from a
federal mutual savings and loan association to a federal stock savings bank. On
that date, the Holding Company issued and sold 1,495,000 shares of its common
stock at $10.00 per share in connection with the conversion. Net proceeds to the
Holding Company were $14.2 million after reflecting conversion expenses of
$750,000. The Holding Company used $7.1 million of the net proceeds to acquire
all of the issued and outstanding stock of the Bank.
The Bank operates as a thrift institution with the principal business being the
solicitation of deposits from the general public; these deposits, together with
funds generated from operations, are invested primarily in single-family, owner
occupied adjustable-rate mortgage loans. The Bank is a member of the Federal
Home Loan Bank of New York ("FHLB") and is subject to certain regulations of the
Board of Governors of the Federal Reserve System with respect to reserves
required to be maintained against deposits and certain other matters. The Bank's
deposit accounts are insured by the Savings Association Insurance Fund ("SAIF"),
as administered by the Federal Deposit Insurance Corporation ("FDIC"), up to the
maximum amount permitted by law. The Bank is subject to regulation by the Office
of Thrift Supervision ("OTS"). The Bank conducts its business through a 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 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 quarterly report 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:
<PAGE>
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.
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 $2.1 million to
$4.3 million at March 31, 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 22.30% and 20.21% at March 31, 1998 and December 31, 1997, respectively.
<PAGE>
The Company's cash flows are comprised of three classifications: cash flows from
operating activities; cash flows from investing activities; and cash flows from
financing activities. Net cash flows provided by operating activities,
consisting primarily of interest and dividends received less interest paid on
deposits, was $622,000 and $658,000 for the three months ended March 31, 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
sale and maturity of securities, was $1.4 million for the three months ended
March 31, 1997. Net cash of $1.1 million was provided by investing activities
for the three months ended March 31, 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,
consisting primarily of a net increase in deposits offset by a net decrease in
advance payments by borrowers for property taxes and insurance and dividends
paid, was $423,000 and $3.5 million for the three months ended March 31, 1998
and 1997, respectively.
During the three month periods ended March 31, 1998 and 1997, the Company did
not repurchase any of its shares. The Office of Thrift Supervision (OTS)
restricts the number of shares which may be repurchased during the three year
period following conversion. Generally, only 5% of shares outstanding may be
repurchased annually during the first three years following conversion. However,
the OTS has allowed additional share repurchases of 5% annually based on
extenuating facts and circumstances.
At March 31, 1998, the Bank's capital exceeded each of the capital requirements
of the OTS. At March 31, 1998, the Bank's tangible and core capital levels were
both $19.3 million (11.0% of total adjusted assets) and its risk-based capital
level was $20.1 million (21.2% 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 $ 1.0 million (0.6%) to $175.4 million at March 31, 1998
from $174.4 million at December 31, 1997. This increase occurred as securities
available for sale grew $3.0 million (73.7%) to $7.1 million and loans
receivable, net increased $3.1 million (2.3%) to $136.9 million at March 31,
1998. Additionally, federal funds sold increased $2.4 million to $2.7 million at
March 31, 1998. Offsetting these increases was a combined decrease in investment
securities and mortgage-backed securities of $7.2 million (24.8%) to $21.8
million at March 31, 1998. The decrease in investment securities was primarily
attributable to the calls of certain investment securities.
At March 31, 1998, total liabilities were $153.7 million representing an
increase of $742,000 (0.5%) from December 31, 1997. Stockholders' equity
increased $250,000 to $21.7 million at March 31, 1998 as compared to $21.4
million at December 31, 1997. Retained earnings increased by $172,000 primarily
as a result of net income of the Company for the three month period ended March
31, 1998 offset by dividends paid totaling $98,000.
<PAGE>
Nonperforming assets decreased $196,000 (13.4%) totaling $1.3 million at March
31, 1998, compared with $1.5 million at December 31, 1997. The ratio of
nonperforming loans to total loans receivable was .85% at March 31, 1998,
compared with 1.00% at December 31, 1997. The ratio of nonperforming assets to
total assets at March 31, 1998, was .72% compared with .84% at December 31,
1997.
Loan Receivable, Net
A summary of loans receivable, net at March 31, 1998 and December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- -----------
<S> <C> <C>
Loans secured by real estate:
Residential:
Conventional ............................. $104,842 100,277
Home Equity .............................. 21,774 22,658
FHA Insured .............................. 2,614 2,772
VA Guaranteed ............................ 1,849 2,028
Commercial and multi-family ................. 6,129 6,130
-------- --------
137,208 133,865
Other loans .................................... 589 721
-------- --------
137,797 134,586
-------- --------
Less:
Unearned discount and net deferred loan fees 45 22
Allowance for loan losses ................... 840 778
-------- --------
885 800
-------- --------
Loans receivable, net .......................... $136,912 133,786
======== ========
</TABLE>
The following table sets forth the information with regard to nonperforming
assets.
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------ ------
<S> <C> <C>
Loans on a nonaccrual status ................... $1,159 1,328
Loans contractually past due 90 days or
more and still accruing interest ............ 19 19
------ ------
Total nonperforming loans ................ 1,178 1,347
Other real estate owned ........................ 84 111
------ ------
Total nonperforming assets ............... $1,262 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 three months
ended March 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of period ...................... $778 642
Provision charged to operations ................... 30 30
Loans charged off ................................. -- (2)
Recoveries on loans previously charged off ........ 32 6
---- ----
Balance, end of period ............................ $840 676
==== ====
</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 ended March 31, 1998, compared with the
corresponding period of the prior year.
The average balance data that follows reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expenses by the average balance of assets or
liabilities, respectively, for the periods shown. The yields and costs include
fees which are considered adjustments to yields.
The rate/volume analysis table presents the extent to which changes in interest
rates and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate), (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume), and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
Average Balance Data, Interest Rates and Interest Differential
(Dollars in Thousands) (Unaudited)
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------------
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) ..... $135,377 $ 2,638 7.90% $118,970 $ 2,309 7.87%
Mortgage-backed securities .... 16,545 259 6.35 20,028 317 6.42
Securities available for sale . 4,308 71 6.68 2,458 37 6.10
Debt securities ............... 10,419 175 6.81 14,910 237 6.45
Other interest-earning asset
including cash equivalents 1,461 19 5.27 3,654 47 5.22
FHLB stock ................... 1,338 24 7.27 1,271 20 6.38
-------- -------- -------- --------
Total interest-earning assets ....... 169,448 3,186 7.63 161,291 2,967 7.46
-------- -------- -------- --------
Savings accounts .............. 36,323 269 3.00 37,034 275 3.01
Money market accounts ......... 7,448 63 3.38 6,300 52 3.35
Demand and NOW accounts (2) ... 10,514 37 1.43 10,549 38 1.46
Certificate accounts .......... 95,474 1,340 5.69 88,250 1,179 5.42
Escrow ........................ 952 5 2.13 808 4 2.01
-------- -------- -------- --------
Total interest-bearing liabilities .. 150,821 1,714 4.61 142,941 1,548 4.39
-------- -------- -------- --------
Net interest income ................. $ 1,472 $ 1,419
======== ========
Net interest rate spread ............ 3.02% 3.07%
==== ====
Net earning assets .................. $ 18,627 $ 18,350
======== ========
Net yield on average
interest-earning assets ...... 3.52% 3.57%
==== ====
Average interest-earning
assets to average
interest-bearing liabilities . 1.12X 1.13X
===== =====
</TABLE>
(1) Calculated net of deferred loan fees and includes nonaccrual loans.
(2) Includes noninterest-bearing demand accounts.
<PAGE>
<TABLE>
<CAPTION>
SFS BANCORP, INC. AND SUBSIDIARY
RATE VOLUME ANALYSIS
(In Thousands) (Unaudited)
THREE MONTHS ENDED MARCH 31, 1998
COMPARED WITH
THREE MONTHS ENDED MARCH 31, 1997
INCREASE (DECREASE)
DUE TO
VOLUME RATE NET
------ ---- ---
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $ 319 9 328
Mortgage-backed securities ( 55 ) ( 3 ) ( 58)
Securities-available for sale 31 3 34
Debt securities ( 76 ) 14 ( 62)
Other interest-earning assets ( 29 ) 1 ( 28)
FHLB stock 1 3 4
------- ------- --------
Total interest-earning assets $ 191 27 218
======= ======= ========
Interest-bearing liabilities:
Savings deposits $ ( 5 ) ( 1 ) ( 6 )
Money market accounts 10 1 11
Demand and NOW deposits 0 ( 1 ) ( 1 )
Certificate accounts 98 62 160
Escrow 1 0 1
------- ------- --------
Total interest-bearing liabilities $ 104 61 165
======== ======= ========
Change in net interest income $ 53
========
</TABLE>
<PAGE>
COMPARISONS OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997
Three months ended March 31, 1998 compared with 1997
Net income for the quarter ended March 31, 1998, was $270,000 or $.25 basic
earnings per share and $.23 diluted earnings per share. This represented an
increase of $45,000 (20.0%) from the comparable quarter of the prior year. The
increase in net income was primarily attributable to an increase in net interest
income and an increase in noninterest income. These increases were offset by an
increase in income tax expense. The provision for loan losses and noninterest
expense were consistent with the same quarter a year ago. The annualized return
on average assets ("ROA") for the current quarter amounted to .62% compared with
.54% for the comparable quarter a year ago. The annualized return on average
equity ("ROE") was 5.10% (on average equity of $21.1 million) compared with
4.19% (on average equity of $21.5 million) a year earlier.
Interest income for the three months ended March 31, 1998, totaled $3.2 million,
an increase of $219,000 (7.4%) from 1997's first quarter. Average loans as a
percentage of total interest-earning assets increased from 73.8% during the
first quarter 1997 to 79.9% for the same period in 1998. Meanwhile, the combined
average balances as a percentage of total interest-earning assets of mortgage
backed securities, securities available for sale and debt securities decreased
from 23.2% in 1997 to 18.5% in 1998. The factors contributing to the increase in
interest income was an increase in earnings on loans which increased $329,000
(14.2%) as a result of a $16.4 million (13.8%) increase in the average balance
invested combined with a 3 basis point increase in average rates earned.
Interest earned on mortgage-backed securities decreased $58,000 (18.3%) as a
result of the combined effect of a $3.5 million (17.4%) decrease in the average
balance invested and a 7 basis point decrease in average rates earned. Interest
income on securities available for sale increased $34,000 (91.9%) as a result of
an increase of $1.8 million (75.3%) in the average invested balance combined
with an increase of 58 basis points in average rates earned. Interest income on
debt securities decreased $62,000 (26.2%) as a result of a decrease in average
invested balances of $4.5 million (30.1%) offset by an increase in rates earned
of 36 basis points. Earnings on other interest earning assets, primarily federal
funds sold, decreased $28,000 (59.6%) as a result of a $2.2 million (60.0%)
decrease in the average invested balance offset by a 5 basis point increase in
the average rate earned.
Interest expense for the quarter ended March 31, 1998, amounted to $1.7 million,
$166,000 (10.7%) greater than the corresponding quarter of the prior year. The
increase occurred as a result of a $7.9 million (5.5%) increase in average
interest bearing liabilities to $150.8 million combined with a 22 basis point
increase in average rates paid to 4.61%. The mix within the deposit structure
changed as the average balances grew in certificate accounts by $7.2 million
(8.2%) and in money market accounts by $1.3 million (20.0%). Average savings
account balance declined $711,000 (1.9%). The increase in average rates paid on
certificate accounts of 27 basis points to 5.69% was a reflection of general
interest rates and a competitive environment that prevailed during the first
quarter of 1998 compared with 1997.
Net interest income for the three months ended March 31, 1998 totaled $1.5
million, $53,000 (3.7%) greater than the comparable quarter a year ago. The
interest rate spread decreased 5 basis points to 3.02% for the quarter ended
March 31, 1998. The net interest margin for the most recent quarter of 3.52% was
5 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 March
31, 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 March 31, 1998, the Bank's allowance for
loan losses totaled $840,000 (0.61% of total gross loans and 71..3% 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 $133,000 for the three months ended March 31,
1998 compared to $91,000 for the three months ended March 31, 1997. Other loan
charges increased $31,000 (81.6%) to $69,000.
Noninterest Expense
Noninterest expense decreased $9,000 (0.8%) to $1.1 million for the three months
ended March 31, 1998, as compared with the same period in 1997. Compensation and
employee benefits increased $31,000 (4.5%) between the respective quarters. This
increase was a result of annual merit increases and increased employee benefits
partially due to increases in the employee stock ownership plan expense.
Advertising and business promotion decreased $33,000 (78.6%) to $9,000 resulting
primarily from increased advertising in relation to the new branch opening
during the first quarter in 1997. FDIC premiums increased $18,000 (360.0%) to
$23,000 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 noninterest expense decreased $15,000 (18.1%)
to $68,000 due in part to expenses associated with the opening of the new branch
in 1997 which were not incurred in the current period. Office occupancy and
equipment expense, other insurance premiums, mortgage servicing fees, data
processing fees and professional service fees remained relatively the same for
the quarters ended March 31, 1998 and March 31, 1997.
Income Tax Expense
Income tax expense totaled $191,000 and $132,000 for the three months ended
March 31, 1998 and 1997, respectively. The increase in income tax expense was
primarily attributable to the $104,000 (29.1%) increase in income before taxes
to $461,000 for the three months ended March 31, 1998.
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
<PAGE>
+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.
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
MARCH 31, 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
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<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: May 15, 1998 BY:/s/ Joseph H. Giaquinto
-----------------------
Joseph H. Giaquinto
Chairman of the Board,
President and Chief Executive Officer
(Duly Authorized Officer)
DATE: May 15, 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 MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 1,579 1,481
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 2,700 4,100
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 7,064 4,951
<INVESTMENTS-CARRYING> 21,806 34,176
<INVESTMENTS-MARKET> 21,940 33,775
<LOANS> 136,912 119,202
<ALLOWANCE> 840 676
<TOTAL-ASSETS> 175,420 168,841
<DEPOSITS> 151,186 144,374
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 2,553 2,534
<LONG-TERM> 0 0
<COMMON> 15 15
0 0
0 0
<OTHER-SE> 21,666 21,918
<TOTAL-LIABILITIES-AND-EQUITY> 175,420 168,841
<INTEREST-LOAN> 2,638 2,309
<INTEREST-INVEST> 505 591
<INTEREST-OTHER> 43 67
<INTEREST-TOTAL> 3,186 2,967
<INTEREST-DEPOSIT> 1,714 1,548
<INTEREST-EXPENSE> 1,714 1,548
<INTEREST-INCOME-NET> 1,472 1,419
<LOAN-LOSSES> 30 30
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 1,114 1,123
<INCOME-PRETAX> 461 357
<INCOME-PRE-EXTRAORDINARY> 461 357
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 270 225
<EPS-PRIMARY> .25 .20
<EPS-DILUTED> .23 .19
<YIELD-ACTUAL> 3.52 3.57
<LOANS-NON> 1,159 1,030
<LOANS-PAST> 19 21
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 778 642
<CHARGE-OFFS> 0 2
<RECOVERIES> 32 6
<ALLOWANCE-CLOSE> 840 676
<ALLOWANCE-DOMESTIC> 459 393
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 381 283
</TABLE>
